Governance Issues

At the system-wide level, good governance requires appropriate mechanisms of financial supervision and also of technical assistance by a central fund to which local financial intermediaries are linked. At the level of a local institution, governance concerns establishing accountability and transparency in the operations of the institution and in the relations between shareholders, depositors, managers and directors. Ensuring solid governance may be the most important factor in the success of rural financial institutions.118

Good governance allows each actor the necessary freedom to act in the best interests of the institution while at the same time responding to the other legitimate interests involved in the institution. When an institution works well in these senses, it can meet the following challenges, as described by Max Clarkson and Michael Deck:119

(1) How does the business preserve its vision?

(2) How does it balance growth, risk and profitability?

(3) How does it establish a governance system that holds management accountable without undermining its independence?

In a concrete sense, governance eliminates conflicts of interest and establishes relationships of trust among depositors, managers, shareholders and members of a board of directors, so that confidence is generated that influential individuals will not abuse their relationship with the institution to obtain access to its funds in an irregular manner. Abuses of this nature, or allegations thereof, have undermined many rural credit cooperatives over the years.

There do not exist precise guidelines in the governance area for rural financial institutions. However, to help avoid the problem of insiders' access to funds and to increase accountability,

Clarkson and Deck (1997, p. 6) outline the basic responsibilities of a board, as follows:

(1) Fiduciary. The board has the responsibility to safeguard the interests of all the institution's stakeholders. As such, the board serves as a check and balance to provide confidence to the [institution's] investors, staff, customers, and other key stakeholders that the managers will operate in the best interests of the institution.

(2) Strategic. The board participates in the organization's long-term strategy by critically considering the principal risks to which the organization is exposed, and approving plans presented by the management. The board does not generate [the institution's] strategy, but instead reviews management's business plans in light of the institution's mission, and approves them accordingly.

(3) Supervisory. The board delegates the authority for operations to the management through the Chief Executive Officer. The board supervises management in the execution of the approved strategic plan and evaluates the performance of management in the context of the goals and time frame outlined in the plan.

(4) Management Development. The board supervises the selection, evaluation and compensation of the senior management team.. . .

They also point out that 'it is not necessary for board members to be shareholders. In fact, it may be preferable if some of the members are independent.. .'. Above all, 'board members should not receive any personal or material gain other than the approved remuneration. The board must have common and clear objectives. It is important that board members do not have political agendas that could influence the direction of the organization'.

118. J. Yaron, M. P. Benjamin and G. L. Piprek, 1997, p. 7.

119. M. Clarkson and M. Deck, 'Effective Governance for Microfinance Institutions', in Craig Churchill (Ed.), Establishing a Microfinance Industry, Microfinance Network, Washington, DC, USA, 1997, p. 6.

In addition, their review touches on the issue mentioned above of having stakeholders who have invested capital in the institution, as opposed to the pure co-operative model (Clarkson and Deck, 1997, p. 7):

One of the rationales for changing institutional forms, from an NGO into a regulated financial intermediary, is that for-profit institutions have capital that is owned by someone who will be upset if their capital is dissipated. Once the institution has shareholders who have something to lose, then there are clear lines of accountability between the owners and the board members.

Finally, they stress that programs of training for such institutions should include board members as well as managers.

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