Do we need a new standard of microfinance governance? Or do boards just need to do their jobs?

Recent discussions around governance in the microfinance industry point to a very interesting fact of life: We still do not know what a mature double bottom-line industry looks like. We haven’t fully articulated the second bottom line, much less converted it into measurable objectives. All of which makes it reasonable to ask whether, when it comes to the role of boards, we’re even having the right conversation.

In my view, we aren’t.

The conversation about the need for MFI boards to focus more heavily on governance of social objectives misses the real question: Whether the boards of MFIs are adequately fulfilling the role of company board, period.

To be clear, I have no interest in excusing misgovernance and or the actions of fly-by-night-operators interested in quick profits. But I’m troubled by the tenor of most discussions that accuse the boards of MFIs of focusing on growth, profitability and funding at the expense of the social aspect double bottom line. They take the wrong tack, and could lead us off course. My view is that the two sides of the line – growth and client focus – are inextricably linked. By extension, I believe that the governance role of boards in a microfinance institution should at least match that of boards in a single bottom line industry. Only once we’ve hit that baseline should we graduate to the discussion around governance of a double bottom line company.

My rationale is twofold:

1. A board’s role is to steer companies towards robust, customer-centric product portfolios

In most markets where MFIs operate, competition is limited; MFI customers do not have a choice of either providers or products. Moreover, there are large pockets of negligible MFI penetration. The result is almost insatiable demand; MFIs have had the luxury of “dumping” any product in the market and being assured that it will be taken up. With so many customers so hungry for access to any financial services or products, most MFI’s don’t need to worry about product differentiation, value for money, etc.

This dynamic may explain why MFI management teams do not spend sleepless nights or include product diversification and the like in board agendas. (It is also perhaps the reason that many MFIs earning over six to eight percent return on assets never bothered to reduce interest rates or improve the quality of their services.)  However – again an MFI is aspiring to be a responsible, long term player in this market – shouldn’t its board be asking for this discussion to be included? Definitely, yes.

My point is that the expectation for the board of a double bottom line company should at least match that of a single bottom line company. Large, well-governed consumer products companies typically address topics like client segmentation, product variants and diversification, large spends on product awareness, product quality and service delivery standards in their board discussions.  Is there any reason this type of discussion shouldn’t take place in the board room of an MFI, even one cast as a pure commercial enterprise rather than a double bottom line business? Clearly, there’s not.

2. A board’s role is to help operators maintain a disciplined eye on the future

Compared to other sectors in the development space, the microfinance sector has established a strong ecosystem of funders, regulators and other stakeholders. Regardless, the microfinance sector is also fairly young – 15 years old, give or take. And so the reality is that MFI operators are constantly fighting challenges relating to the eco-system within which they operate. They must:

  • Raise the debt and capital needed to fuel growth
  • Attract and retain top managerial talent that can sustain growth levels in a responsible, professional manner
  • Navigate ever-changing regulatory structures and compliance requirements

During board meetings, these challenges – which are of immediate and critical importance to MFI managers – often relegate the discussion of clients to the background. That much is true.

But so is the fact that the board’s role is to help MFI operators navigate the immediate challenges of the operational environment while also bringing in the discipline to focus on long-term objectives. In other words, the board’s role is not simply to help the company survive the present, but to responsibly build toward its future – in no small part by ensuring the company is preserving its relationship with clients by serving their needs. Which brings me to a central tenet of my hypothesis:

A board’s responsibility on this front stems neither from the fact that MFIs are double bottom line companies, nor from the fact that their clients are poor. It stems from the simple fact that any board’s job is to help any company achieve long-term success, which – for any company that has customers – depends in large part on their satisfaction.

To fully grasp this point, all you have to do is review the SMART Campaign principles of client protection and ask: Are these any different from what a long term, leading player in the single bottom line industry should be following? From my perspective, the clear answer is, “No.” And from there, it’s a short jump to the conclusion that the boards of MFIs should already be in the business of protecting the future growth future of a company, which naturally includes development of a customer base that’s viable and economically healthy over time.

A board is a board is a board

Microfinance entrepreneurs have different reasons for setting up their institutions. Some have a very strong focus on the social side of the bottom line – for instance, providing the poor with access to financial services, improving income levels or empowering women; others are more interested in making profits in an untapped market. Regardless, the boards of these companies should – simply as a matter of good business practice –  keep client concerns front and center. And that should be true with or without reference to discussions of the vulnerability of a particular client base or a precise, agreed-upon understanding of what it means to have a double bottom line.

Geeta Goel sits on the boards of five MFIs.