Corporate Governance: the challenge facing the microfinance industry

Olga Lucia Calzada

Foto Olga Lucía Olga Lucía Calzada, Responsible for Legal Department Bancamía

Many Colombian companies have been rolling out changes to their corporate governance systems since External Circular 024/2014 came into force. This legislation was enacted by the Colombian financial supervisor and discussed in the first issue of “Progreso”. In this editorial we want to highlight the importance for any organisation, and very particularly for the microfinance industry, of optimising the operations of such systems by adopting the principles of good corporate governance.

With this circular, the Colombian government has demonstrated its interest in bringing Colombian business into line with worldwide best practices, as employers serve as opinion leaders in the take-up of values. It also highlights the importance of transparency in its most active form: the timely, comprehensive disclosure of key information for investors.

This point is something worth focussing on. For information disclosure has traditionally been perceived as a duty, arising from best governance practices that were perceived as external to the companies and in some cases only there to help the investors in their decision taking. The importance disclosure has in generating value for the company has not really been much appreciated.

The structuring or adjustment of a good governance system should thus also focus on ensuring that the best principles, measures and recommendations are mainstreamed into all the different instances where decisions are made, and not only its decision-making organs.

It is easier to identify how this might be done if we consider two specific issues:

1. The operation of the company’s decision-making bodies

Several measures contained in the Circular focus on guaranteeing that shareholders and directors (board members) receive comprehensive, accurate information with enough time prior to their meetings to be able to evaluate it in depth, to gain a critical, strategic understanding of matters about which they should be aware and, in many cases, make decisions.

In the same way, it makes sense for companies’ internal committees, responsible for generating information for the governing bodies, to be subject to the same measures for their meetings: sufficient advance notice, an agenda defined beforehand, with all members receiving comprehensive information in good time. At committee level, the one member/one vote rule should be followed, and the key aspects of all decisions should be duly minuted. The same rules regarding disclosure, risk mitigation, traceability of decisions and monitoring of their implementations should also apply.

2. Diversity

The Circular lays down measures to encourage the creation of collegiate governing bodies, bringing together people with different academic backgrounds and different professional profiles in such a way as to guarantee a balance of experience and expertise and ensure the independence of their decision making. Thus these bodies are able to take a multidisciplinary approach to their business, understanding the environment in which each company operates, while being aware of the applicable regulations governing it and having genuine insight into the markets in which they work.

The same rules ought to be adopted for all internal committees at whatever level, whether their purpose is to formulate proposals or simply to make recommendations that are taken up at a higher level.

Finally we must not omit the crucial role which company directors play in rolling out a system of good corporate governance.

The directors must oversee the implementation of good governance principles and measures. They are responsible for ensuring the incorporation of these principles into everything done in the company and for establishing an unwavering commitment to them throughout the corporate culture. This undoubtedly requires their commitment, time and effort in the appropriate performance of their duties: reviewing and analysing the reports submitted to them, active participation with decisive input on the committees supporting the board, defining policies and structures, and formulating strategic plans, among others.

Furthermore, directors are required to stand accountable before the shareholders that have appointed them to control and direct the management of their organisations, all this without forgetting the remaining stakeholders.

In conclusion, the greatest challenge in establishing and strengthening good corporate governance in any enterprise, and especially in microfinance institutions, is in implementing and complying with recommended best practices at all levels of the organisation, as well as the transparent articulation of the duties, functions and roles of all those participating in the governance system.