All in the family? The impact of founder directors and family governance on microfinance institutions' social performance

• Published date: 01 March 2024
• Author: Shahadat Hossain,Jeremy Galbreath,Mostafa Monzur Hasan,Trond Randøy
• Date: 01 March 2024
• DOI: http://doi.org/10.1111/corg.12528

ORIGINAL ARTICLE

All in the family? The impact of founder directors and family

governance on microfinance institutions' social performance

Shahadat Hossain

1,2

| Jeremy Galbreath

3

| Mostafa Monzur Hasan

4

|

Trond Randøy

5,6

1

Department of Finance, University of

Chittagong, Chittagong, Bangladesh

2

School of Accounting, Economics and

Finance, Curtin University, Perth, Western

Australia, Australia

3

School of Management and Marketing, Curtin

University, Perth, Western Australia, Australia

4

Department of Accounting and Corporate

Governance, Macquarie University, Sydney,

New South Wales, Australia

5

Center for Corporate Governance,

Copenhagen Business School, Copenhagen,

Denmark

6

School of Business and Law, University of

Agder, Kristiansand, Norway

Correspondence

Shahadat Hossain, Department of Finance,

University of Chittagong, Chittagong,

Bangladesh.

Email: shahadath@cu.ac.bd;

shahadat.hossain@curtin.edu.au

Abstract

Research Question/Issue: This study investigates the impact of family governance,

including founder directors and their ties to family members on the board, on the

social performance of microfinance institutions (MFIs), a special kind of social enter-

prise with dual objectives.

Research Findings/Insights: Using a dataset of 735 MFIs operating in Bangladesh

from 2007 to 2017, we find that founder directors and board members with family

ties to the founder have an adverse impact on MFIs' social performance. These find-

ings hold when we perform several robustness tests and endogeneity tests.

Theoretical/Academic Implications: We contribute to the corporate governance lit-

erature on MFIs and social enterprises in two ways. First, our findings suggest that,

when MFIs are confronted with dual performance objectives, founder directors may

“trade off”social outcomes in favor of economic outcomes and therefore adversely

affect MFIs' social performance. Second, our findings extend the literature by show-

ing that the presence of board members with family ties to founder directors also

adversely affects MFIs' social performance.

Practitioner/Policy Implications: This study suggests that MFIs' board composition

influences their governance and ability to oversee their social and financial perfor-

mance effectively. If MFIs' social performance is a major concern of national policy

makers, then regulation should be put in place to limit board recruitment with

family ties.

KEYWORDS

boards of directors, corporate governance, family ties, founder directors, microfinance

institutions, social performance

1|INTRODUCTION

Motivated by the fact that the microfinance sector serves the banking

needs of the poorest citizens of the world (Hermes et al., 2011;

Lopatta & Tchikov, 2016), recent research has highlighted the need to

focus on the social performance of microfinance institutions (MFIs)

(Alon et al., 2020). The extant literature has suggested that good gov-

ernance is vital for the performance of social enterprises such as MFIs

(Centre for the Study of Financial Innovation [CSFI], 2014,2016), but

their governance is complex due to their simultaneous pursuit of both

Received: 4 April 2022 Revised: 21 November 2022 Accepted: 13 March 2023

DOI: 10.1111/corg.12528

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2023 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2024;32:249–274. wileyonlinelibrary.com/journal/corg 249

financial and social goals (Armendáriz & Morduch, 2010; Mersland &

Strøm, 2009). This dual purpose may produce trade-offs in the extent

to which both goals can be achieved equally well (Jensen, 2002).

Therefore, this study scrutinizes the effect of corporate governance

factors (family governance in particular) on the performance in the

microfinance sector.

Our starting premise is that MFI board members—pursuing both

financial and social performance objectives—can be exposed to con-

flicting interests when facing multitask goals (Hahn et al., 2015;

Holmstrom & Milgrom, 1991; Lynn, 2021). Although past research has

addressed the benefits of independent directors for good MFI gover-

nance (Bassem, 2009; Hartarska, 2005; Hartarska & Mersland, 2012;

Kyereboah-Coleman & Osei, 2008), the impact of founder directors

and their ties to family board members has received far less attention

in the MFI literature (Mori et al., 2015). Accordingly, this study takes

the opportunity to address a research gap.

We posit that founders on MFIs' boards of directors face a trade-

off dilemma between financial and social interests that leads them, in

effect, to make decisions that have an adverse impact on their social

performance. An adverse relationship is posited because founder

directors on the board are more likely to have invested significant

time, effort, and finance and, to protect their capital interests, are

likely to place greater emphasis on the financial outcomes than on the

social outcomes, advancing the mission of MFIs. We also posit that

this adverse relationship with social performance may be prevalent

when the founder has ties to family members on the board. When

more than one member of the founder's family is present on the

board, these family members may try to dominate deliberations over-

all. Attempts to dominate board activity and decision making stem

from the fact that founding members bring funds from their family

resources to the MFI. We argue that, due to their embedded eco-

nomic interest, board members who have a family connection to the

founder exacerbate the trade-off problem, thereby adversely affecting

the MFI's social performance.

To test our hypotheses, we use the setting of Bangladesh and

employ an unbalanced panel dataset of 735 non-governmental organi-

zation (NGO) MFIs from 2007 to 2017. We chose Bangladesh because

the modern version of the microfinance movement started here, the

sector has grown fast, and the market is mature and now one of the

largest in the world (Mia et al., 2017). The findings of our study sug-

gest that founder directors on the board do adversely affect social

performance. For instance, for a one-standard-deviation increase in

the proportion of founder directors to total directors, the breadth of

outreach decreases by 4.40% (i.e., a decrease of 3522 borrowers from

the loan portfolio) and the depth of outreach decreases by 3.89%

(i.e., an increase in the average loan balance of BDT373.68 or US

$4.99) relative to the mean value.

1

An increase in the average loan

balance suggests that the most economically underprivileged citizens

receive less focus, thereby undermining the social mission of MFIs.

Our study also demonstrates a negative effect of family members'

dominance of the board. For instance, for a one-standard-deviation

increase in the proportion of founder directors with ties with family

board members to total directors, the breadth of outreach decreases

by 3.52% (i.e., 4254 fewer borrowers) and an inverse (adverse) rela-

tionship with the depth of outreach is found, whereby the average

loan balance increases by BDT467.19 (or US$6.23) relative to the

mean value. The results remain robust after controlling for endogene-

ity and using a lagged regression model, alternative measures of key

variables, and seemingly unrelated regression (SUR) analysis.

The findings contribute to the literature in several ways. First, our

findingsprovide insights into how MFIs, a particularkind of social enter-

prise, manage a dual objective. Our findings suggest that, when con-

fronted with a dual objective, founder directors may “trade off”social

outcomes in favor of economic outcomes and therefore adversely

affect MFIs' social performance. Second, our study extends the litera-

ture by exploring founders' ties to family members on the board. Like

founder directors, we find that their ties with family members on the

board have an adverse impact on MFIs' social performance. Lastly, our

study has implications for policy makers. Specifically, policy makers

overseeing the microfinance sector may need to limit the presence of

MFI foundersand ties to family members on the board.

2|INSTITUTIONAL SETTING:

MICROFINANCE IN BANGLADESH

The modern version of the microfinance program was established in

1976 in Bangladesh by Muhammad Yunus. Microfinance in

Bangladesh is pioneering because, after the success of the Grameen

Bank's microcredit model, many new players entered the market and

the microfinance movement spread worldwide (Yunus, 2013). Modifi-

cations to the core principles of the Grameen Bank took place to meet

the market demand and provide better services to the world's poorest

people (Cull et al., 2009; Mia et al., 2017). The microfinance market in

Bangladesh is now the world's second largest (after India) in terms of

clients served, with at least 32 million borrowers (Microcredit Regula-

tory Authority [MRA], 2017).

With respect to the microfinance sector, MFIs in Bangladesh have

specific requirements regarding formation, regulatory requirements,

and corporate governance practices. For example, the MRA estab-

lished the “MRA Rules 2010”for the licensing and operation of MFIs

operating in Bangladesh. Regarding corporate governance practices,

the boards of MFIs need to comprise a minimum of 5 and a maximum

of 10 members and should include female members. The rules also

state that an individual should not be a board member for more than

three consecutive terms and that the total number of new members

should be lower than the total number of board members for

any term.

3|LITERATURE AND HYPOTHESES

3.1 |Theoretical background and literature

In general, the perspectives that address trade-off problems consider

circumstances that involve choosing between two options that

250 HOSSAIN ET AL.