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30 Chapter 2 - Good Governance: Managing Internal RiskInformation and disclosureBoard oversight quality is heavily dependent on the quality and timeliness of information supplied to membersby the MFI’s management. This dependence is closely tied to the quality of the MFI’s management informationsystems, accounting personnel and practices, and internal controls systems. To avoid faulty decision making, theboard should clearly understand what information it needs, what should and can be tracked regularly, and howthe management information systems are able (or unable) to gather that information.The board should be aware of the MFI’s reporting requirements. A good starting point in designing a financialperformance monitoring system, for example, is for the board to do an inventory of existing reportingrequirements. The board should pay particular attention to how well management is using information toinform operations, make decisions, and propose new strategies. A list of common reports and informationprovided to board members includes the following:• Financial and operating reports on a monthly or quarterly basis, including a set of carefully chosen indicatorsfor tracking progress against financial goals, operational plans, and the MFI’s social mission. These reportsshould give the board a complete and focused picture of progress regarding the triple bottom line. 8• A complete board information package for each monthly or quarterly meeting including (1) the currentagenda, (2) minutes of the prior meeting, (3) management reports, (4) board committee reports, and (5) anyadditional information relevant to issues to be raised in the meeting.Additionally, the board should use the following to verify reports it receives from management: independentlyaudited financial statements, together with the auditor’s management letter and any responses given by MFImanagement on a yearly basis, and internal audit reports as frequently as deemed necessary by the Audit Committee.Training and developmentGood governance must be developed over time. Effective boards undertake specific activities aimed at helpingmembers to learn and grow in their ability to support and lead their MFI to the achievement of the institutionalmission and objective (see box 2.7). Common training and improvement activities include• Training sessions on best practices in microfinance and understanding of key financial and social indicatorsfor measuring progress, which may involve internal MFI staff members or external experts• Retreats to build relationships and consensus between board members regarding the balance of financialand social objectives• Client visits to acquaint members with the MFI’s operations, products, and services and also to gain theclients’ perspective• Self-evaluation on a yearly or biannual basis to measure effectiveness, identify strengths and weaknesses,and develop further strategies to improve board performance8. For more information on financial performance monitoring from a board’s perspective, see Bruett and Natilson (2002).
Managing Risk and Creating Value with Microfinance31Box 2.7 A Case Study: The Dominican Integrated Development InstuteThe Dominican Integrated Development Instute (Instuto Dominicano de Desarrollo Integral, or IDDI), foundedin 1984, is a nonprofit instute focused on infrastructure, health, local development, and biosustainability. Itsmicrocredit department was founded in 1990. Unl 2002, management by the board of directors was largelyabsent, and this lack of leadership was reflected in IDDI’s porolio.The board met only every two or three months, with lile rotaon of its membership and low levels ofassistance. Its composion was not diverse, and it used very few sources of support. Moreover, themicrofinance department was not instuonally independent. Although it could show good financialindicators and growth potenal, few funds were available to meet demand. Worse, the systems of controland auding were weak. As a result, IDDI had grown very lile and its porolio—with 90 percent equity—was out of balance.The 2002 reforms addressed these weaknesses by improving management and oversight by the board ofdirectors. Today, the board consists of seven members, each serving for two years. Board members meetevery month. The assembly, with 21 members, meets yearly. The board has rededicated itself to preservingthe mission and assets of the instute. To that end, it sponsored a CAMEL (Capital Adequacy, Asset Quality,Management, Earnings, and Liquidity Management) evaluaon (see chapter 1 of this volume), separated theaccounng and financial funcons from the other departments, and restructured its debt-to-equity rao.Finally, IDDI’s microcredit center has grown by an outstanding 400 percent to US$2.5 million, 2,800 clients,and 14 employees.Source: Compiled by Tillman Brue.Third-party reviewsBoards can benefit from a third-party review that includes an evaluation of the board itself. Reviews such asregulatory reviews or external audits may be legally. Others, such as rating reviews or internal evaluations,may be voluntary. A board should not hesitate to ask reviewers to consider its performance and activities. Anexperienced regulator, rater, or consultant can often identify the strengths and weaknesses of a board’s structure,its monitoring procedures, and its activities and then make recommendations to improve board effectiveness.The following checklist presents an effective approach to board self-evaluation (Curtis 2007: 62):• Get directors on board.• Focus on group dynamics, such as committee and overall board performance. Be aware that peerevaluations can cause friction and disrupt board cohesiveness.• Design the process internally.• Do not overlook individual board member assessment.• Focus on issues that will allow the board to do its job.• Pay particular attention to- Staffing needs- Skill set of individual directors- Board members’ ability to communicate with one another- Experience of individual board members- Potential conflicts of interest
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