1. Université de Mons 1 Cooperation with Banks and Corporate Governance: Key Lessons for the Development of MFIs Marc Labie Marc.Labie@umons.ac.be Marc.Labie@umons.ac.be CERMi - Centre for European Research in Microfinance (UMONS - ULB) – www.cermi.euwww.cermi.eu European Microfinance Network Brussels, December 17 th, 2013

2. Université de Mons Corporate Governance: a major issue in (micro)finance Banana Skin Reports (2008: 2 nd (on 29); 2009: 7 th (on 25); 2011: 4 th (on 24); 2012: 2 th (on 20)) Some major crisis (at the institution and at the country level) → EIB project “Microfinance in crisis” So, controlling microfinance growth and development properly is perceived as crucial but, often, not much effort is really made. Why ?  Because there is always a trade-off between short-term/long-term investments (governance is a long- term investment for which returns are not easily visible – governance is only seen as a major topic when there is a crisis – and then it is often (too?) late).  Because it puts constraints on top management.  Because it is not well understood and it is a complex “systemic issue” (and we have a hard time thinking in a “systemic way”). 2

3. Université de Mons Understanding microfinance corporate governance: first, a definition… “Corporate governance is a system, or a set of mechanisms, by which an organization is directed and controlled in order to reach its mission and objectives.” (Labie & Mersland, 2011) 3

4. Université de Mons Labie & Mersland, 2011 (based on Charreaux 1997) [The Handbook of Microfinance] 4 Specific MechanismsNon-Specific Mechanisms Intentional Mechanisms  Direct shareholders control (assembly)  Board of directors  Salary and bonus mechanisms  Formal Structure & organization chart  Internal Auditors  Ownership structure  Legal Environment (Regulation and supervision procedures)  Legal Auditors  Consumers Associations  National and international associations and networks Spontaneous Mechanisms  Informal (relationship) Networks  Managers cross-control  Corporate culture  Reputation (among the employees)  Depositors  Financial Providers (MIVs and others)  Labour Market  Political Market  Media Environment  Business Culture

5. Université de Mons The “easy” move: strengthening the intentional specific mechanisms? 5 Intentional specific mechanisms only depend on the “will” of the institution, but it does not necessarily mean that they are easy to improve: why ? The case of boards. Mainly because of …  Frequent lack of debate and follow-up on issues such as the mission of the organization and the choices it makes;  Misunderstanding by board members and management of the functions of the board and how to assume them properly;  Constitution of boards and nature of the commitment of board members;  Weak evaluation of most boards (when in place).

6. Université de Mons So, what could be discussed? Board objectives (1) Board objectives:  Respect legal obligations  Establish strategy with management  Fiduciary Responsibility  Supervision and control  Auto-evaluation  External relationships 6

7. Université de Mons So, what could be discussed? Board management (2) What to look for when dealing with board issues :  Adequate staffing (internal, affiliated, external)  Technical skills and mission acceptance  Dialogue between the board and managers  Objective recruitment and rotations (within the board itself)  Separation of the CEO and chairman functions  Establishment and good functioning of specialized committees  Clear information from the internal audit directly to the board  Clear identification of potential conflicts of interest 7

8. Université de Mons 8 Thank you for your attention. Marc Labie Marc.Labie@umons.ac.be Marc.Labie@umons.ac.be CERMi - Centre for European Research in Microfinance (UMONS - ULB) – www.cermi.euwww.cermi.eu