Policing the Policeman: The Governance Role in Microfinance Companies

By May 24, 2023 No Comments

Who polices the policeman? Funny as it may sound, it is a very important question that needs to be addressed in everybody’s life—be it on the personal or professional level. Who checks to determine if we are doing what we are supposed to do? At the beginning of every year, several people make New Year resolutions (goals). Who checks to ensure that we abide by these resolutions? Most often, we do not write down our resolutions, which makes it difficult to track how well we are doing.

Every business, including Microfinance Companies (MFC), set  goals  to  achieve. There is therefore the need to make certain that businesses put plans in place to achieve their goals.

An MFC that is run by the owner will know what these goals are. But how does he/ she ensure that the business is on course to achieve the goals? An African proverb has it that he who charts a path may not know when or if the path is crooked. It is therefore important that there is someone (the board) to police the policeman (management).

It is also important to set up systems with plans to ensure that MFCs achieve their goals. Once the plans are made, there is the need to ensure that MFCs stick to the plans. Where there is the need to change the plans, it should be done in such a manner so as not to veer off the goal of achieving the objectives of the MFC.

Many business owners (including MFC owners) consider the governance of their businesses as a condition to meet the requirements of the Regulator. But truth be told, a good governance structure is for the benefit of the business as a whole and also to protect shareholders’ interest. The way a business is started can have an impact on the nature of its governance structure.

Usually, those who start as sole proprietors and who later transform their businesses into limited liability companies have issues with their governance systems. In such MFCs, the functions of the board and management are usually fused, making it difficult to separate the two.


Governance is a set of processes, customs, policies, laws and institutions affecting the way a business is directed, administered or controlled. Its purpose is to influence directly or indirectly the behaviour of the business towards its stakeholders (Dignam& Lowry, Company Law, 2006). Governance therefore involves how a business is monitored, evaluated and controlled so that the interest of shareholders and others such as deposit clients are protected.

According to Elisabeth Rhyne of the Centre for Financial Inclusion, it is the responsibility of the board to monitor the status of the business, make good strategic decisions, and hold the management of the business accountable for their execution. Simply put, the board should provide the critical checks and balance system that ensures that a business stays focused and achieves its aims of maximising shareholders’ investments.

The role a board plays in a microfinance company is very important and should not be taken for granted. The main purpose for which the regulator and Registrar General require for a board to be in place is to ensure that the business stays on course. It should therefore not be seen as a bother.


Why is it important to ensure that we have the right calibre of people on boards? We have set up our own businesses, and know how we want to run it. So why then do we need external people to come and tell us what to do? We have employed experienced people who are capable of managing the business well. So why would we need a board of directors?

Who selects the board of directors? It is the sole prerogative of the owner(s) of the business to select who become the board of directors of their business? It is a common practice for owners of a business to select the board of directors so it is not wrong if this approach is used. The only catch is that the members selected should be independent of the management of the business.

Can they ‘question’ the actions and decisions taken by the management of the business? Are the owners involved in the day to day running of the business? How well can they separate themselves from the managerial role and play the role of directors? These are questions that every business owner should take into consideration when faced with a decision to select board members.


The role the board is expected to play and the activities of the business have a bearing on who becomes a board member. In selecting members of a board, it is important to keep in mind the expectations of the board and the expertise required to fulfil those expectations. Care should be taken when doing this as there is the temptation that there will be several board members if the expertise of the members are not taken into consideration.  Additionally, the business owner may decide to engage people with certain expertise on ad hoc basis.

In selecting the board based on the expertise required, one needs to know the responsibilities of the board. The board of a microfinance company has at least four (4) responsibilities.  These are:  strategic, supervisory, fiduciary and management development. Following us a discussion of what each entails.

Strategic: The board is responsible for setting policy and strategic direction for the MFC. The board sees to the long-term goal of the MFC, considering the principal risks to which the MFC is exposed. In most cases, the board does not develop the strategies but provides inputs and approves them. For that reason, in selecting members for a board, one should look out for people who will be able to provide strategic direction for the MFC.

Supervisory: The Board is responsible for the operations of the MFC but it does this through delegating its authority to management through the Chief Executive Officer or the Managing Director. The board evaluates the performance of management in accordance with the strategies of the MFC.  In selecting board members, it is therefore important to select people who can exercise supervisory roles over the management of the MFC.

Fiduciary: The board is the steward of the MFC and is responsible for protecting the interest of stakeholders. These stakeholders include the owners of the business, clients and employees. The board is responsible for checking how the MFC is managed and provide confidence to owners, clients, staff and all other relevant bodies that all is well with the business. In doing this, the board should ensure that there are adequate resources to implement the agreed plans. When selecting members for a board, consider the ability of the members to steer the affairs of the MFC such that the interest of all stakeholders will be protected.

Management Development: The board is responsible for the selection, evaluation and compensation of the management of the MFC. For most small businesses such as MFCs, some members of the board usually also double as members of management. This is where if care is not taken, the board may not have the freedom to critic the work of management.

With these responsibilities in mind, who then should be selected as board members for MFCs? Consider the following questions: Is the owner of the MFC part of the board? What about the management staff? What are their expertise? A board with diverse knowledge and experience is key.  The number of board members should be adequate enough to work effectively but also small enough to promote togetherness. This sounds like a tough one, right? One way of making sure all the needed expertise are available is through the use of committees, where people with the requisite expertise are co-opted to serve on the board.

Most often, owners of MFC’s select persons with very high qualifications and very busy schedules as their board members. That is great! The question is: Will these people have the time to deliberate on issues concerning the MFC? It is not a feel-good thing to have high-profile members on your board if they would not have the time to see to the welfare of the MFC.

Members on a board of an MFC should demonstrate personal commitment by devoting their time.  There is also the possibility of conflict of interest because it is possible that another MFC might have also considered this high-profile person. It is therefore important to ensure that members selected are ready to devote their time and expertise to the MFC.


In selecting board members, also remember that they have to be compensated for their time. Compensation helps to attract the right calibre of people to the board; it also ensures that the board members assume some responsibility towards the MFC.  Often times, board members are made to feel that it is an honour instead of a responsibility to serve. Of course there are some people who are likely to take the compensation without really working for it. There are also people who will be willing to offer the services for free.

Do your homework well before selecting an individual to sit on your board. Check to find out how the boards of similar businesses are compensated. Talk to the people you have in mind to find out how they would want to be compensated. Reach a compromise before signing them on. The best practice is an annual fee and allowances for meeting attendance. Remember that this is a cost to the MFC!

As a cost saving measure, the company can decide to pay executive directors (directors who are also in management) a lower sitting allowance compared to non- executive directors. Remember: The aim is to see the business grow!

Have you been operating for a while now and wondering how this article will be of help to you? You can change your board of directors and there is nothing wrong with doing so. If you select board members and they did not perform to your expectation, nothing stops you from changing them at the end of their term.

Every board member should be given a Terms of Reference or a contract stating what they are expected to do. The contract should spell out the term – the number of years to serve on the board; and more especially, how they can be removed. You need to ensure that they read and understand the terms and append their signatures to it. With such a contract, you can hold them accountable.  Avoid appointing board of directors by word of mouth!


All board members, whether old or new, should go through an orientation session. It is good to have a board manual that will guide the activities of the board. You can get a consultant to develop one for your MFC or you can get one from another MFC and customise it to suit your company. If you choose the later, just make sure the MFC’s mission is in line with yours and where there are differences, address them accordingly. Do not copy blindly! The board manual is usually the source document for the orientation session. Experts in the sector can also be invited to the orientation session to make presentations.

Minutes of board meetings are very important and should be documented well. Lastly, evaluation of the board is very important. The board should evaluate its own performance.  Board evaluations help to increase transparency, improve information on board roles, prepare the board for changes and new members, and increase the accountability of the board to the shareholders. Although the evaluations are usually self-evaluations, it will be prudent to have an external person conduct the evaluation and provide independent feedback.

As it is, it looks like everyone who polices, also needs a policeman!

By Akosua Aboagyewaa Darkwa