UNIVERSAL CORPORATE GOVERNANCE CODE FOR MICROFINANCE ... · march 2011 1st edition universal corporate governance code for microfinance institutions

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FUNDACIÓN MICROFINANZAS

UNIVERSAL CORPORATE

GOVERNANCE CODE

FOR MICROFINANCE

INSTITUTIONS

March 20111st Edition

UNIVERSAL CORPORATE

GOVERNANCE CODE

FOR MICROFINANCE

INSTITUTIONS

© Fundación Microfinanzas BBVA.

All rights reserved.

The content of this publication is property of the BBVA Microfinance Foundations. No part of this publication may be reproduced without prior written permission. The publication without authorization violates the Intelectual Property Law.

Fundación Microfinanzas BBVAPaseo de Recoletos, 10.- 28001 Madrid (España)

www.mfbbva.org email: [email protected] Tel.: +34 91 374 70 84

INTRODUCTION

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INTRODUCTION

The BBVA Microfinance Foundation contributes to sustainable economic and social

development of disadvantaged people in society through productive microfinance. The

Foundation works to strengthen the microfinance sector in order to extend financial

products and services to more people, under better conditions. With this in mind, the

Foundation has several lines of work underway, including strengthening corporate

governance in the microfinance sector.

The lack of good corporate governance is one of the main challenges facing the sector

in Latin America and the Caribbean. Corporate governance is related to an institution's

internal operating and control procedures. It plays a key role in creating transparency and

trust for investors and in attracting capital. Good corporate governance contributes to

efficient management and to considering stakeholder interests, boosting the microfinance

institution's reputation and integrity and fostering customer trust.

The BBVA Microfinance Foundation has written two reference corporate governance

documents for the microfinance sector, which are available for any microfinance institution

interested in applying it:

• The "Universal Code of Corporate Governance for Microfinance Institutions", which

is included in this publication and contains a series of good practices, standards

and principles that, in accordance with generally-accepted international standards

and good practices, the BBVA Microfinance Foundation considers suitable for the

good governance of any microfinance institution and for the proper governance of

each institution, regardless of its legal structure (regulated or non-regulated financial

institution, NGO, cooperative, etc.).

• This Universal Code is supplemented by the “Guide to adopting good governance

principles in microfinance institutions”, written by the Foundation in collaboration

with the IDB/MIF. This Guide covers the essentials that microfinance institutions must

consider when preparing a corporate governance code and implementing it in their

Boards of Directors.

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INDEx

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INDEX

I. DEFINITION OF GOOD CORPORATE GOVERNANCE .......................................................................10

II. IMPORTANCE OF CORPORATE GOVERNANCE ...............................................................................11

III. CORPORATE GOVERNANCE PRINCIPLES ........................................................................................12

IV. GOOD GOVERNANCE IN ADMINISTRATION ...................................................................................14

1. ANNUAL GENERAL MEETING .......................................................................................................................14

1.1. CONVENING .............................................................................................................................................................14

1.2. RIGHT TO INFORMATION .......................................................................................................................................15

1.3. DELEGATION AND REPRESENTATION .................................................................................................................15

1.4. MEETING MINUTES ................................................................................................................................................15

2. BOARD OF DIRECTORS ..................................................................................................................................16

2.1. BOARD OF DIRECTORS DUTIES ............................................................................................................................16

2.2. SIZE OF THE BOARD OF DIRECTORS ..................................................................................................................17

2.3. BOARD OF DIRECTORS COMPOSITION ...............................................................................................................17

2.4. APPOINTMENT AND RE-ELECTION OF DIRECTORS .........................................................................................17

2.5. DURATION OF OFFICE .............................................................................................................................................18

2.6. END OF TERM OF OFFICE .......................................................................................................................................18

2.7. INCOMPATIBILITIES INHERENT TO THE POSITION ..........................................................................................19

2.8. DIRECTOR REMUNERATION ..................................................................................................................................19

2.9. DIRECTOR RESPONSIBILITY ..................................................................................................................................20

2.10. DIRECTOR EVALUATION .......................................................................................................................................20

2.11. CONFLICTS OF INTEREST .....................................................................................................................................20

2.12. BOARD OF DIRECTORS OPERATIONAL METHOD ...........................................................................................21

2.12.1. DISTRIBUTION OF POSITIONS ....................................................................................................................21

2.12.2. RULES OF OPERATION .................................................................................................................................22

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V. GOOD GOVERNANCE IN MANAGEMENT .......................................................................................25

1. GENERAL MANAGER / EXECUTIVE CHAIRMAN / COO ............................................................................25

1.1. GENERAL MANAGEMENT'S DUTIES AND RESPONSIBILITIES ...................................................................25

1.2. GENERAL MANAGEMENT REMUNERATION ...................................................................................................26

1.3. GENERAL MANAGER SUCCESSION PLANNING ............................................................................................26

VI. BOARD OF DIRECTORS COMMITTEES .............................................................................................27

1. AUDIT COMMITTEE ........................................................................................................................................27

2. INVESTMENTS AND RISKS COMMITTEE ...................................................................................................28

3. APPOINTMENTS AND REMUNERATION COMMITTEE ............................................................................28

4. CORPORATE GOVERNANCE COMMITTEE .................................................................................................28

5. SPECIAL COMMITTEES ..................................................................................................................................29

VII. GENERAL ACTING PRINCIPLES ........................................................................................................30

1. PROCESS STREAMLINING ............................................................................................................................30

2. CONTRACT TRANSPARENCY ........................................................................................................................30

3. INTERNAL AND EXTERNAL CONTROL ........................................................................................................30

4. RISK CONTROL.................................................................................................................................................31

5. FINANCIAL PROFITABILITY AND SELF-SUSTAINABILITY .......................................................................31

6. MEASURING PERFORMANCE AND IMPACT .............................................................................................31

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I. DEFINITION OF GOOD CORPORATE GOVERNANCE

Good Corporate Governance refers to a system of people, values, criteria, processes and

procedures that ensure that an organization is managed properly and that guides it towards

its mission and vision.

The general duties of the Corporate Governance system are:

1. Defending the organization's mission, vision and fundamental goals.

2. Moving the organization along its main strategic guidelines.

3. Maintaining the organization's long-term sustainability.

4. Ensuring that corporate responsibility is applied throughout the organization.

Good Corporate Governance makes sure mechanisms are in place and put into practice

in order to strike a balance between management and control and to meet the needs of

stakeholders (everyone involved in the organization and/or affected by its activity).

The challenges involved in implementing Corporate Governance include:

1. Identifying the path to follow and the solutions that best meet the organization's needs.

2. Hiring people who can guarantee efficient management and administration.

3. Conveying that credibility in the eyes of the market is a fundamental pillar.

4. Commitment to stakeholders (shareholders or partners, customers, suppliers,

institutions and markets, and so on).

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II. IMPORTANCE OF CORPORATE GOVERNANCE

When an organization has high Corporate Governance standards, it is seen to be more

trustworthy and therefore has access to better financing conditions and better conditions

on the capital markets in which it trades.

Better Corporate Governance means that the organization is better organized, plans its goals

and strategies better and fulfils its processes more efficiently. It consequently becomes

stronger and more competitive.

The advantages of Good Corporate Governance include:

1. It creates value.

2. It ensures efficient company management and administration.

3. It protects the rights of investors and other stakeholders, which in turn builds market

trust and sustains the organization over time.

4. It attracts capital.

5. It allows access to financing sources.

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III. CORPORATE GOVERNANCE PRINCIPLES

• FAIRNESS

Protection of shareholder rights, in the case of organizations with a corporate status, guaranteeing fair treatment for everyone and with special protection of minority shareholder rights and encouraging the exercise of their right to company information and voting rights.

In the case of organizations with a different legal status, like NGOs, cooperatives, etc., the guarantee that decision-making at the governance levels is fair, limiting abuse of power by a minority group or excessive concentration of power in one of the members.

• RESPONSIBILITY

Establishing a framework of responsibility for administrators (or governance body members) and senior executives (or the organization's managers) aimed at creating long-term, sustainable value for shareholders and other stakeholders (customers, suppliers, international finance and development bodies, etc.). The aim is the company's long-term survival on the basis of sustainability, keeping integrity and boosting its financial and intellectual capital (human, structural, relational and social).

• RESPECT FOR RIGHTS

Respect for people’s dignity and their inherent rights. The organization must be committed to the United Nations Universal Declaration of Human Rights and to other international organization treaties that promote human rights, in particular the International Labor Organization.

An important aspect of these rights and a demonstration of this dignity is equal opportunities and respect for diversity.

• CORPORATE INTEGRITY

Promoting honorable and impeccable behavior, based on the belief that without integrity customer, stakeholder and company trust is impossible.

As part of personal integrity, the organization’s employees must show outstanding dedication and a professional attitude in both processes and result management, in order to ensure an excellent reputation.

• LOYALTY

Acting in good faith in the organization's general interests, honestly and rigorously, knowing that a consistent example set by all of the organization's employees is of fundamental importance.

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The organization must hire responsible people who try to find the best answer to situations, proposing solutions and assuming the risk of being wrong. This way they learn to take the right decisions.

• COMPLIANCE WITH REGULATIONS

Compliance with legal provisions and regulations that apply to the organization.

In accordance with the applicable legal framework, cooperation with supervisory, judicial and administrative authorities to prevent unlawful activities and conflicts of interest.

• TRANSPARENCY

Attaching particular importance to policies that allow stakeholders their access to significant information, guaranteeing that this information is reliable and available, based on transparency and external, independent verification.

This means issuing and disclosing information responsibly and accurately, promoting transparency, fluidity, confidentiality and integrity in the markets where it operates.

The organization must also establish procedures and rules to ensure that legal requirements regarding the safekeeping of documents and records are fulfilled.

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IV. GOOD GOVERNANCE IN ADMINISTRATION

1. ANNUAL GENERAL MEETING

This is the institution's highest governing body. Regardless of its name, it varies according to the organization's legal status and/or the country's legislation. If the organization is a company, association or cooperative, it refers to the Meeting of Shareholders (or members) as the supreme corporate body formed by the shareholders/members.

Good governance requires participation from the maximum number of shareholders/members in the Meeting decisions, in order to benefit the institutions. The shareholders/members therefore need to be given the opportunity to exercise their vote and communicate with each other.

The key question is checking whether the shareholders/members and other participants are able to fully exercise their rights. All shareholders must have the same rights, including the right to vote.

The organization must establish internal regulations that set the criteria for organizing and running the Annual General Meeting in order to allow the shareholders/members to exercise their rights.

1.1. CONVENING

The Chairman of the Board of Directors convenes the Annual General Meeting in accordance with the agenda.

The Board of Directors can convene the Annual General Meeting (AGM) whenever it deems necessary on behalf of the institution's interests. The Board is under the obligation of convening the Annual General Meeting at least once every fiscal year and when requested by a representative number of shareholders/members.

The convened Annual General Meeting will assemble to:

- Review and approve corporate management .

- Review and approve, if applicable, the financial statement from the previous year.

- Decide on how to allocate profit.

- Adopt resolutions on any other matter as long as it is included on the agenda and the share capital required by the law or in the organization bylaws is represented at the Meeting.

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Any announcements of the meeting must contain every detail required by law and must always specify the venue, day and time of the first scheduled meeting, as well as all of the matters that will be discussed (the agenda).

1.2. RIGHT TO INFORMATION

Once the AGM has been announced, the institution will provide shareholders/members

with documents and other information related to the matters that will be discussed at the

Meeting.

Before the AGM is held, shareholders can ask the Board of Directors for any information

or clarifications they consider necessary regarding the items on the agenda, and they

can ask any questions they consider relevant.

1.3. DELEGATION AND REPRESENTATION

Any shareholders can be represented by another person at the AGM, even if they

are not a shareholder. The representative powers must be conferred specifically for

each meeting, which can always be revoked should the represented person attend

the meeting in person. In the case of associations and cooperatives, members can

delegate their vote in accordance with the institution's articles of association.

The document that sets out the delegated or representative powers for the Annual

General Meeting will include instructions on where the vote heads to and the agenda.

1.4. MEETING MINUTES

The deliberations and resolutions at the Meeting will be recorded in a Minute, which

must include at least the following: the meeting venue, date and time; the notification

method and notice period; the list of attendees; the matters discussed (agenda);

decisions taken and number of votes in favor, against or blank votes; written material

submitted by attendees during the meeting; appointments made, and the date and time

the meeting was closed.

The minutes therefore reflect everything discussed and approved at the Annual General

Meeting and are thus important because they are an excellent proof of the resolutions

adopted and shareholders/ members participation.

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Universal Corporate Governance Code for Microfinance Institution

2. BOARD OF DIRECTORS

It is the body responsible for administering the organization with all of the necessary powers.

Good governance therefore places an emphasis on the importance of the Board of Directors

as a governing body which channels the structure and operation of the organization’s

corporate bodies in its interests.

2.1. BOARD OF DIRECTORS DUTIES

The Board of Directors, which is subject to the AGM guidelines and policies, is the body

responsible for representing, administering, managing and supervising the institution

and assumes the broadest powers in all of those areas.

It is therefore generally responsible for:

- Helping define the strategy that will increase the institution’s value, guiding the

management by assimilating information that affects the organization’s performance

and creating a planning document and annual budget for the following year.

- Evaluating Management’s performance based on:

(i) Creating policies that are in the institution’s best long-term interests.

(ii) Ensuring that the management team has all of the necessary resources

to implement the institution’s policies.

(iii) Monitoring the results of the institution’s policies.

- Defining how the Board of Directors method of operation, i.e. the members, their selection,

evaluation and changeovers or rotation, in order to guarantee a strong structure.

- Formulating and disclosing the remuneration policy with an emphasis on how this

policy is related to the performance of key executive bodies and their members.

- Ensuring compliance with laws and regulations, and supervising internal control

systems related to financial reports.

- Establishing the Code of Ethics and Conduct.

- Establishing the mechanisms that regulate possible conflicts of interest.

In all of its duties and in accordance to the Code objectives, the Board of Directors

will promote excellent treatment and customers service, partners, suppliers and other

stakeholders.

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2.2. SIZE OF THE BOARD OF DIRECTORS

The size of the Board of Directors in accordance to with the size of the institution and must foster participation of all of its members.

The Board of Directors must be of a size that ensures proper representation, efficiency and participation.

The Annual General Meeting is responsible for determining the exact number of Board

members, subject to legal regulations in each country and to the institution’s bylaws.

2.3. BOARD OF DIRECTORS COMPOSITION

It will be formed by internal and external Directors, who can be independent or not. The total number of independent Directors should represent at least one third of the total number of Board members.

The Board of Directors structure must be balanced in terms of member experience, qualifications and independence so as to undertake the different tasks and inherent responsibilities.

Experience and qualifications refer to a balanced Board of Directors structure in terms of financial matters, risks and corporate goals.

Also, to be a member of the Board of Directors a person must not be involved in an legal procedure on the grounds of prohibition or incompatibility.

All the Board members will have the right to speak and vote. If the manager sits on the Board of Directors, he will have the right to speak but not to vote to ensure that the

administration and management functions are separated.

2.4. APPOINTMENT AND RE-ELECTION OF DIRECTORS

The appointment and re-election of the Board of Directors members falls on the Annual

General Meeting or the organization’s highest governing body.

Once chosen, the Board members must represent the institution’s interests. They must

perform their duties in good faith, objectively and independently, with due care and

diligence, so that their decisions are always aimed at the institution’s best interests. All

of the Meeting members must be aware of and ratify the institution’s internal regulations,

Code of Ethics and Conduct and Code of Corporate Governance.

The Board of Directors must ensure that the people put forward for the position of Director

have the necessary solvency, competence and experience and are willing to put in the

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necessary time and effort to carry out their duties, taking special care in relation to the

choice of people proposed for the position of independent Director.

The resolutions that the Board of Directors adopts in relation to the re-election of members

and its deliberations in this regard shall take place in the absence of the Director whose

re-election is proposed. If the Director is at the meeting, he must leave the room.

Where established in the country’s legal regulations, the appointment of the Board of

Directors members will also be subject to approval from the regulatory or supervisory body.

2.5. DURATION OF OFFICE

Directors shall remain in office for the term defined by the Annual General Meeting. If they have been co-opted, they shall work out the term of office remaining to the director whose vacancy they have covered through co-option, unless the AGM establishes a longer term on ratifying the appointment agreed by the Board of Directors.

Board of Directors members will remain in office until their successors are chosen, unless their powers are revoked or they are disqualified beforehand. In any case, the organization’s articles of association must determine the period of effective member renewal, which must not exceed 5 years. Effective renewal means that at least one new member must join the Board of Directors in the aforementioned period.

2.6. END OF TERM OF OFFICE

Directors shall resign from their office when the term for which they were appointed has expired, are re-elected, or when the Annual General Meeting decides so.

The Board of Directors has the power to revoke a member at any time, even if their term of office has not expired.

Causes for the end of term of office for members include: death, resignation from office, maximum established age, physical or legal incapacity to carry out the assigned duties or being revoked from their position (if the reason they were appointed as member of the Board of Directors because of that specific position).

The Board members must hand in their notice to the Board of Directors, which will

arrange their resignation if it deems necessary, in the following cases:

a. When barred (on grounds of incompatibility or other) under prevailing legal

regulations.

b. When significant changes occur in their professional situation or the condition by virtue of which they were appointed to the Board.

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c. When they are in serious infrigement of their duties as directors.

d. When they have failed to comply with: the organization bylaws, the Code or Corporate Governance, the Code of Ethics and Conduct and the internal regulations. When the Director, acting as such, has caused severe damage to the Company’s assets or its reputation or credit, and/or no longer displays the commercial and professional honor required to hold a directorship.

e. If remaining on the Board of Directors might affect the Board or the institution’s credit or reputation, or it might harm its interests (e.g. in a conflict of interests or breach of legislation).

f. In the case of a non-independent member when the shareholder whose interests he represents on the Board of Directors is involved in the institution.

When a Board member ceases to occupy his position before his term of office ends, through resignation or any other cause, he must explain the reasons in a letter to all of the members, and, regardless of whether this end of term of office is reported as a significant event, the reason should be included in the Annual Corporate Governance Report.

2.7. INCOMPATIBILITIES INHERENT TO THE POSITION

Board of Directors members cannot work for the competitors of the institution in which they have ceased to be a Director, nor can they accept employee, manager or administrator positions in those companies, unless the Board of Directors grants express authorization or they were providing those services before they joined the Board of Directors and informed the Board about said situation at the time.

Members who leave the Board of Directors can work for any other institution, except competitors of the institution in question or its subsidiaries. In this case, the member must request express authorization from the Board of Directors, which may refuse this request in the institution’s interests. If the request is refused, the member cannot be appointed to a similar position or work for another competitor of the institution or its subsidiaries for

two years after he has left the Board of Directors.

2.8. DIRECTOR REMUNERATION

The Annual General Meeting must establish the remuneration policy for the Directors,

taking the necessary measures in order to maintain, correct or improve it and to adapt

this policy to the principles of moderation and the institution’s performance.

The remuneration that the Board members receive must be transparent. The Board of Directors must include information on the total and global amount that the Board members receive in the annual information and in the Annual Corporate Governance Report.

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As a general rule, for the smooth running of the institution, the Board of Directors members must receive sufficient remuneration, in order to establish a tie that binds competent people, and this remuneration must one way or another be consistent with the Directors outcomes and the institution performance.

2.9. DIRECTOR RESPONSIBILITY

Directors will respond the institution, shareholders and creditors for any damages that they cause due to unlawful actions or omissions or due to a breach of their inherent duties, in accordance with legally established terms and conditions.

2.10. DIRECTOR EVALUATION

The Board of Directors must evaluate annually each member’s performance in accordance with objective criteria that the institution’s Board of Directors establishes.

2.11. CONFLICTS OF INTEREST

A conflict of interest is any situation or event related to institutional regulation, administration, operation or control in which a Board of Directors member must intervene or participate as part of his duties and whose decision is directly or indirectly related to his own personal or family interests and/or that institutional decision goes against the institution’s interests.

Directors must avoid falling into the following conflicts (including but not limited to):

• Acting based on friendship or family relationship.

• Carrying out any activity that could generate or seem to generate personal favors in return.

• Receiving remuneration, gifts or any other type of monetary compensation or compensation in kind from any individual or legal entity for work or services rendered to the institution.

• Using their position or the institution’s name for personal gains.

• Generally speaking, any activity carried out in better conditions than market conditions for the respective Board member.

Board members must inform the Board of Directors, or whichever committee is responsible, as soon as possible of any direct or indirect conflict that could go against the institution’s interests, providing the necessary information so that an unbiased and informed decision can be taken.

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Directors must abstain from intervening in votes relating to matters in which they or people related to them have a direct or indirect interest.

In any situation in which there is doubt over a possible conflict of interest, the Board member must proceed as though this conflict of interest did exist. If the majority of members are in a potential conflict of interest situation, the Board must abstain from carrying the activity, or from holding the event or entering the agreement or contract that generates this situation, unless the Board Chairman gives express authorization.

The following people are considered to be related to Board of Directors members:

a. The spouse of the Board of Directors member in question or anyone with a similar relationship.

b. The parents, grandparents, children and siblings of the member or his spouse.

c. The spouses of the member’s parents, grandparents, children and siblings.

Any Board of Directors member who infringes upon these provisions will be responsible for any damages and loss caused to the institution and may be revoked by the Board of Director or by the Annual General Meeting.

2.12. BOARD OF DIRECTORS OPERATIONAL METHOD

2.12.1. DISTRIBUTION OF JOB POSITIONS

Chairman

The Board of Directors will appoint a Chairman from its members, who will chair the Board and who will also be Chairman of the institution. The Board will delegate the Chairman all of the powers inherent to his position in order to efficiently manage the institution.

The Chairman is given ordinary powers to convene the Board of Directors, prepare the agenda for its meetings and lead discussions. The Chairman must nonetheless convene the Board of Directors and include any items on the agenda when requested by a representative number of Board members.

If the Chairman is unable to carry out his duties or is absent, the Deputy Chairman -if there is one- or the oldest Board member will stand in for him.

Deputy chairman

The Board of Directors can appoint a Deputy Chairman from its members, who will

hold the Deputy Chairman’s Office for the Board.

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The Deputy Chairman’s only duty is to stand in for the Chairman in his absence or

unable to fulfill his duties.

Secretary

The Secretary of the Board of Directors may or may not be a Board member. The

Board will take this decision. If not a member, the Secretary will have the right to

speak but not to vote at the meetings.

The Board will appoint the Secretary and terminate his term of office, selecting a

competent person with proven integrity and identity for the institution. Given the

importance of his duties (he enforces legal, statutory and regulatory requirements),

the Secretary should be independent and have stability in his post.

The Secretary must help the Chairman with his duties. In addition to the special duties

assigned by the Board of Directors, the Secretary will be Secretary for the Annual

General Meeting and a permanent collaborator for General Management.

2.12.2. RULES OF OPERATION

The Board of Directors will hold an AGM at least once a year and, at the Chairman’s

initiative, as often as he deems necessary for the smooth running of the institution, or

at the request of a majority of members, as must be established in the bylaws.

At least once of year, the Board of Directors must hold a special meeting to evaluate

its own work as a decision-making body, the consistency of its internal rules and its

members’ dedication and performance. It must propose any changes that it considers

necessary for its organization and operation.

The Board of Directors will prepare an annual plan of AGM sessions, specifying the

dates of the planned meetings and the items on the agenda.

Convening and agenda

The Board of Directors will be convened by the Chairman and, in his absence, by the

Deputy Chairman standing in for him, or by the General Manager.

The meeting will be considered to be convened on the dates specified in the

calendar of sessions established for the year, regardless of whether the Secretary,

on the Chairman’s instructions, sends notice to the members sufficiently in advance

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of the sessions specified in the Agenda, which can be sent by letter, fax, telegram,

email, or any other online channels. The same means of notice should be used to

cancel the meeting.

The Board of Directors will be validly constituted when all its members are present

and unanimously resolve to constitute a meeting.

The announcement will enclose the session Agenda, although other items can

be included on it if the Board Chairman considers it necessary in the institution’s

interests. He can also decide that an item be removed from the agenda even after the

meeting has been convened.

The Chairman will take the necessary measures to ensure that the Directors receive

enough information prior to the meeting so that they can take well-reasoned and

justified decisions.

Session development

The Board of Directors will be validly constituted when half plus one of the members

attend the meeting, in person or represented.

The Board members can appoint another Board member to represent them, without

any limitations. However, the Board members are encouraged to attend the meeting

in order to enrich the discussions.

Representative powers must be conferred by letter, fax, telegram or email addressed

to the Chairman and specifically for each session, which can be channeled through

the Board Secretary.

The Board of Directors meetings will be held on the specified date and venue, in

accordance with the Agenda that the Chairman has established. The Chairman will

prepare the proposals that will be submitted to the Board’s approval and will lead the

deliberations and discussions.

The institution’s executives and other people may join the meetings should the Chairman

ask for their adequate attendance in light of the specific matters laid before the Board.

The Chairman will encourage the participation of all of the Board’s members in the

deliberations and discussions and will put matters to the vote when he considers they

have been sufficiently debated.

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The resolutions will be adopted by absolute majority of votes, either present or

represented, unless established otherwise in applicable law/bylaws/shareholder

agreements.

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V. GOOD GOVERNANCE IN MANAGEMENT

1. GENERAL MANAGER / EXECUTIVE CHAIRMAN / COO

This Code advocates a full separation between administration and management duties so

that each body carries out its duties with the highest efficiency. The Board of Directors

members are responsible for the general strategy, control and supervision and must not

interfere in the General Management’s activities, to which the Board of Directors must

delegate the institution’s management duties.

However, the separation between management and governance duties and administration

duties must never result in important decisions or measures being taken by the institution’s

management bodies without the Board of Director’s intervention.

The General Manager is the institution’s legal representative, judicially and extra-judicially.

He is appointed by the Board of Directors and he reports to the Board Chairman.

The General Manager is responsible for putting in place procedures to implement the Board

of Directors’ policies, strategies and systems, including those relating to internal control

systems.

The General Manager will not be a member of the Board of Directors, although he will

actively participate in the sessions, with the right to speak but not vote, in order to give his

input on the items on the agenda or any other matter requested of him, with the exception of

sessions that discuss his own management activities.

The General Manager can be relieved of his duties at any time by the Board of Directors

without needing the reasons for the end of term of office of Board members.

1.1. GENERAL MANAGEMENT’S DUTIES AND RESPONSIBILITIES

There must be a proper balance between the Board of Directors’ and the General

Management’s duties, each exercising their powers and duties within the respective

area of competence of both bodies.

The General Manager will have the duties established by law and in the institution’s

bylaws and will fulfill the duties that are delegated to him by the AGM or the Chairman, as

well as those inherent to his position.

The provisions of the present Code of Governance will apply regarding conflicts of

interest that are inherent to the position of Board of Directors member.

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The provisions of the present Code of Governance will apply regarding incompatibilities

that are inherent to the position of Board of Directors member.

1.2. GENERAL MANAGEMENT REMUNERATION

The Board of Directors will establish the General Manager’s remuneration in accordance

with market conditions for this type of position, bearing in mind his professional and

personal conditions, the institution’s image and his experience. The General Manager’s

remuneration and financial benefits must be included in writing in his employment

contract.

A reasonable part of the General Manager’s remuneration can be variable, depending on

the institution’s management results, although the maximum limit at each time and the

remuneration conditions must be specified in detail.

1.3. GENERAL MANAGER SUCCESSION PLANNING

The Management’s succession planning is the responsibility of the Board of Directors,

which must ensure that the institution is well prepared for the next Management

generation.

As part of the succession plan, the Board of Directors must select potential candidates.

The plan must consider every different scenario possible, such as the General

Manager’s retirement at a suitable age, the General Manager’s decision to resign from

his post with sufficient notice, medical emergencies (illness or temporary absence) or

sudden death.

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VI. BOARD OF DIRECTORS COMMITTEES

The Board of Directors can set up the committees it deems necessary to help it perform its

duties better and assist it in matters that fall under their specific area of competence. These

committees must be set up and adapted in accordance with needs. The Board of Directors

can delegate the decision-making on specific matters to them.

The Board of Directors will establish the number of Committees, their name and their

responsibilities, and can also appoint or remove their members from office and appoint or

remove their respective chairmen from office.

The Board of Directors’ Internal Procedures Regulation must include the procedure and

method for convening meetings, legal quorum, method of adopting resolutions, minimum

frequency of meetings and other committee operating procedures.

1. AUDIT COMMITTEE

The Audit Committee members will be appointed by the Board of Directors, bearing in

mind the Directors’ knowledge, experience and skills, especially in relation to accounting,

auditing and risk management.

The Audit Committee makes recommendations to the Board of Directors regarding the

appointment of external auditors and their remuneration, as well as the approval of annual

financial statements and periodical statements. It also discusses the audit program and

results with Auditors and ensures fulfillment with internal controls, accounting policies

and financial information.

The Audit Committee is responsible for ensuring that internal and external audit activities

are carried out properly and that audit matters are given sufficient importance at the

Board of Directors meetings.

The Audit Committee will meet at least once a year, and whenever the Chairman deems

necessary or at the request of a majority of members.

The institution’s external auditors can attend the Audit Committee’s meetings whenever

their attendance is considered necessary in accordance with the nature of the items on

the agenda.

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2. INVESTMENTS AND RISKS COMMITTEE

The Investments and Risks Committee is responsible for analyzing matters relating to the

institution’s risk control and management strategy and policy, and assessing and approving

risk operations that could be significant.

The Investments and Risks Committee has powers over controlling financial risks generated

by the business units. It must approve the methods and models to identify, measure, monitor,

control, report and reveal different risk types. Its other duties include: reporting regularly

to the Board of Directors on risk exposure and the measures taken to manage it; adjusting

or authorizing overruns on exposure limits for the different risk types; and adopting,

implementing and disseminating contingency plans in the event of acts of nature or force

majeure to avoid breach of the set risk exposure limits.

The members of this committee must have the necessary skills and experience to carry

out their duties, and the Chairman must be specifically qualified in the risk management of

financial institutions.

This Committee will meet at least twice a year, and whenever the Chairman deems necessary

or at the request of a majority of members.

3. APPOINTMENTS AND REMUNERATION COMMITTEE

The Board of Directors sets up this committee to coordinate the appointments and

remuneration policy to be applied to the Board of Directors members.

The Appointments and Remuneration Committee is responsible for attending the Board of

Directors meetings in order to appoint, re-elect, remove from office and remunerate the Board

members and the institution’s senior management, authorize and report on transactions with

related parties and enforce the institution’s governance rules, regularly checking that its

rules, recommendations and principles have been fulfilled.

The Appointments and Remuneration Committee will meet at least once a year and whenever

the institution’s Board of Directors or Chairman requests that a report be issued or proposals

be approved within their area of competence, and whenever the Committee Chairman deems

necessary to facilitate the committee in its duties.

4. CORPORATE GOVERNANCE COMMITTEE

The Corporate Governance Committee’s duties include supervising the proper application

of good governance principles proposed in this Code and to which the institution is subject.

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These duties are exercised notwithstanding the legal and statutory powers of the institution’s

representative and management bodies.

This Committee enforces the good governance principles established at each time and

proposes any necessary measures to improve and update those principles.

This Committee will meet at least once a year and whenever the institution’s Board of

Directors or Chairman requests that a report be issued or proposals be approved within

their area of competence.

5. SPECIAL COMMITTEES

This type of Committee responds to the institution’s specific needs or one-off needs, fulfill-

ing a specific duty at a given moment in time, without the Committee or its duties being

required by the institution permanently.

They will be set up for the purpose, at the time and for the duration that the Board of Direc-

tors deems necessary.

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VII. GENERAL ACTING PRINCIPLES

These are a series of basic criteria for institutions aimed at improving their performance. They

are simple, flexible, generic and feasible criteria.

The following list includes but is not limited to the aforementioned criteria, selecting those

considered most relevant in terms of providing flexibility to the institution’s processes and

guiding them in their activities.

1. PROCESS STREAMLINING

In microfinance institutions, customers’ urgent financial needs often need to be solved.

The emphasis must be placed on short timeframes and meeting those deadlines, because

they are key elements in the quality of the service. Well-defined procedures need to be

established to assess the customer’s request and accept or deny it. The level of requirement

in the procedures should be stepped up as the amount involved in the transaction increases.

Institutions should have a credit manual that explains those procedures, which must be

focused on the two-fold aim of mitigating transaction risks and streamlining product approval

and payment times.

2. CONTRACT TRANSPARENCY

Product contract conditions must be explained to customers as clearly as possible. This

includes informing them in simple but rigorous terms about all of the aspects of the contract

and their implications regarding the customer’s relationship with the institution: product cost

or remuneration type, expiry period and repayment conditions, terms and amount of possible

penalties in the event of breach of contract, etc.

The product or service cost must be explained in rigorous and exact terms to the customer,

although complicated explanations and technical terms that hinder comprehension must be

avoided.

Financial contracts must be worded carefully to ensure transparency. Unfair clauses and

conditions or those establishing random payments and/or unilateral decision-making powers

and interpretation must not be included.

3. INTERNAL AND ExTERNAL CONTROL

Institutions must establish internal and external control mechanisms to guarantee in-depth

knowledge of the institution’s activities and strict and timely compliance with domestic

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legislation and regulations and good practices established by domestic and international

bodies involved in the microfinance sector.

A general, suitable and flexible reporting system must be put in place for all potential users:

the institution’s customers, shareholders, employees and executives. Mechanisms and

procedures must be established to ensure maximum efficiency for this reporting system.

Finally, institutions must comply with and enforce the legal regulations in the country in

which they operate.

The prevention of fraud, corruption and use of an institution’s services and structures for

unlawful activities must be focal points and areas in which institutions must guarantee

measures and procedures to detect, prevent and eliminate them immediately.

4. RISK CONTROL

Risk control is a core aspect in general financial activity, and in microfinance activity.

Microfinance sometimes involves a higher potential risk level that classic financial activity.

Management is responsible for directly supervising the organization’s liquidity, solvency

and performance. It is not so much a question of eliminating risks as being aware of them

and managing them as efficiently as possible, preventing problems that could affect the

institution and anticipating the best solutions available.

5. FINANCIAL PROFITABILITY AND SELF-SUSTAINABILITY

Institutions must design microfinance activity in order to achieve financial self-

sustainability in the shortest time possible, without overlooking the corporate purpose.

Financial sustainability must be focused on increasing the customer database and

expanding financial inclusion.

6. MEASURING PERFORMANCE AND IMPACT

Institutions must establish objective indicators to rigorously measure and assess economic

performance and social impact on the area and population that they cover.

There are current a number of indicators to determine an institution’s economic performance,

measured in terms of efficiency, profitability, balance sheet management and portfolio quality.

Institutions must attach particular importance to measuring social impact in order to guide

and assess fulfillment of their, mainly social, goals. Institutions must therefore propose and

use any indicators that provide information on this aspect of their activity.


The Universal Corporate Governance Code for Microfinance Institution contains a series of good practices, standards and principles that, in accordance with accepted international standards and good practices, the BBVA Microfinance Foundation considers suitable for the good governance of any microfinance institution and for the proper governance of each institution, regardless of its legal structure (regulated or non-regulated financial institution, NGO, cooperative, etc.).

The Universal Code is a reference document for the microfinance sector which explains the essential content for any MFI corporate governance code. This document is supplemented by the Guide for the adoption of good governance principles in microfinance institutions, written by the Foundation in conjunction with the IDB/MIF. This Guide covers the essentials that microfinance institutions must consider when preparing a corporate governance code and implementing it in their Boards of Directors.

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UNIVERSAL CORPORATE GOVERNANCE CODE FOR MICROFINANCE ... · march 2011 1st edition universal corporate governance code for microfinance institutions