managing risk.pdf

22 Chapter 2 - Good Governance: Managing Internal RiskExternal Public Entities and Aid AgenciesExternal public entities include bilateral donor agencies and multilateral agencies (for example, the World Bankand the Corporación Andina de Fomento, among others), and public and international financial institutions(the International Finance Corporation, part of the World Bank). External public entities invest in MFIsprimarily because of the social and economic benefits they hope to achieve, such as increased employmentand income levels or promotion of solutions to social and economic problems. Donors may also have politicalconcerns based on their relationship with the host country. In general, those institutions do not play anactive governance role. Their policies usually require them to take a minority stake and often preclude theirparticipation in governance. They are most concerned with avoiding losses and the consequent damage to theirreputation or credit rating. Moreover, the public entities’ internal structures and operating procedures can limittheir contribution to good governance. Turnover among agency personnel, lack of microfinance expertise, andlack of time or budget to focus on governance issues are common problems.Microfinance Investment VehiclesA relatively new type of financial intermediary that mobilizes funds from public and private funders and channelsthem to MFIs is called a microfinance investment vehicle (MIV). While MIVs have been funding MFIs for morethan a decade, their growth in recent years has been explosive—in 2005 alone, it is estimated that the combinedMIV portfolio nearly doubled to US$1 billion by year’s end (MicroRate 2006). According to a geographicinvestment analysis, 56 percent of this investment was done in Latin America and the Caribbean. The MIVs’primary concern is to recover their principal with a small return. Those funds are usually regional, closer to theMFI than are multilateral or international funders. The MIVs often allocate experienced staff members andresources to monitor the performance of the MFI. They are often able to provide input into key board decisions.MFIs in TransformationAs an institution transforms from a nonprofit ownership structure to a for-profit structure, governance must alsochange. This usually means transitioning from an institution dominated by a founder or social entrepreneur intoa more professionally managed institution with broader ownership and a formal governance structure. Such atransition requires significant delegation of authority to management with a wider array of checks and balances(see box 2.2). The original board must share institutional control with incoming shareholders; must fund thetransformation; and must adopt a new structure, bylaws, and agreements that safeguard the rights of the newowners. 5 This transition is a difficult process for boards, as it requires the original board members to give up controlto entering investors. Those new entrants may not share the same charitable goals and social agenda, or at leastmay ask for equal emphasis to be placed on commercially oriented goals and concerns. It is also important to notethat members of corporate boards can be sued; members of NGO boards, generally, cannot.Becoming a deposit-taking institution places additional functional and legal responsibilities on the board. If anMFI becomes regulated, its board will become the official point of contact between regulators and the MFI.Regulations often dictate how MFI governance is to be carried out and specify the necessary committees andtheir functions. Regulators may have the right to approve board members and determine whether they are “fitand proper” and bring the requisite skills.5. For an internationally recognized set of corporate governance standards and guidelines, including the rights of shareholders,equitable treatment of shareholders, and the responsibilities of the board, see OECD (2004).