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32 Chapter 2 - Good Governance: Managing Internal Risk- The board’s ability to access accurate information and thereby enable it to assess future businessopportunities- The board’s ability to communicate with management• Consider the legal ramifications: Limit access to board evaluation results, and limit the paper trail.• Generate actionable results: Focus on strengths and weaknesses. Use the information garnered tobuild team cohesiveness and improve decision making.The Board of Directors: Member Selection and ParticipationFor development of an effective board, five critical considerations contribute directly to the board’s performanceand transparency: board member characteristics, board composition, the service period, conflict of interestpolicies, and compensation policies. Each of those is discussed next, with some specific good practices provided.Necessary characteristics of board membersAn effective MFI board needs members with a variety of skills. Board members should ideally possess anabundance of leadership characteristics and multiple technical skills (see table 2.1). Banking laws and regulationsrequire that financial institution board members meet a “fit and proper” test. This term generally means thatmembers should be of good moral character with no record of bankruptcy or criminal convictions and possessan appropriate level of experience. All board members should develop the capacity to analyze financial reportsbecause each one assumes fiduciary responsibility on a personal level. Special attention should also be given toeducate board members on <strong>risk</strong> management as it relates to MFIs.Table 2.1 Recommended Characteriscs and Background of a Board MemberLeadership CharacteriscsTechnical Background• Commitment to the MFI’s mission• Integrity and trustworthiness• Demonstrated success as a leader• Communicaon skills• Common sense and good judgment• Willingness to make the me commitment• Understanding of the personal commitment• Ability to work well with other board members• Banking• Microfinance• Accounng• Law• Public relaons• Markeng• Human resources• Entrepreneurial or business management• Community or social development• Informaon technology• FundraisingSource: Author.Board compositionIn new MFIs, board member selection is often based on a personal relationship with a dominant founder.Funders may request the authority to appoint board members as part of their investment agreement. As a result,
Managing Risk and Creating Value with Microfinance33management and other board members may be limited in their ability to influence the profile of investorappointedboard members. Important checks and balances are often disregarded when long-standing personalrelationships prevent board members from effectively overseeing management activities. This type of board isnot uncommon in the early stages of an organization, yet as the MFI grows and changes, those board membersshould cede control to individuals who are not constrained by this potential conflict of interest.As the needs of the organization change and the membership of the board rotates, members should be recruitedto match the organization’s current and future needs. For example, if an MFI introduces microinsuranceproducts, it may wish to invite a professional with experience in underwriting to join the board. In addition,cultural, ethnic, and gender diversity ensures that the board maintains a broad perspective. For example, theboard of an MFI that serves female clients should seek to maintain significant female representation on itsboard.Varying opinions exist regarding the inclusion of clients and employees on the board. One school of thought(associated with Continental Europe) maintains that employee representation is healthy, while another schoolof thought (more Anglo-American) maintains that staff participation blurs the line between the government,management, and staff. In addition, while the client’s perspective is undoubtedly important to maintainingeffective governance, the inclusion of clients on boards has not been particularly successful. Client representativesoften lack the skills or broader perspective to participate in a meaningful way.Service period and participationThe service period for board members should be sufficiently long to develop a strong leadership unit, butshort enough to continually introduce new members with fresh perspectives and novel ideas. The typical boardmember commitment ranges from two to four years. Board member terms should be staggered to prevent alarge, simultaneous replacement of directors; it is important to maintain a continuity of ideas and objectives onthe board. Members who do not participate during a specific period or who fail to meet board standards shouldbe removed. Also, the number of sequential service periods should be limited.Letters of appointment and conflict of interest policiesTwo useful tools to formalize the participation of board members include the letter of appointment and conflictof interest policies. The letter of appointment should include detailed information on expected responsibilities,expected time commitment, compensation structure, legal liabilities and obligations, codes of conduct for boardmembers, and conflict of interest policies (see box 2.8).
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