ocially oriented equity investors—particularlythose that take formal roles in the governanceof microfinance service providers and funds—facechallenging situations and decisions.
Equity investingrequires active governance—and this is particularlytrue for value-based investing because value-basedinvestors seek to guide the company so that itbehaves responsibly and creates both financial andsocial returns. Again and again in the course of research, those involved in microfinance institution(MFI) governance have said that most microfinanceinvestors are not taking an active enough role.
Oneexperienced microfinance professional spoke formany when she observed: “Foreign investors mustbe engaged owners, not just sleeping partners.” Thispaper offers evidence from interviews that took thepulse of more than 100 industry insiders to providea self-assessment of microfinance governance today.Corporate governance serves to mediate interestsof diverse stakeholders including shareholders,management, and employees, as the basis fordecisions on a company’s strategy and goals.It provides the framework within which shareholdersoversee operational performance and manage risk toensure the company’s long-term health.
In the case of MFIs, those diverse interests also include protectingvulnerable clients and pursuing a social as well as afinancial bottom line. Equity is of growing importanceto the microfinance sector, and social investors thatprovide equity have expanding opportunities to playgovernance roles. This Focus Note explores the extentto which investors are currently capitalizing on thisopportunity for active and effective governance. Itoffers practical insights, emerging good practices, andreflections on how to address reported gaps.In this paper, we use an intentionally broad conceptof governance. This assumes that while traditionalcorporate governance activities, such as votingone’s shares or taking a board seat, are important,microfinance investors can and should go further byexerting influence throughout the investment cycle,from initial due diligence through to their exit fromthe MFI. Although the focus is mainly on internationaldevelopment finance institutions (DFIs) andmicrofinance investment vehicles (MIVs)
that provideequity, where relevant this paper also considers cross-border lenders and local investors. Interviews withcurrent and former staff of investment organizations,investor-appointed and independent directors of MFIs and funds, chief executive officers (CEOs) andsenior managers of MFIs and funds, researchers, andothers inform this “self-assessment” of governancein the sector and ideas on how to strengthen socialinvestors’ performance in this regard.
Together, theyrepresented at least seven DFIs, 32 MIVs, and 19 MFIs.The analysis also uses CGAP investment data, deskresearch, and preliminary data from a field test of newMIX governance indicators.
Few of those interviewed question that strongerMFI governance is needed and could help improveindividual retail providers and the sector as awhole. While existing guidance and how-to toolsdescribe the ideal of effective MFI governance,practices on the ground are still nascent.
Ourresearch highlights areas for further improvementand reveals promising practices. Raising theperformance bar across the MFI sector will requirestrategy, resources, and staying power. Equityinvestors can play a key role. See Box 1 for asummary of key findings.
Voting the Double BottomLine: Active Governance byMicrofinance Equity Investors
1 This paper ses the terms “social,” “socially oriented,” and “doble bottom line” investor interchangeably.2 This paper ses “MFI” in its broader sense to refer to specialized providers of financial services to lower income cstomers.3 See, for example, OECD (2004). Traditional corporate governance focses mainly on the “principal–agent” problem, i.e., how owners canoversee and protect their interests after delegating operational roles to management.4 DFIs are bilateral (e.g., the Netherlands Development Finance Company [FMO]) or mltilateral (e.g., the International Finance Corporation[IFC]) entities that fnd development activities and have majority or fll pblic ownership. MIVs inclde microfinance fnds, networks,holding companies, and other entities that fnd MFIs directly or throgh fnds/strctres.5 See Annex A for a complete listing of those interviewed.6 The srvey with draft governance indicators received 162 responses from the MFIs that reported to MIX in 2010.7 See, for example, Concil of Microfinance Eqity Fnds (2005), Cerise-IRAM (2006), BBVA Microfinance Fondation (2011), Promifin(2011), and Goldberg et al. (2011).
No. 79May 2012Katharine McKee
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