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24 Chapter 2 - Good Governance: Managing Internal RiskIn executing its strategic responsibilities, the board must keep in mind all of its stakeholders. It is accountableto the MFI and its shareholders—and has a duty to act in their best interests—but should also consider theinterests of employees, creditors, customers, suppliers, and the local communities. Moreover, it should observerelevant environmental and social standards (OECD 2004) (see box 2.3).Box 2.3 The Board and Social Performance ManagementNearly all MFIs have social goals: their very existence—at least in part—is to serve a social purpose. An MFI’ssocial goals must be clearly expressed within its mission. “Mission dri” occurs when an MFI’s focus onsocial issues is lost because its purpose is vague or is neglected in pursuit of other goals (such as profitabilityor growth). One key role of an MFI’s board is to protect and balance social and financial goals and to guardagainst mission dri. This is no easy task.Social performance management (SPM) is an instuonalized process that involves seng clear socialobjecves, monitoring and assessing progress toward their achievement, and using this informaon toimprove overall organizaonal performance. SPM engages a wide spectrum of stakeholders into the MFI’soperaons, including board members.The key reference in SPM within microfinance is the global acon-research Imp-Act Programme, which hasworked with more than 30 organizaons worldwide to develop an overarching framework that promotesSPM as a core business funcon. The framework combines regular monitoring of client status, analysis andcommunicaon of findings, and corresponding adjustments to products or service delivery that will improvethe MFI’s program.Source: Campion, Linder, and Knos 2008.SupervisionThe board delegates operational and administrative responsibilities to the chief executive officer (CEO) andthe management team. However, it is responsible for monitoring management’s performance in executingapproved plans and for evaluating their performance against planned goals and timelines. For this reason, andto judge management impartially, the board should resist involving itself in the MFI’s management of dailyoperations. If it becomes a surrogate for the staff, it will fail in its supervisory capacity. In times of institutionalcrisis or succession of a CEO, a board may be required to assume temporary management. However, this roleshould be relinquished as soon as competent management is restored. Finally, the board should periodicallyevaluate its own performance and effectiveness (see box 2.4).
Managing Risk and Creating Value with Microfinance25Box 2.4 Evaluang Board PerformanceIn theory, the board is responsible to instuonal shareholders and ensures that management acts inaccordance with shareholder wishes. In pracce, both within microfinance and elsewhere, many boardsbecome servants of the CEO or one dominant shareholder. Recent high-profile corporate scandals involvingboards that failed to act in shareholders’ best interests raise an important queson: how can shareholdersevaluate whether or not the board is doing its job?There are no set guidelines for conducng a board assessment: each board formulates its own plans forevaluaon. However, as with the evaluaon of the CEO, board assessment must be done regularly andagainst preset, well-defined criteria. These criteria should be established in board policy. The key areas toevaluate are as follows:1. Board and commiee structure• Does the board as a whole or an individual commiee have the staff, skills, and experience to tackleits current or expected problems?• Are more independent directors needed to ensure financial and legal survival of the instuon?• Do the commiees meet oen enough to fulfill their dues?• Do the commiees receive and process informaon in an efficient and effecve manner?• Do the commiees keep the board apprised of <strong>risk</strong>s and uncertainty in their areas of experse andresponsibility?• Do potenal conflicts of interest or personal issues exist that may disrupt the cohesiveness of thegroup?• How strong is group cohesiveness? If deficiencies exist, how do they hinder the performance ofcertain commiees or the board as a whole?2. The responsibilies of the board• Is the board evaluang the company’s financial and operaonal performance appropriately, or shouldother measures (quantave or qualitave) be used?• Is the CEO fulfilling his or her dues and providing solid leadership?• Has the board adequately assessed the growth potenal of the company?• Can the board beer address the needs and concerns of its stakeholders (both equity and debt)?3. The physical process that boards use to conduct business• Does the board or any individual commiee spend enough me on vital issues or areas that canenhance stakeholder value?• Is the board using all of the available tools and resources to come to a conclusion?• Is there good communicaon between the board and management?Source: Adapted from Curs (2007).Management developmentDuring the early stages of an MFI’s development and the transitional periods that follow, the board mustguarantee the survival of the organization. This responsibility means having the right people at the right time.For example, the board supervises the selection, evaluation, and compensation of the management team. Thissupervision includes anticipating and preparing for management succession. The board must ensure that themanagement team has the needed skills to handle current operations and take on new challenges. The best
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Eco-AuditEnvironmental Benefits Sta
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