Social corporate governance and the problem of mission drift in socially-oriented microfinance institutions

Columbia Journal of Law and Social Problems

Volumn 41, Issue 3, 2008, Pages 269-316

  Arena, Todd ^a  

^a The Earth Institute at Columbia University

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EID: 48049115350     PISSN: 00101923     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (336)

1. See generally UNITED NATIONS CAPITAL DEVELOPMENT FUND, MICROFINANCE AND THE MILLENNIUM DEVELOPMENT GOALS (2005), available at http://www.yearofmicrocredit.org/docs/mdgdoc_MN.pdf.
2. See also Connie Brück, Millions for Millions, THE NEW YORKER 1 (October 2006), available at http://www.newyorker.com/archive/2006/10/30/061030fa_fact1? (attributing to Mohammed Yunus the position that "microcredit can lead to a world in which poverty has been extinguished and that eventually .. . there will be 'poverty museums'").
3. Formal financial services refers to any financial activity that is the object of government policy. The "formal sector" refers to the market for these activities. This generally includes banking institutions and securities trading. Set against the formal sector is the "informal sector," which refers to unregulated financial markets and unregulated financial activity. This generally includes unofficial currency markets and unregulated lending by merchants commonly known as "moneylenders." See Parker M. Shipton et al., Financial Reform: A Manual for Assessing the Roles of Law and Culture 5 (CAER, Discussion Paper No. 33, 1995).
4. See Microfinance Gateway, Frequently Asked Questions, http://www.microfinancegateway.org/section/faq (defining microfinance and the difference between microfinance and microcredit). Consumption smoothing is achieved when a family or individual is able to sustain a baseline level of consumption throughout a given period of time, regardless of income shocks or seasonal changes in household demand.
5. Id.
6. See Sasha Polakow-Suransky, Giving the Poor Some Credit, THE AMERICAN PROSPECT (Apr. 30, 2003), available at http://www.prospect.org/cs/articles?article=giving_the_poor_some_credit (describing the popularity of the movement, which "took off with strong support both from the free-enterprise zealots of the right and the anti-poverty warriors of the left").
7. Implementation of the first United Nations Decade for the Eradication of Poverty, G.A. Res. 58/488, U.N. Doc. A/RES/58/222 (Dec. 17, 2003).
8. International Year of Microcredit 2005, G.A. Res. 53/197, U.N. Doc. A/RES/53/197 (Dec. 15, 1998).
9. See Bruck, supra note 1, at 1.
10. Nobel Peace Prize Web Page, http://nobelprize.org/nobel_prizes/peace/ laureates/2006/ (last visited Jan. 31, 2008).
11. See Bruck, supra note 1, at 3, 6 (describing how the microfinance movement has "enticed foundations, rich individuals, even investors into channeling millions into microfinance" and how "[i]n 2005, Citigroup, the largest banking network in the world, launched a microfinance business division");
12. AMINUR RAHMAN, WOMEN AND MICROCREDIT IN RURAL BANGLADESH 14 (1999) ("Currently, microcredit is not only an antipoverty development tool but is also an emerging sector for financial markets and profit-making potential.").
13. See Bruck, supra note 1, at 4 (reporting the argument that for-profit "commercialization [is] the only way microfinance [can] serve large numbers of people, because commercial enterprises [can] tap the capital markets for the funds they needed to grow").
14. See, e.g., Jeffrey Tucker, The Micro-Credit Cult, 13 THE FREE MARKET 11 (Nov. 1995), available at http://www.mises.org/freemarket_detail.asp?control=215 ("A closer look, however, shows the movement to be financially dangerous, subtly coercive, and, in its most famous case [Grameen], an enemy to children and families.").
15. See, e.g., Sudhirender Sharma, Micro-Credit Improves Cash Flow but Doesn't Create Wealth, INFOCHANGE, http://www.infochangeindia. org/microc-article5.jsp ("Conversely, at the cost of the poor a large number of NGOs have benefited; banks have found a convenient route to increase lendings [sic].").
16. While this Note analyzes the relationship between the microfinance movement's traditional social orientation and the relatively recent push toward FSS, the argument advanced in this Note also applies to those MFIs that do not desire to achieve FSS in any technically-defined sense but are nevertheless concerned about their financial performance. In this way, the Note recognizes that the general industry-wide push for FSS has led to an increase in financial pressures across the MFI industry, regardless of an MFFs orientation or goals. See Roy Mersland & R. Øystein Strøm, Performance and Corporate Governance in Micro-Finance Institutions 14 (June 2007) (unpublished paper), available at http://mpra.ub.uni-muenchen.de/3887/.
17. See Polakow-Suransky, supra note 4 ("For years a debate [has] raged between the 'poverty camp' and the 'sustainability camp' over whether microfinance programs could provide services to the 'poorest of the poor' and still become viable institutions themselves.");
18. Bruck, supra note 1, at 2 ("In recent years, younger and nimbler players have been taking microfinance -their preferred term -toward the idea of building a fully commercial, profit-making sector. This conflict, between pure do-gooders and profitminded do-gooders, has come to define the current debate within the microfinance world.");
19. Michael S. Barr, Microfinance and Financial Development, 26 MICH. J. INT'L. L. 271, 279 (2004) ("Recent debates focus on whether microfinance can be self-sustaining by charging higher interest rates and becoming more efficient, or whether it can and should reach deeper into the ranks of the poor.").
20. See RAHMAN, supra note 9, at 145 ("There is less space to allow agendas of both social development and institutional financial sustainability.");
21. Bruck, supra note 1, at 4 (stating that many in the microfinance movement are "worrie[d] about "mission" drift,' saying that, as the drive for profitability increases, only the so-called 'less poor' (as opposed to the very poor) will qualify for loans").
22. Martin Greeley, Poverty and Well Being: Problems for Poverty Reduction in Role of Microcredit, in WHO NEEDS CREDIT? POVERTY AND FINANCE IN BANGLADESH 95 (G. Wood and I. A. Sharif eds., 1997).
23. See David S. Gibbons & Jennifer W. Meehan, The Microcredit Summit's Challenge: Working Towards Institutional Financial Self-Sufficiency while Maintaining a Commitment to Serving the Poorest Families 32 (Feb. 2, 1997)(updated 2000) (unpublished paper presented to the 1997 Microcredit Summit), available at http://www.microcreditsumimt.org/papers/challenge. pdf (defining "poor" as "households that fall in the top 50% below the official poverty line in a given country," and "poorest" as those in the bottom fifty percent). This Note uses the terms "poorest of the poor" or "poorest" and "less poor" rather than Gibbons's and Meehan's terms, despite their similar usage, as the former terms reflect industry usage within the microfinance movement.
24. See Damian von Stauffenberg, How Microfinance Evolves: What Bolivia Can Teach Us, 4 MICROENTERPRISE DEV. REV. 6 (2001) (describing the process of "formalization" such that "MFIs are beginning to evolve into banks").
25. See id.;
26. Bruck, supra note 1, at 6-7 (discussing microfinance organizations that do not concern themselves with social development or poverty reduction goals as part of their business, focusing only on loan provision).
27. Jonathan Murdoch et al., Financial Performance and Outreach: A Global Analysis of Lending Microbanks 23 (World Bank Policy Research, Working Paper No. 3827, 2006) (concluding from their evidence that even the best performers have faced "tensions between outreach and sustainability").
28. See infra text accompanying note 112.
29. RACHEL ROCK ET AL., PRINCIPLES AND PRACTICES OF MICROFINANCE GOVERNANCE 17-19, 34 (1998) (defining the dual mission as between "client coverage" and "profitability," but noting that the dual mission is "based on how [MFFs] define their mission" such that the dual mission can be defined in the abstract as one "that combines social and financial objectives").
30. Id. at 18 ("Balancing a dual mission becomes more complex when the microfinance activity is not the sole or main activity of the institution... [such as when] an NGO [is] involved in microfinance as well as health care, literacy, and other social programs.").
31. Mersland & Strøm, supra note 13, at 14 (finding a trend of MFIs shifting from group- to individual-based loans, which they show simultaneously increases financial performance while decreasing outreach, and suggesting this indicates "that the industry is putting increased emphasis on sustainability and less on outreach").
32. See supra note 22.
33. But see Jonathan Murdoch, Smart Subsidy for Sustainable Microfinance, FLN. FOR POOR, Dec 2005, at 1-2 (2005) (challenging the conception of subsidies as bailouts for MFIs that have failed in their attempts to achieve FSS by arguing that subsidies should not be considered "inherently useful nor inherently flawed" and concluding that properly tailored subsidies can "maximize social benefits while minimizing distortions and mistargeting," even in the long-term).
34. See James Copestake, Impact Assessment of Microfinance and Organizational Learning: Who Will Survive?, 2 J. MICROFINANCE 2, 119, 128 (2000) (discussing the "global dimension" of microfinance, which includes multilateral donor agencies, and its role "as a major spur to many organizations to improve their standards and performance, not the least in establishing criteria for public and private investors into the sector").
35. See Michael Tucker, Financial Performance of Selected Microfinance Institutions: Benchmarking Progress to Sustainability, 3 J. MICROFINANCE 2, 107, 107-08 (2001) ("An increase in competition and the emergence of an ability to compare the financial performance of MFIs with each other and to benchmarks is beginning to create greater concentration on improving business practices.").
36. Jameel Jaffer, Microfinance and the Mechanics of Solidarity Lending: Improving Access to Credit Through Innovations in Contract Structure, 9 FLA. ST. J. TRANSNAT'L L. & POL'Y 183, 194 (1999) (FSS is distinguishable from operational self-sufficiency, which is limited to "consistently positive cashflow").
37. See RAHMAN, supra note 9, at 130 (stating that "subsidy dependency [is a third category of financial operation], in which the costs of the organization are funded through grants and subsidies from donors").
38. See also Gibbons & Meehan, supra note 17, at 31 (offering a more technical definition of FSS as "the ability of a microfinance organization to cover all costs, including adjustments, which appear on the Income Statement in a given period with the adjusted operating income"). The concepts of FSS, operational self-sufficiency, and subsidy dependency are analytic in nature, and the distinctions between the three (especially the last two) are often difficult to determine in practice. For example, it is important to recognize that an MFI can receive subsidies and still be FSS, as long as loan operations can pay for themselves after subsidies and bad-debt write-offs have been accounted for as adjustments.
39. See ROCK ET AL., supra note 22, at 17 ("[S]ocial mission seeks to provide financial services to as many of the lowest income population as possible").
40. See Murdoch, supra note 26, at 7-8 (discussing integrated models and nonfinancial services).
41. See Murdoch et al., supra note 20, at 23 (defining mission drift as "a shift in the composition of new clients, or a re-orientation from poorer to wealthier clients among existing clients").
42. See Sharma, supra note 12 (discussing how microcredit loans will not facilitate wealth generation by stating that "[u]nless loans are converted into investments in onfarm productive activities, rural poverty will not go away. Micro-credit improves cash flow but doesn't create wealth. Far from helping people generate wealth, easy credit is being used to encourage primary producers at the farm to become secondary distributors for consumer products. .. . [I]n the long run, we will witness a cumulative debt trap, and the adverse consequences of moving away from primary production activities to support market interests.").
43. For example, if an MFI ignores a patriarchal social context when it lends to female clients, that MFI runs the risk of creating an extra demand on a female borrower's productivity, on top of her husband's demands for labor in the household, which can result in increased domestic violence. See infra notes 128-129.
44. See also, Special Correspondent, Microfinance Agencies Evolve Code of Conduct, HINDU, Mar. 22, 2006, http://www.thehindu.com/ 2006/03/22/stories/2006032221090400.htm (discussing the admission by the national MFI organization of India, Sa-Dhan, that MFIs have engaged in "coercive recoveries," causing the organization to adopt a code of conduct prohibiting "abusive language or intimidation," presumably by male loan officers to female clients).
45. See Gibbons & Meehan, supra note 17, at 3 (discussing "progressive lending" strategies).
46. See Bruck, supra note 1, at 4 (explaining that "some advocates of commercialization argue that microcredit burdens the very poor with debt, and that the less poor are the only appropriate customers");
47. Thomas Dichter, Hype and Hope: The Worrisome State of the Microcredit Movement, THE MICROFINANCE GATEWAY, March 2006, http://www.microfinancegateway.org/content/article/detail/31747 (arguing that "[t]he microcredit paradox is that the poorest people can do little productive with the credit, and the ones who can do the most with it are those who don't really need microcredit, but larger amounts with different (often longer) credit terms").
48. See supra note 14 and accompanying text.
49. See Jaffer, supra note 29, at 188.
50. See id. at 187-93 (discussing the reluctance of formal lenders to extend loans to the "rural poor").
51. See Joseph Stiglitz & Andrew Weiss, Credit Rationing in Markets with Imperfect Information, 71 AM. ECON. REV. 393 (1981).
52. See Jaffer, supra note 29, at 183 ("Screening potential borrowers, monitoring borrower behavior after loans are granted, and enforcing credit agreements are all extraordinarily costly where documented credit histories do not exist, businesses are very small, and legal systems are undeveloped, unreliable, or inaccessible," thus resulting in high default rates which cause lenders to refuse credit to a large number of would-be borrowers.).
53. Stiglitz & Weiss, supra note 40; Jaffer, supra note 29, at 184.
54. See Gibbons & Meehan, supra note 17, at 3-4, 7-8 & n.10 (discussing the high costs associated with outreach and service to the poorest of the poor clients);
55. Jaffer, supra note 29, at 194, 198 (discussing high costs associated with lending to those excluded from formal lending, especially related to screening individual clients for creditworthiness and with enforcing repayment when a client becomes delinquent).
56. Jaffer, supra note 29, at 194, 198.
57. Peri-urban refers to those environments that are the frontier of urban and "planned" spaces, commonly referred to as "slums," which are not officially recognized by the State and which are generally not formally incorporated into urban infrastructure or legal systems. See, eg., MIKE DAVIS, PLANET OF SLUMS (2007).
58. BRIGHT HELMS, ACCESS FOR ALL: BUILDING INCLUSIVE FINANCIAL SYSTEMS, 124-125 (2006) (noting that the dispersed nature of the clients, the poor infrastructure and lack of information about clients and their credit histories, the shortage of professionals qualified to staff rural financial branches, the medium-termed nature of the agricultural production cycle and the uncertainty across annual production cycles in the long-term, the high level of risk associated with agricultural production, and the lack of available or usable collateral are all contributing factors in the high cost and difficulty associated with the provision of financial services to rural areas);
59. Hannah Siedek, Technology Series, Part 1: Banking Agents, THE MICROFINANCE GATEWAY, Sept. 2007, http://www.irricrofinancegateway.org/content/article/detail/43155 ("Reaching poor people in rural areas often is prohibitively expensive for financial service providers. Transaction numbers and volumes are usually insufficient to cover the cost of a branch.").
60. Wealthier clients are more attractive from the perspective of financial performance because they typically have available and usable collateral, some form of existing income-generating enterprise or steady income, a much lower risk of default, and the increased likelihood of a successful post-default indemnification. Thus, these clients will be able to handle much larger loans than microfinance's traditional target group. Larger loans mean larger returns per loan. Because administrative costs are basically the same for all types of loans, this means greater revenue over costs. In comparison, poorer clients can only handle small loans. The returns from which are often barely able to cover the administrative costs of closing the loan. In addition to the per-loan closing costs, MFIs will also have fixed and variable costs on assets and other liabilities. Thus, MFIs that forgo subsidies and cover operations through lending alone will find wealthier clients more attractive. See Thomas Dichter, Questioning the Future of NGOs in Microfinance, 8 J. INTERNATIONAL DEVELOPMENT 259, 262-264 (1996) (discussing how the village-level economic conditions that cause a focus on receiving returns from loan operations can lead to a failure to achieve both a "social return" and the kind of economic investment that benefits poor clients over time, and arguing that "[w]e are seeing repeatedly that when the financial viability of the delivering institution becomes the sine qua non for microfinance best practice, the tendency to creep upwards on the poverty scale away from the poorest grows stronger").
61. See Special Correspondent, Micro-finance Victims Petition Rights Panel, THE HINDU, Apr. 4, 2006, available at http://www.thehindu.com/2006/04/04/stories/2006040411900400.htm (discussing allegations from microcredit borrowers that they had been driven into cumulative debt through force by MFIs).
62. See M. MURALI KRISHNA & D.U. RAO, PRAGATHI MANUAL: A POLICY AND OPERATIONAL GUIDE, 22 (January 2006) (on file with the Journal) [hereinafter PRAGATHI] (describing MFFs social development program as an "effective tool to change our rural areas," thus presumably making this program as important as its microfinancial services in achieving the social development goals of the organization). For example, cutting production and agricultural training services to clients can abandon them to stagnate in lowvalue economic activities, such as secondary-market distribution, rather than climbing the income ladder.
63. See also supra note 33 (discussing primary-production versus secondarymarket distribution);
64. GLENN D. WESLEY, A TALE OF FOUR VILLAGE BANKING PROGRAMS 61-67 (IADB 2004) (discussing how MFIs in rural settings organized around the group lending model "often aim to serve very poor clients, who may not be able to make very effective use of financial services without complementary [non-financial services]. Thus, the delivery of at least a basic level of [non-financial services] may significantly improve the [MFFs] return on its provision of financial services.");
65. Murdoch, supra note 26, at 6 (discussing Pro Mujer, a Bolivian MFI, and noting that "[s]uch integrated models of banking coupled with social services (or other services) are not appropriate for every MFI or every location - or even most institutions and locations. Nor are they simple to implement...[though] they are possible to implement well and that they are meaningful for clients.");
66. Dichter, supra note 47, at 262-64 (discussing how a push for financial performance leads to a focus on short-term returns, causing the MFI to push clients towards nonvalue-added industries or to forgo investment in income-generating activities, which are presumably the intended purposes of microloans).
67. Dichter, supra note 47, at 262 ("For the evidence we have so far suggests that the more we adhere to economic rationality the less we get a lasting 'social return.'").
68. See supra notes 14-20 and accompanying text.
69. See generally Gibbons & Meehan, supra note 17;
70. Christopher Dunford, Building Better Lives: Sustainable Integration of Microfinance and Education in Child Survival, Reproductive Health, and HWIAIDS Prevention for the Poorest Entrepreneurs, 3 J. MICROFINANCE 1 (2001);
71. Murdock et al., supra note 20 at 4 ("The [study's results] thus attest to the possibility of... staying true to initial social missions even when aggressively pursuing commercial goals.").
72. "Practitioners" refers to managers and analysts of MFIs, and other professionals "in the field." This definition would not generally apply to academics, legal scholars, or economists.
73. See generally Gibbons & Meehan, supra note 17;
74. Dunford, supra note 52, at 2 (stating that "the concern for sustainability, interpreted as the financial viability of the microfinance service as a business, has made practitioners very cautious about nonfinancial add-ons");
75. Tucker, supra note 28, at 108 ("A shift in defining [the] social mission may, however, be underway at some institutions as profits grow in importance.");
76. Susy Cheston & Larry Reed, Measuring Transformation: Assessing and Improving the Impact of Microcredit, 1 J. MICROFINANCE 21 (1999) ("The microcredit movement exists to alleviate poverty. Yet the only performance indicators used to gauge the effectiveness of microcredit programs measure the profitability of the lending institution and the quality of its portfolio. They don't tell us whether our clients become less poor due to the services we provide.").
77. See Gibbons & Meehan, supra note 17, at 3-4 (outlining the arguments on both sides of the debate).
78. Id.
79. Id. at 4 (arguing that "there [is] no necessary medium- to long-term tradeoff that would necessitate "classic" mission drift). Note, however, that the authors point out that there maybe a short-term tradeoff between rapid expansion and outreach, as the financial requirements for rapid scale growth are significant.
80. Id. at 21.
81. See ROCK ET AL., supra note 22, at 22 ("Good governance is common to successful NGOs" providing microfinance services ....);
82. Gibbons & Meehan, supra note 17.
83. See generally Mersland & Str0m, supra note 13 (analyzing the effectiveness of different corporate governance mechanisms as measured against both outreach and financial performance).
84. Gibbons & Meeham, supra note 17.
85. Id. at 18-20.
86. Id. at 9.
87. Id. at 15.
88. Id. at 16-18.
89. Id. at 4.
90. Robert D. Brown, Corporate Governance - Alternatives for Decision Making, 26 CAN. BUS. L. J. 121, 123 (1996) (discussing the role of management and the board, and the use of information and control systems, to facilitate proper business management).
91. Id. at 124.
92. See ACCION International Home Page, http://www.accion.org/ (last visited Oct. 6, 2007).
93. See FROM MARGIN TO MAINSTREAM: THE REGULATION AND SUPERVISION OF MICROFINANCE (Rachel Rock & Maria Otero eds., ACCION International 1997);
94. MARIA OTERO, THE NEW WORLD OF MICROENTERPRISE FINANCE: BUILDING HEALTHY FINANCIAL INSTITUTIONS FOR THE POOR (1994);
95. ROCK ET AL., supra note 22.
96. Jaffer, supra note 29, at 199-200 ("There are MFIs ... based on the Grameen model in over a hundred countries around the world, and more than one hundred microcredit programs in the United States alone (primarily in inner city areas) are modeled on the Grameen Bank.").
97. Rashmi Dyal-Chand, Reflection in a Distant Mirror: Why the West has Misperceived the Grameen Bank's Vision of Microcredit, 41 STAN. J. INT'L L. 217, 242-43 (2005).
98. id. at 224 n.33;
99. MOHAMMED YUNUS, BANKER TO THE POOR: MICRO-LENDING AND THE BATTLE AGAINST WORLD POVERTY 204 (1999) ("In Grameen we always try to make a profit so that we can cover all our costs, protect ourselves from future shocks, and continue to expand.");
100. RAHMAN, supra note 9, at 132 (noting that Grameen, through "its practices of banking . .. upholds the ideology of capitalism, that is, investing capital for maximizing profit").
101. Brown, supra note 65, at 124 ("The aim of any corporate system is to be useful, in relation to defined objectives...").
102. Dyal-Chand, supra note 70, at 242-43 ("The Bank has always charged at least market rates of interest for commercial banks in Bangladesh.");
103. SHAHDDUR R. KHANDKAR ET AL., GRAMEEN BANK: PERFORMANCE SUSTAINABIUTY 63-65 (World Bank Discussion Paper No. 306, 1995) (discussing the increase in interest rates as related to the pursuit of self-sufficiency);
104. YUNUS, supra note 71, at 114, 117 (stating that "[alfter 50 installments have been repaid, a borrower pays her interest, which is slightly above the commercial rate").
105. Dyal-Chand, supra note 70, at 242 ("As a matter of fact, the trend, partly attributable to the Bank's efforts to achieve financial self sufficiency, seems to be toward abovemarket interest rates, with more recent reports showing interest rates that are double the rates charged by commercial banks in Bangladesh.");
106. RAHMAN, supra note 9, at 132-33 (discussing the raising of interest rates in response to increased costs and in order to increase profit margins);
107. KHANDKAR ET AL., supra note 73 (determining that Grameen had achieved operational self-sufficiency by 1993, noting the role that raising interest rates played in accomplishing this).
108. Brown, supra note 65, at 124-25 ("Ultimate corporate governance is exercised at the level of the board of directors .. . [who] exercise their authority and responsibility primarily by approving individual transactions or specific actions.").
109. Id.
110. RAHMAN, supra note 9, at 130-31 (discussing the dramatic rise in subsidies and foreign grants over the period of 1984-1994, during which the board voted to raise rates several times).
111. Id. at 145.
112. Brown, supra note 65, at 121 ("Useful models of corporate governance must take into account the terms under which capital is obtained by the enterprise, terms that may provide important restrictions on the freedom of action of the company and may affect its course of conduct").
113. See supra note 27.
114. Brown, supra note 65, at 121.
115. Lynne L. Dallas, Two Models of Corporate Governance: Beyond Berle and Means, 22 U. MICH. J.L. REFORM 19, 19 & n.1 (1988) ("shareholders are the 'owners' of the corporation who, by virtue of such ownership, are entitled to control the corporation... [which includes] the right[] to elect the board of directors, to vote on certain corporate matters, and to rely on the fiduciary duty of directors to operate the corporation in [their best interests]");
116. A BERLE & G. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 299300 (rev. ed. 1967).
117. RAHMAN, supra note 9, at 6;
118. Jaffer, supra note 29, at 198.
119. Jaffer, supra note 29, at 183 (describing credit rationing) & 187 (arguing that the peer-lending model should be considered a form of "solidarity lending" and that "solidarity lending alone can explain a large part of the success that MFIs have experienced in increasing the rural poor's access to affordable credit").
120. Id. at 197-98.
121. Geographic area is defined as an area of fifteen to twenty-two villages. Id. at 197.
122. Id. at 198. This results in groups tending to be made up of individuals who know each other, though Grameen prohibits groups to contain more than one member of a fam-ily.
123. RAHMAN, supra note 9, at 7-8;
124. Jaffer, supra note 29, at 198.
125. The costs associated with screening and monitoring are shifted to the clients in the peer group themselves, who are assumed to bear these burdens at lower costs. See Daryl J. Levinson, Collective Sanctions, 56 STAN. L. REV. 345, 396 (2003) ("While assessing the credit risks of Bangladeshi villagers would be prohibitively costly for a bank, the villagers themselves are intimately acquainted with each other's honesty, financial status, and work ethic").
126. Jaffer, supra note 29, at 200-01 (discussing how the peer lending model (1) creates incentives for borrowers to monitor each other rather than requiring the bank to do so, (2) "harness [es] social, cultural, religious, and moral norms" associated with traditional Bangladeshi village environments, (3) provides an easy opportunity for Grameen workers to disseminate information to clients, and (4) frees the bank from much of the screening of prospective borrowers through creditworthiness vouching). This solves the problems associated with "credit rationing."
127. But see Dyal-Chand, supra note 70, at 254-56. (discussing studies that show human rights abuses flowing from the peer lending model).
128. See Jaffer, supra note 29, at 197-206 (discussing the cost savings and improved incentive resulting from "solidarity [peer] lending").
129. Dyal-Chand, supra note 70, at 227-28 (noting that Grameen's social mission is "to extend to women the benefits of development and wealth generation");
130. Jaffer, supra note 29, at 246 ("If the ultimate goal in using the microcredit model is to alleviate poverty through permanent income generation by means of self-employment, Western importers should consider how seriously the Grameen Bank's unique understanding and evaluation ofthat goal implicates the vitality of its model in the United States.").
131. See Dyal-Chand, supra note 70, at 227-28 (discussing the focus on women). The focus on women has been lauded by many commentators, including feminist scholars.
132. See, e.g., Margareth Etienne, Addressing Gender-Based Violence in an International Context, 18 HARV. WOMEN'S L.J. 139, 164 (1995) (arguing that Grameen empowers women).
133. But see Dyal-Chand, supra note 70, at 264 (citing research critical of the targeting of women, concluding that gender-relations in Bangladesh "can put women in a much more vulnerable position than they had been prior to receiving the opportunity to borrow from the Bank");
134. RAHMAN, supra note 9, at 120-27 (discussing increased incidents of violence against women from male family members).
135. See supra note 82.
136. Dyal-Chand, supra note 70, at 228;
137. RAHMAN, supra note 9, at 5.
138. _ See supra note 72 and accompanying text (discussing the role of business objectives in corporate governance).
139. Dyal-Chand, supra note 70, at 242-43 (questioning whether it is appropriate to refer to Grameen as "market-based" because its interactions with its clients extends much farther than arms-length dealing, but that "indeed the Bank behaves in many respects like a market-focused institution").
140. Id. at 245 & n. 126 (discussing the requirement on clients to claim some form of business ownership on loan applications and reapplications);
141. RAHMAN, supra note 9, at 98-99 (discussing the types of loans and Grameen's loan application approval policies). This condition is considered evidence that Grameen is pursuing a goal of poverty-alleviation among its clients.
142. See Dyal-Chand, supra note 70, at 219 (discussing a "growing momentum behind the notion that the particular model of microlending developed by the Grameen Bank in Bangladesh might -literally -ehminate the universal problem of entrenched poverty").
143. See Grameen, The Sixteen Decisions of Grameen Bank, http://grameen-info.org/bank/the16.html. This condition has been considered evidence that Grameen, in addition to poverty alleviation, is pursuing a "social development effort" among its clients as an organizational goal.
144. See also Dyal-Chand, supra note 70, at 227 (summarizing the Sixteen Decisions as "promises to follow the principles of discipline, unity, courage and hard work; to grow vegetable all year round; to keep families small; to build and use pit-latrines; and to refrain from giving and receiving dowry"). This aspect of the loan condition has been described as a "social contract."
145. Laurie A. Morin, Legal Services Attorneys as Partners in Community Economic Development: Creating Wealth for Poor Communities through Cooperative Economics, 5 UDC/DCSL L. REV. 125, 133 (2000).
146. RAHMAN, supra note 9, at 115-17 (describing the monitoring structure that is intended to create "a strong supervisory measure by involving both borrowers and bank workers to ensure that borrowers use their loans for income generation and pay installments from their earned income," but concluding that this system creates only "inadequate supervision" due to pressures accompanying the "phenomenal expansion" of Grameen and the requirements of achieving financial self-sufficiency).
147. Dyal-Chand, supra note 70, at 222-24 (discussing the popularity of Grameen's social development mission, especially how the Sixteen Decisions have "intrigued" scholars in the United States, and how the self-employment requirements have generated interest among "Republican and Democratic politicians, feminist scholars and organizations, and a number of scholars and practitioners in the Community Economic Development ('CED') movement").
148. RAHMAN, supra note 9, at 88-89 (discussing how "the prime objective of the Sixteen Decisions is to focus on fundamental social change among poor women in rural Bangladesh").
149. But see Dyal-Chand, supra note 70, at 245-53 (questioning whether Grameen's success at raising income levels is a result of "transform[ing] the poor into entrepreneurs," and arguing that in order to be certain of this Grameen would have to measure not just income levels but "whether [its] programs result in market integration of low income individuals, as suppliers as well as consumers," since "factors that may be well-matched to social goals reveal little about the viability of the market as the engine of poverty reduction").
150. See Dallas, supra note 81, at 22-23 & n.14 (discussing the use of incentives to minimize agency costs, which are the "costs" incurred by an organization when the interests of management and owners diverge, as well as the transaction cost literature).
151. Dyal-Chand, supra note 70, at 243 & n.121 ("[T]he Bank claims to measure its success as a market participant not only by its own lending practices, but also by the success of the poor people whom it helps to participate in the market via microfinance.").
152. Id. at 244 (discussing how both Grameen and many of its admirers measure its success by the number of loans extended);
153. RAHMAN, supra note 9, at 136-38 (discussing the efforts of Grameen to upscale its activities through "high disbursement and high repayment rates" and how this focus has shaped operational goals).
154. Dyal-Chand, supra note 70, at 244 ("The Bank also tracks income levels of borrowers and their families, claiming that its lending raises a significant percentage of its borrowers over the poverty line.").
155. Id. at 245-53 (discussing how Grameen "appears to measure success by what the U.S. public might call social welfare indicators, rather than by market participation," calling into question the assumption by those "in the West" that Grameen "is a capitalist institution aiming to transform the poor into entrepreneurs"). These social welfare indicators include "increases in the nutritional levels and health of its borrowers and their ramifies, amounts of personal physical assets (such as changes of clothes and land), educational level of children in the borrowers' families before and after borrowing began and other similar criteria."
156. Id. at 244.
157. Brown, supra note 65, at 123-24 ("All corporations have information and control systems, designed to provide appropriate information for action and to provide assurances and control with respect to the management of the corporation's assets, liabilities and operations.... Such systems enable management, and the board, to exercise control in a complex and fast-changing world by identifying deviations from corporate plans and budgets and from corporate standards and policies.").
158. Grameen Bank is 90% owned by its clients and 10% owned by the government. Dyal-Chand, supra note 70, at n.33.
159. See RAHMAN, supra note 9, at 133-35. Rahman, however, is critical of whether such board restructuring is effective in practice, arguing that power imbalances between rich and educated males and poor and illiterate females confounds the ability of the women to properly execute their role on the board.
160. Id.
161. See supra note 75 and accompanying text (discussing the role of the board of directors in corporate governance generally and the role of Grameen's board in setting interest rates).
162. See supra note 81 and accompanying text (discussing the right of shareholders, as its owners, to control the corporation by acting as a check over the actions of its board of directions, and Grameen's requirement that its clients own a share in the organization).
163. See generally BERLE & MEANS, supra note 81.
164. See Dyal-Chand, supra note 70, at 245-53;
165. RAHMAN, supra note 9, at 115-17, 133-45;
166. Asif Dowla, Book Review: Grameen Bank and Women's Empowerment in Bangladesh: A Review Essay, 4 J. MICROFINANCE 159, 160, 167 (2001)
167. (reviewing RAHMAN, supra note 9).
168. Dyal-Chand, supra note 70, at 245-53 (arguing that the internal auditing measures, which focus on what the author terms "social welfare indicators," rather than selfemployment generation indicators, are inadequate to properly inform management of success or failure of this social development objective).
169. Id.
170. Id.
171. See RAHMAN, supra note 9, at 90-97 (discussing the failure of monitoring of the "social development initiatives" of Grameen, including the Sixteen Decisions).
172. See id. at 132-38.
173. See id. at 136-38.
174. Id. at 135 (reporting that "a large number of borrowers are unaware of their purchase of shares from the bank" and the resulting passivity, indeed complete inactivity, among shareholder-clients);
175. Tucker, supra note 11 (discussing how shares are "only superficially owned by borrowers who cannot sell or trade their stock");
176. Dowla, supra note 113, at 161 ("[M] any borrowers do not understand what it means to be owners, despite the fact that they nominally own shares, and that the ownership is meaningless, as they don't receive any dividends from their shares.").
177. But see id. at 166 (discussing client protest as a means by which clients exercise ownership control over Grameen).
178. See supra note 81 and accompanying text.
179. RAHMAN, supra note 9, at 133-34 (discussing the board's power imbalances between the "five highly educated and powerful men with high status in the society" and the "nine directors who come from the Grameen borrowers [who] are women, the poorest people in the society with absolutely no formal education," who "are expected to be passive and shy" resulting in a situation where "Dr. Yunus, the managing director,... decides everything").
180. But see Dowla, supra note 113, at 163-64 (discussing the efficacy of electing ex-client women on the board of directors, as both a "symbolic change and a very good beginning" to reforming the patriarchal nature of rural Bangladesh).
181. According to one field manager's monthly descriptive report to the managing director (Yunus), translated by Rahman, "[w]e have been educated in the Grameen Bank that our primary consideration is the welfare of our members, but in many instances investment has become prime and members are becoming secondary." RAHMAN, supra note 9, at 136. Rahman concludes that "[s]ince the mid-1980s, there has been pressure from senior offices on grassroots-level bank workers to increase the investment of the branch."
182. Id.;
183. ALEX COUNTS, GIVE US CREDIT 304 (1996) (discussing the pressure on Grameen workers to increase membership rolls through disbursements and to collect repayment on time, resulting in pressure on borrowers from both peer-lending group members and loan officers).
184. RAHMAN, supra note 9, at 138-45 (discussing how dubious loans get approved in order to maintain the high disbursement rates and how this creates higher rates of debt, to the point that the debtor becomes insolvent).
185. See Dowla, supra note 113, at 167 ("[T]o attain sustainability the staff gave multiple loans to the same member.... Given the insecurity and uncertainty that comes with living in rural areas, the debt burden had adverse consequences for the welfare of the household and many households are falling in a trap of perpetual debt cycle.").
186. Id. at 167 ("The pressure of sustainability, again, led to disbursement of loans to the better-off households ... In other words the bank ended up in a vicious circle of increased disbursement to increased default to increased lending to better-off households to further increased default.");
187. Tucker, supra note 28, at 121 ("Instead of the initial poor clients eventually taking their business to banks as they prospered, Grameen and other MFIs have found that becoming banks or quasi-banks is an effective strategy for retaining clientele and reaching financial self-sustainability. ").
188. See supra note 35 and accompanying text (discussing "progressive lending" as a legitimate social policy rationale for shifting lending from poorest- to less-poor clients).
189. RAHMAN, supra note 9, at 120-27;
190. Dyal-Chand, supra note 70, at 262-64.
191. Dyal-Chand, supra note 70, at 264 (describing how the demand of husbands for their wives' loans couples with Grameen's demands for repayment to create a "dual imposition on women... [which] can put women in a much more vulnerable position than they had been prior to receiving the opportunity to borrow from the Bank");
192. Celia R. Taylor, Microcredit as a Model: A Critique of State I NGO Relations, 29 SYRACUSE J. INT_ L. & COM. 303, 327 (2002) ("[R]ather than empowering poor women, loan circles can deepen poor women's enmeshment in traditional relationships of domination.") (internal citations omitted).
193. But see Dowla, supra note 113, at 161-63 ("Even the harshest local critics of Grameen Bank concede that the biggest achievement of Grameen Bank is the empowerment of women, not enchainment....").
194. See supra note 109 and accompanying text (arguing that Grameen's policy of electing female former-clients to its board of directors is intended to align the interest of the board with those of its clients, but noting Rahman's skepticism about the efficacy of this policy in producing this result). See also ROCK ET AL., supra note 22, at 33 (discussing the role, as well as risks, of employee and client participation on MFI boards).
195. See supra note 108 and accompanying text (arguing that Grameen's policy of requiring clients to own a share in the organization is intended to check the behavior of the board in order to ensure that its decisions are in line with the interest of the shareholder-clients).
196. See supra notes 110 & 111 and accompanying text (arguing that Grameen's policies concerning board membership and share ownership should be seen in light of the roles that a corporation's board of directors and shareholders play in corporate governance, concluding that such policies are concerned with aligning the interests of Grameen's board of directors with those of its clients).
197. The argument is that women's presence in management or ownership control will have the same effect as the presence of the women's movement in U.S. politics. See Elizabeth M. Schneider, The Violence of Privacy, 23 CONN. L. REV. 973, 979-80 (1991) ("The battered women's movement grew out of the rebirth of the women's movement in the 1960s, and it is one of the areas in which the women's movement has made an enduring contribution to law. Like sexual harassment, the 'problem' of battering women and the social and legal construct of a "battered woman' did not exist in this country until the women's movement named it.").
198. See supra note 120 (describing Grameen's clients' ignorance of their shareholder rights).
199. See supra note 122 (describing Grameen's board power imbalances).
200. See AWARE Introduction Web Page, http://www.awareweb.org/ introduction.htm (last visited Jan. 21, 2008).
201. See PRAGATHI, supra note 49, at 4.
202. Id. at 10-11. In particular, AWARE noticed that earlier structures of its microcredit program tended to credit ration, discriminating against the poorest of its potential clients in favor of less poor clients.
203. Id.
204. This sketch of AWARE MACS, Ltd.'s microfinance program is based on the author's field notes, speeches given by the Chairman P.K.S. Madhavan, or conversations with D.U. Rao, CEO, and Madame Samiksha Thakur, Director in charge of Continued Motivational Education & Human Resource Development, of AWARE MACS, Ltd, taking place between June and August of 2006. All notes are on file with the author.
205. PRAGATHI, supra note 49, at 17 ("Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people.").
206. Id. at 23.
207. Id. at 20.
208. See supra notes 84-89 and accompanying text.
209. PRAGATHI, supra note 49, at 25-27.
210. Id. at 34 (discussing wage costs -necessary to stay competitive in the labor market - possibly having to be passed along through administrative charges on loans).
211. See also id. at 17 (noting the negative relationship between expanded credit services and interest rate ceilings). Note also that AWARE includes a "risk fund" charge on all loans, effectively raising the interest rates, which it uses to insure against client default and to ensure that institutional creditors receive full recovery on their investments in AWARE.
212. Id. at 25-26.
213. Id. at 19 (reporting that Chairman Madhavan stressed that "any microfinance program . . . needs financial sustainability"). Seven out of the twelve job categories created in the Pragathi hierarchy have financial accountability as their primary responsibility.
214. Id. at 28-33. The daily responsibilities of most mid-level employees in the Pragathi hierarchy are solely concerned with ensuring financial accounting accuracy and full recovery rates.
215. Id. at 23-27.
216. Aishwarya's banking services are not restricted to the same extent as Pragathi's. See infra note 148. Branches operate in larger villages to provide service to both men and women and do not limit their services to the very poor; rather Aishwarya is run simply as a banking institution for rural clients who would not otherwise have access to banking services. Thus, the cross-subsidization also takes on an element of redistribution in the relationship, with Aishwarya clients subsidizing loan operations to Pragathi clients. Interview with Madame Samiksha Thakur, Dir. of Continued Motivational Educ. & Human Res. Dev., AWARE MACS Ltd., in Rajahmundry, East Godavari district, Andhra Pradesh, India (June 2006).
217. PRAGATHI, supra note 49, at 34. In 1999, AWARE registered its microfinance program as a separate legal entity under the Andhra Pradesh Mutually Aided Cooperative Societies (MACS) Act, Andhra Pradesh Act No. 30 (1995) [hereinafter MACS Act], as AWARE MACS Ltd. (AML), which then began functioning as a full-fledged financial institution.
218. Id. at 10. In registering as MACS, AWARE decided not to register under the Indian Union's competing Non-Banking Finance Companies (NFBC) Act, Chapter HIB of the Reserve Bank of India Act (1934)
219. [hereinafter RBI, 1934]. From the standpoint of outreach, MACS provides a better enabling policy than NFBC, as it has less restrictions on capital structures, no minimum capital requirements, and no restrictions on deposit collection (NFBCs cannot accept deposits until a certain level of Net Owned Funds (NOFs) are maintained, and deposits cannot exceed 25% of NOFs) and deposit mobilization. §§ 45IA-45IC of RBI, 1934 & §§ 9(2), 14(2), 15 of MACS Act (stating only that MACS must "be specific" on these matters, but not specifying any requirements to their content, and allowing for deposit mobilization and "non-speculative" investment of funds outside of the business). For organizations that deal with micro-level financing and the subsequent small amounts of capital, such restrictions can be prohibitive. The tradeoff, from the standpoint of the State, is that MACS entails less regulation (NFBCs are regulated under the Reserve Bank of India (RBI), § 45IA of RBI, 1934, whereas MACS need only register with the Registrar, §4 of MACS Act), and thus entail greater risk of financial mismanagement and abuse. For this reason, creditors prefer NFBCs to MACSs, and thus capital is difficult to raise in large numbers as a MACS.
220. See Mersland & Strøm, supra note 13, at 7 (discussing the relationship between government regulation and the ability of both customers and creditors to trust an MFI). Furthermore, the MACS Act restricts service provision to non-members of the MACS. § 14(1) of MACS Act (limiting mobilization of funds to "from its members"). The result is that MACSs providing microfinance services must have large membership bases in order to attain a sustainable level of financial performance. Thus, there is a pressure to upscale the microfinance services if financial selfsufficiency is desired. By incorporating Aishwarya as an NFBC and Pragathi as under the MACS Act, AWARE was able to gain the benefits of both models of regulations. Interview with D.U. Rao, CEO, AML, in Hyderabad, Rangareddy district, Andhra Pradesh, India (June 2006).
221. PRAGATHI, supra note 49, at 12.
222. See supra notes 83-89 and accompanying text.
223. PRAGATHI, supra note 49, at 12 (discussing the role of donor funds in financing the program).
224. Pragathi's constitution provides that net surplus from operations shall be distributed 10% toward a deficit cover fund, 10% to a general reserve fund, 20% to a bad debt reserve fund, and the remaining 60% to a community development fund. Id. at 10.
225. Id. (describing AWARE's activities as "imparting literacy among women, providing legal assistance and awareness programme [s], social education, environmental education").
226. Id. at 19 ("We do not want to be a moneylender. Our microfinance 'PRAGATHI' should have [an] integrated approach and [should have] development as [the] central theme.").
227. See supra note 95 and accompanying text (discussing the role of business objectives in traditional corporate governance and arguing that clearly defined social objectives can play a similar role in social corporate governance).
228. Id.
229. Pragathi has two actionable conditions: no liquor use is allowed to occur in the house of a member, and all girls in the house of a member must attend school. Pragathi has a Panchasheela (five principles) that guides the member's behaviors, including a pledge, similar to the Sixteen Decisions of the Grameen model, as well as Hindu slokhas (prayers) and the national anthems, which they chant and sing in union at all meetings. The pledge and other conditions on discipline are required to be accepted prior to membership in a sangham; however only the two mentioned above are actionable after a loan has been disbursed. P.K.S. Madhavan, Chairman, AWARE, Speech to Pragathi Trainees (July 2006).
230. Id.
231. Id.
232. This also has the effect of aligning social enforcement with the goal of FSS, as violations of the social conditions affect disbursement and recovery rates. See supra notes 116-118 and accompanying text.
233. PRAGATHI, supra note 67, at 24.
234. See id. at 29-33.
235. For example, they must "conduct general and legal awareness classes in the Sanghams to educate the members about their civil rights and responsibilities." Id. at 30.
236. See supra note 103 and accompanying text (discussing the role of incentive systems to align the interests of agents and employees with the objectives of the corporations as a whole).
237. See PRAGATHI, supra note 67, at 29-30.
238. For example, employees must ensure that all members have toilets in their homes by the end of the loan period, and must provide literacy education for "at least 50 women" in a year. Id. at 30.
239. See supra note 161.
240. Specifically, they are given instruction on an "analysis procedure" related to employment generation, which proceeds from "product identification," surveying "skill availability," and then reviewing "demand for supply." D.U. Rao, CEO, AMS, Speech to Pragathi Trainees (July 2006). A list of employment-generating village activities that require only household level or easily achieved skill sets is reviewed with the trainees. AWARE's policy on employment generation is that each household should be trained in more than one occupation. In this way, AWARE ensures that all sangham members will be able to meet the "daily/weekly income" condition on the loan. PRAGATHI, supra note 49, at 24 (listing "subjects for training").
241. Id. at 30.
242. The office of Director in charge of Continued Motivational Education & Human Resource Development is specifically mandated to educate with respect to "Women Empowerment [and] Gender sensitization through various training camps, conferences, seminars, workshops for members of the Pragathi and all the people involved in particular to the society in general." Id.
243. Id.
244. See id.
245. Richard B. Smith, An Underview of the Principles of Corporate Governance, 48 BUS. LAW. 1297, 1306 (1993) (discussing the role of "outside" directors and the "growing independence of non-management directors").
246. Id. (discussing "the capacity of disinterested outside directors to take matters into their own hands in a manner that is not biased in favor of a co-director" to the betterment of the corporation).
247. See supra notes 154 & 155 and accompanying text;
248. see also Margaret A. Johnson et al., The Impact of Outcome-Based Assessment on Microenterprise Programs, 1 J. MICROFINANCE 44, 49 (1999) (discussing how donor agencies believe that "monitoring and assessing community services programs should focus on the results they achieve for their customers... [and that] [t]hese results should be directly connected to the goals and objectives of the program");
249. ROCK et al., supra note 22, at 22 ("It is imperative... that the institutional mission be clearly defined and accurately communicated to the institution's various stakeholders, including donors, lenders, staff, and clients.").
250. See Melvin Aron Eisenberg, An Overview of the Principles of Corporate Governance, 48 BUS. LAW. 1271, 1275 (1993) ("[A] basic premise of corporation law is that a business corporation should have as its objective the conduct of such activities with a view to enhancing the corporation's profits and the gains of the corporation's owners.").
251. See supra note 148 (discussing the lack of prudential regulation);
252. Alexandra O'Rourke, Public-Private Partnerships: The Key to Sustainable Micro financing, 12 L. & BUS. REV. OF THE AMERICAS 179 (2006) (outlining the existing forms of microfinance regulation in international comparison, noting the common lack of regulation, and concluding that the existing regulatory models are inadequate).
253. See supra note 171 and accompanying text.
254. Id.
255. See Dallas, supra note 81, at 23-24 (discussing the "efficiency model" theory of corporate governance).
256. See Copestake, supra note 27, at 130 (arguing that there is a need for clearly defined goals that lead to "some convergence over how general questions are framed about client satisfaction and influence over business decisions").
257. See Christopher Dunford, In Search of "Sound Practices" for Microfinance, 2 J. MICROFINANCE 1, 6, 10 (2000) (arguing for the use of experimentation to determine "sound" (rather than "best") practices and that "this approach calls for everyone to be very clear, very explicit about their objectives").
258. See supra note 177 and accompanying text.
259. See supra notes 156-162
260. and accompanying text (arguing that AWARE's loan conditions and employee contracts function to align the interests of these individuals with the organization's social mission in a way that is analogous to the role of incentives systems in corporate governance, that their social dimension makes them distinct from traditional incentives systems, and concluding that they perform an important role in social corporate governance). See also, ROCK et al., supra note 22, at 22 (arguing that the most successful NGO MFIs had board members who "strongly identified with the institutional mission," thus highlighting the importance of aligning the interests of board and management with the goals of the MFI).
261. See Gibbons & Meehan, supra note 17, at 16-17 (discussing the use of "carrots" and "sticks" to induce repayment on loans outstanding).
262. Id. at 16-18 (discussing the use of "staff incentives" in order to both "encourage greater labor productivity" and to "reinforce the critical importance of strong portfolio quality management," and discussing the use of "client incentives" to induce repayment).
263. See Dyal-Chand, supra note 70, at 255-59 (discussing the coercive and potentially harmful nature of contract conditions and loan-imposed incentives to self-monitor among peer-lending group borrowers).
264. See Tucker, supra note 11.
265. See supra notes 34, 48 (discussing a recent controversy in the mostly rural Krishna district of the Indian province of Andhra Pradesh, in which group-lending practices allegedly led to coercive recovery practices).
266. See Brown, supra note 65, at 123 ("The key question in corporate governance is therefore how to ensure that [the] flow of relevant and useful information is available, and then to have systems in place to facilitate the recipient analyzing and acting upon it.").
267. See Dowla, supra note 113, at 167-168 (arguing that RAHMAN, supra note 9, succeeds in revealing that the problems faced by the Grameen Bank resulted from "severing the chain of communication between borrowers, staff in the field, and upper level management" and that this may have resulted, if only temporarily, in Grameen losing "sight of its mission and... becom[ing] a bank of loan collection only").
268. See Johnson et al., supra note 171, at 49 (discussing monitoring and assessment of "community services" in light of "the results they achieve for [the MFFs] customers").
269. See Larry E. Ribstein, Market v. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J. CORP. L. 1, 40 (2002) (arguing in the context of the U.S. Sarbanes-Oxley Act of 2002, which codified existing corporate law imposing a duty to implement and annually certify internal controls, that "auditor regulation significantly increases firms' audit fees as well as their costs of dealing with and producing information for auditors");
270. Calmetta Coleman & Cassell Bryan-Law, Audit Fees Rise, and Investors May Pay Price, WALL ST. J., Aug. 12, 2002, at C1.
271. See Brown, supra note 65, at 125 (arguing that "in large part, a modern corporation can only afford to have one set of information systems" and that this single system should meet the needs of all those in the organization who require information).
272. See Dunford, supra note 52, at 16.
273. See Cheston & Reed, supra note 54, at 28 ("Our simple rule of thumb is that [an MFI] should be willing to spend as much to track and audit its impact as it does to track and audit its finances. Or, put another way, measuring whether it is achieving its objective should be at least as valuable to an institution as measuring whether or not it is earning enough money to stay in business.").
274. See supra notes 168-170 and accompanying text (arguing that AWARE's Director in charge of Continued Motivational Education & Human Resource Development is analogous to the role that the independent, non-executive plays in traditional corporate governance, and concluding that this position is an example of a social director, whose role on the board is to ensure that the organization adheres to its social mission).
275. See Copestake, supra note 27, at 131 (discussing the need to increase the "cadre of professional impact assessment researchers").
276. See supra notes 130, 132-133, 135 and accompanying text (arguing that femaleoriented MFIs are benefited through female board members, especially ex-clients, and discussing the problems with ensuring that such board members will be effective in serving the client's interest).
277. See supra note 133 and accompanying text (arguing that female representation in the board or management brings a "woman's perspective" about the experiences and needs of female clients that would otherwise not be understood by all-male organizations).
278. See generally Dunford, supra note 178 (arguing for experimentation in the microfinance community to develop "sound," rather than "best" practices and noting the need for flexibility in organizational forms).
279. See Cheston & Reed, supra note 54, at 27-29 (discussing the role of an "impact audit" in improving an MFFs effectiveness in achieving its own social goals and the fact that "[increasingly, businesses are turning to the "social audit". . . as a way to determine whether their work has a positive impact on their employees, customers and communities").
280. See Brown, supra note 65, at 125 ("The auditors of the corporation have the duty to review the system and, to the extent necessary to fulfill their specific responsibilities, to obtain reasonable assurance that the systems are appropriate, that they are being effectively operated, and that the data produced has the appropriate distribution.");
281. see also Cheston & Reed, supra note 54, at 28 (discussing the fact that financial audits collect data on a regular and consistent basis and are used to generate trend analysis and profit comparisons in order to inform regular planning, and the role auditors play in verifying and suggesting improvements to these data collection systems).
282. See Copestake, supra note 27, at 130 (discussing the expense of long-term employment of staff overseeing internal controls and thus the "strong case for subcontracting this work to specialist consultants").
283. See Tucker, supra note 28, at 122 (arguing for the need to develop industry-wide benchmarks against which MFIs can measure their performance, and stating how "[m]easures derived from social audits would be the most likely source of such benchmarks").
284. Id. at 108 ("As more of MFI financing has come in the form of loans at below market interest rates instead of outright grants, the providers of low interest loans have found that their fiduciary responsibilities necessitated greater scrutiny of the financial practices of recipient.") (emphasis added).
285. See supra notes 103-112 and accompanying text (discussing Grameen's elaborate monitoring and information system, the composition of its board, and the identity of its shareholders, arguing because they focus on clients' behavior rather than on the organization's operations they have a uniquely social dimension that is absent from traditional corporate governance, and concluding that this social dimension is what distinguishes social from traditional corporate governance).
286. See supra note 202.
287. See supra Parts IV.A.3. and IV.A.5.
288. See, e.g., Eisenberg, supra note 172, at 1280-81 (discussing the American Law Institute's Principles of Corporate Governance, which state that "[a] director or officer has a duty to the corporation").
289. See Dallas, supra note 81, at 33 ("[S]ome writers believe that management is an agent only for shareholders");
290. Daniel R. Fischel, The Corporate Governance Movement, 35 VAND. L. REV. 1259, 1262 (1982).
291. See Dallas, supra note 81, at 33 ("Management is an "agent" for various constituencies, such as shareholders, employees, and customers.").
292. See generally Armen A. Alchien & Harold Demsetz, Production, Information Costs, and Economic Organization, 62 AM. ECON. REV. 777 (1972).
293. See Ribstein, supra note 189, at 35-39 (discussing the "potential costs of increased liability and regulation" and how they can skew executive incentives, damage resource allocation in the market for executives, increase costs to firms, and reduce trust within an organization);
294. see also supra notes 116-117 and accompanying text (discussing the difference between primary and secondary effects of MFI and agent actions on client behavior).
295. See Ribstein, supra note 189, at 37 (discussing how liability can negatively "affect the disclosure policies executives set" when "executives do not get the benefits of minimizing disclosure costs or of extra clarity of disclosure, [but do] bear the costs of failing to disclose fraud" such that it could lead to a disincentive to monitor for fraud, in the hope that one cannot be liable for what one did not detect).
296. Id. (discussing how forcing directors to bear the risk of fraud, formerly borne more cheaply by diversified directors, may "increase rather
297. See supra notes 209-211.
298. See Ribstein, supra note 189, at 36 (arguing that "[diversified owners can tolerate risks associated with specific firms, and care only about the risks of their whole portfolios, which if adequately diversified are similar to those of the market as a whole").
299. See Rock et al., supra note 22, at 19-28 (discussing the diversity of ownership structures for MFIs; identifying at least four major categories of "owners" common across the microfinance industry, including NGOs, private investors, public entities, and specialized equity funds, but also identifying "social investors" who are investing in the social mission of MFIs; highlighting the diversity of interests and expectations among these groups; noting that this diversity can lead to governance problems; and concluding this diversity places the board of directors in the position of balancing these interests and providing for all of them).
300. See supra text accompanying note 81.
301. See supra Parts IV.A.3 and IV.A.5.
302. See Mark Sidel, The Guardians Guarding Themselves: A Comparative Perspective on Nonprofit Self-Regulation, 80 CHI.-KENT L. REV. 803 (2005) (arguing that government regulation is appropriate in some sectors, but that where "autonomy and relative freedom from government control has always been deeply prized," as is the case with the microfinance community, "self-regulation" appears to be the optimal regulatory approach).
303. See supra note 120 and accompanying text.
304. See, e.g., Dowla, supra note 113, at 162
305. ("Grameen borrowers in general are more vocal and articulate compared to other women in the village who are not Grameen members." (quoting RAHMAN, supra note 9, at 95-96)).
306. See id. at 166 (discussing borrower protests in Tangail district, resulting in a major change in Grameen's policy regarding interest payment collection and mandatory fund contributions);
307. PRAGATHI, supra note 49, at 10-11 (discussing AWARE's change in policy away from male Scheduled Tribais and Backward Caste members and toward rural women as resulting from the explicit demands of women).
308. Mahasabhas are large meetings of clients held for the purposes of disseminating information, providing a sense of community and empowerment, and sometimes even for non-partisan, identity-based political organizing. AWARE's mahasabhas run between 10,000 and 100,000 people in strength and are convened about twice a year. Interview with P.K.S. Madhavan, Chairman, AWARE, in Bhagwatipuram Human Resources Training Center, Hyderabad, Rangareddy district, Andhra Pradesh, India (June 2006).
309. See supra note 120 and accompanying text.
310. See ROCK ET AL., supra note 22, at 19-28 (outlining the various ownership structures commonly encountered in MFIs and the forms of governance mechanisms that owners employ to ensure management subservience to their interests) & 36-37 (outlining various mechanisms intended to review board performance, such as term policy, director removal procedures and performance evaluations).
311. See, e.g., David Ellerman and Peter Pietgoff, The Democratic Corporation: The New Worker Cooperative Statute in Massachusetts, 11 N.Y.U. REV. L. & SOC. CHANGE 441, 458-76 (1982-1983) (discussing the ownership rights that accompany share ownership; arguing that by conceiving of membership rights as personal rights, rather than property rights, in worker-owned cooperatives, the nature of ownership and thus the nature of the institution is changed; noting that there is a diversity of legal structures governing ownership rights; and discussing how these different legal structures serve differing goals).
312. See Graham Wright, Replication: Regressive Reproduction or Progressive Evolution?, 2 J. MICROFINANCE 2, 69 (2000) (discussing the "increasing interest in second-tier, apex organizations").
313. See Aaron Jones, Promotion of a Commercially-Viable Microfinance Sector in Emerging Markets, 13 GEO. J. ON POVERTY L. & POL'Y 187, 213-14 (2006).
314. Id. at 214;
315. Wright, supra note 225, at 69.
316. See Jones, supra note 226, at 213-14.
317. Jones, supra note 226, at 214.
318. Wright, supra note 225, at 69.
319. Id. The conflict of such a dual role, however, may be analogous to the tension that MFIs face in fulfilling both financial and social goals. While this point is clearly outside the scope of this Note, it suggests a governance solution to the conflict if this analogy can be maintained.
320. See, e.g., Jones, supra note 226, at 214 ("Even apex efforts that have focused more on "capacity building" at licensed MFIs rather than boosting financing have proven to be of minimal effectiveness.");
321. CONSULTIVE GROUP TO ASSIST THE POOREST, OCCASIONAL PAPER No. 6: APEX INSTITUTIONS IN MICROFINANCE 12, 14, 16 (2002), http://www.cgap.org/docs/OccasionalPaper_06.pdf.
322. See supra notes 77-79 and accompanying text (discussing the role of donor demands in Grameen's governance and its analogy to the role that creditors play in corporate governance, especially through manipulation of the terms under which credit is offered);
323. see also supra note 27 (discussing the role of multilateral donor agencies in MFI governance by "spurfring] [them] to improve their standards and performance").
324. See Sidel, supra note 217, at 804 ("We must ensure that stricter self-regulation does not narrow nonprofit autonomy and freedom.").
325. See Dunford, supra note 178, at 7 (arguing that among the diversity of governance practices that are available to MFIs, the preferable ones for a given MFI are "still waiting to be fully explored and articulated").
326. Id. ("The microfinance movement needs to remain for some time to come a 'learning organization' or a movement of experiments in sound practices geared to the different organizational strategies and situations.").
327. Id.
328. See Wright, supra note 225, at 64 ("The diversity of systems is driven by the needs of the project or the institution implementing it: their existing groups, nonfmancial service objectives (such as delivery of family planning commodities or community conscientisation), the donor agencies' disbursement schedule, or blueprint implementation models.").
329. See Dunford, supra note 178, at 7 ("Given the diversity of microfinance organizations, strategies and situations, there cannot possibly be a unitary set of best practices, only diverse sets of sound practices.").
330. Id.
331. David W. Hess, Social Reporting: A Reflective Law Approach to Corporate Social Responsiveness, 25 J. CORP. L. 41, 43 (2000) ("The law is "reflexive" in that it encourages corporations to constantly re-examine their practices and reform those practices based on the most current information.").
332. Thomas W. Dunfee, Corporate Governance in a Market with Morality, 62 LAW & CONTEMP. PROBS. 129, 155-56 & n.120 (1999) (discussing reflexive law, which "preserves the freedom of regulated parties to reach their own outcomes but establishes procedures that will force those parties to 'take account of various externalities'").
333. See generally Hess, supra note 241.
334. Id.
335. See, e.g., O'Rourke, supra note 173 (arguing that commercial banks should partner with MFIs in order to meet their technical and funding needs while maintaining appropriate levels of regulation for both banks and MFIs, and that this would be superior to deregulated financial services or mandatory licensing systems);
336. Jones, supra note 226 (arguing that governments can and should play a more active role in the promotion of the microfinance sector and its ability to access the capital markets).