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Elizabeth Rhyne ... Good Governance and the Future of Equity Flows ... The Shareholder vs. Stakeholder View on Governance

Burgess COMMENTARY

Peter Burgess

Good Governance and the Future of Equity Flows

From Elisabeth Rhyne
Thu, Mar 14, 2013 at 6:31 PM
To: Peter Burgess

The Shareholder vs. Stakeholder View on Governance

With good governance a top priority for investors, donors, and regulators, it’s time to ask exactly what good governance looks like. A recent debate about the Anglo-American (shareholder) versus the European (stakeholder) models of governance set out to answer that question. The Governance Working Group (GWG), a member group of microfinance professionals hosted by the Center for Financial Inclusion, sponsored a webinar to discuss the characteristics of the two models and their implications for microfinance institutions, equity funds, and clients.

Lauren Burnhill of One Planet Ventures started off the debate by describing the model of single tier governance commonly used in the U.K. and U.S. In this model, each company has a single board that includes both executive directors, who are employed by the company or have significant ties to its corporate management, and non-executive directors who have no direct relationship with the company or its management. The company CEO may serve as chair of the corporate board, in which case a great deal of power is invested in that board position. The overarching duty of the board is to protect the interests of shareholders. In this model, particular importance is given to the protection of minority shareholder rights.

Judith Mayer of the Technische Universität München described the European (stakeholder) model. It is a two-tier model, with both a management board and a supervisory board, and it focuses not only on the interests of shareholders, but also of employees and clients. The management board is comprised of the executive committee of an organization that manages the day-to-day affairs and represents the organization. The supervisory board is not involved in day-to-day management, but instead shapes strategy, oversees the management team, and safeguards the institution overall. Underpinning the European model is the view that management should make decisions for the benefit of all stakeholders.

What do the members of the Governance Working Group think of each model?

While both models have their advantages, and while GWG members recognize that there are many variations of each model, they strongly agreed that a profit-maximizing lens (i.e., shareholder-focused) should not be the only view represented within the boardroom. They considered how best to ensure that governance practices reflect the values and principles inherent in their mission statements, including the interests of the client. During the debate it was evident that the members of the GWG generally preferred the European stakeholder model due to its inclusive nature. The Anglo-American model, with its singular focus on shareholders, does not as readily invite attention to the role of the corporation in society. As a result, there is less emphasis on the social or environmental impact of corporate decisions.

For further information, we invite you to review the PPT presentation used in the webinar.

Where Are Equity Flows Heading?

The Council of Microfinance Equity Funds (CMEF), a council of 25 private equity funds, will gather in Lima in early April for their semi-annual meeting, themed “Where are the future global flows of equity funds heading?” Members will conduct a global mapping exercise to determine where equity investments are being made, what the investment drivers are, where exits are expected to take place, and how these investment flows might change in the future. Continuing the discussion on “balanced returns” that began at the recent SPTF’s social investor roundtable in Belgium, the CMEF will examine how greater clarity can be achieved around expected returns, and how the differences in social and financial objectives among investors can be more effectively communicated. This CMEF meeting will also place a lens on Latin America through discussions of existing hot spots or emerging high-activity areas which could lead to over-indebtedness or portfolio problems in the region.