Socially oriented equity investors—particularly those that take formal roles in the governance of microfinance service providers and funds—face challenging situations and decisions. Equity investing requires active governance—and this is particularly true for value-based investing because value-based investors seek to guide the company so that it behaves responsibly and creates both financial and social returns. Again and again in the course of research, those involved in microfinance institution (MFI) governance have said that most microfinance investors are not taking an active enough role. One experienced microfinance professional spoke for many when she observed: “Foreign investors must be engaged owners, not just sleeping partners.” This paper offers evidence from interviews that took the pulse of more than 100 industry insiders to provide a self-assessment of microfinance governance today.
Corporate governance serves to mediate interests of diverse stakeholders including shareholders, management, and employees, as the basis for decisions on a company’s strategy and goals. It provides the framework within which shareholders oversee operational performance and manage risk to ensure the company’s long-term health. In the case of MFIs, those diverse interests also include protecting vulnerable clients and pursuing a social as well as a financial bottom line. Equity is of growing importance to the microfinance sector, and social investors that provide equity have expanding opportunities to play governance roles. This Focus Note explores the extent to which investors are currently capitalizing on this opportunity for active and effective governance. It offers practical insights, emerging good practices, and reflections on how to address reported gaps.