Corporate Governance in Microfinance Institutions: Board Composition and the Ability to Face Institutional Voids

Abstract

AbstractManuscript TypeEmpiricalResearch Question/IssueWe utilize institutional theory to examine corporate governance in microfinance institutions (MFIs). Many MFIs operate at the bottom of the economic pyramid (BOP), which is usually agrarian, impoverished, and plagued with institutional voids. We investigate the link between the composition of the boards of MFIs and the ability of the MFIs to face institutional voids to ensure organizational viability.Research Findings/InsightsWe find that MFIs with boards that have more socio‐economic expertise and female representation are better able to lower the MFI's costs of operating at the BOP. However, this relationship weakens when the effectiveness of agrarian institutions at the BOP is low. When agrarian institutions are ineffective, the board of the MFI may have difficulty in helping the MFI reduce its costs of operating at the BOP. Agrarian crises arising from ineffective agrarian institutions tend to aggravate the various institutional voids present at the BOP, making it harder for the board to guide the MFI around the institutional voids.Theoretical/Academic ImplicationsWe extend institutional theory to understand how boards direct and control firms operating at the BOP to face institutional voids. In some cases, a firm can fill an institutional void. However, because other institutional voids exist, the board must also help the firm develop workarounds to ensure organizational viability. We extend existing literature on board composition to highlight how human capital and gender diversity of boards can help improve the viability of firms operating at the BOP.Practitioner/Policy ImplicationsMFIs with high operating costs may benefit from electing a board with socio‐economic expertise and female representatives. Governments and policy makers can work toward building effective social, economic, and political institutions to help create contexts that are favorable to firms (such as MFIs) that often find it difficult to operate at the BOP.