Boards of directors at international financial institutions and multilateral development banks are unique. Conventional precepts of corporate governance impose a singular fiduciary duty on directors to act in the best interests of the organization and shareholders. But IFI directors have an additional representational responsibility to the subset of shareholders that appointed them.
Another peculiar feature is the notion of the “resident board” at many leading IFIs. Delegates to the Bretton Woods conference in July 1944 considered whether the members of the boards of the International Monetary Fund and the World Bank should comprise of eminent experts on economics, investment, and finance, or representatives of member governments who would reside and work full-time at the headquarters of the institution.
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The capacity of these institutions and their staff were untested, yet they were charged to undertake complex projects in the most challenging circumstances. Understandably, the delegates opted for the reassurance of a resident board of directors representing constituencies of shareholder countries. This precedent was followed by subsequent institutions for the next 40 years.
A need for reform
Over the past decade, the rationale for resident boards has been reexamined, and several new institutions have sought greater efficiency through nonresident boards, including the Asian Infrastructure Investment Bank and the Green Climate Fund.
Resident boards of directors in change-minded institutions are useful — yet there is an urgent need to review the functional relationship between boards and management. Both are essential to instill a greater sense of innovation, to make critical changes in business operations, and to undertake reforms. Resident boards are uniquely suited to facilitating and achieving much-needed reforms of themselves and their relationships with management.
The path to reform won’t be smooth. Public institutions are typically slow, resistant to change, and skeptical of innovation. Directors of MDBs sometimes approach their work with a defensive, regulatory mindset that results in delay or inaction. MDB boards and management must overcome these impediments and reconsider governance frameworks that were designed 75 years ago for circumstances that bear little resemblance to today’s operations or objectives.
Reviewing roles at ADB
Many basic — even mundane — decisions in the operations and administration of MDBs require board action under antiquated governance frameworks, including the authorization of small or low-risk loans. Hundreds of board approvals of transactions and policies are required each year at MDBs.
As the size, scope, and complexity of operations have increased, the proportion of time that board members spend on these items has expanded dramatically. This leaves less time and resources for board engagement on more important matters of strategy, policy, planning, and oversight. Antiquated processes jeopardize maximizing vital interventions in smart and green cities, climate change, gender equity, and sustainable financing while focusing on project details where directors’ inputs add less value.
At the Asian Development Bank, calls for a reconsideration of the roles of management and the board culminated in extensive discussions in 2018-19. ADB management and board have embraced the debate, requesting staff to engage the board earlier and more deeply in more specific, regional, sectoral, and thematic planning, priorities, and reporting.
But greater board engagement requires greater and more detailed information. That is why ADB management is revamping a stingy information-sharing mindset that historically treated board members as outsiders and shared little more information beyond what was publicly disclosable.
There will also be broader delegation by the board to management of authority to approve certain low-risk projects, coupled with enhanced efficiencies in project cycles and processes.
Going forward, the new board-management relationship will be based on stronger mutual trust in the spirit of common endeavor.
Management will trust that board members will safeguard the confidentiality of highly sensitive information, that they will not overburden staff with unnecessary requests for extraneous data and analyses, and that they will not consider the deeper engagement and transparency as an invitation to micromanage. In turn, the board will trust that management will competently design, approve, and implement projects delegated to it by the board.
The ADB board is also examining the scope and roles of its committees. For the first time in years, the board is reconsidering whether the existing committee structure is best-suited to the current business of the bank. At issue is how to enhance the effectiveness and flexibility of committees, enabling the board to adapt quickly to changing circumstances and to improve deliberations and decision-making.
How a resident board works
ADB’s resident board comprises 12 directors representing constituencies encompassing ADB’s 68 member countries. Board residency facilitates interactive debate and deliberations that would not be possible if the directors were scattered across Asia, the Pacific, Europe, and North America.
Important projects and initiatives require consultations with shareholders, even when shareholder approval is not legally required. MDB shareholders use their shareholdings to inject their values, beliefs, and priorities into MDBs’ policies and projects, principally through their elected directors who serve in part in a representative capacity.
As such, directors’ responsibilities include reporting and consulting with capitals, and their capacity for effective shareholder engagement is dramatically enhanced by the knowledge, experience, and insights they acquire by virtue of their residency, their daily interaction with management and staff, and greater familiarity with the institution.
Directors familiar with the institution can also act as liaisons between member governments and the institution and more effectively bring the perspectives of shareholders into discussions and convey to capitals management’s perspectives.
Conversely, directors on nonresident boards are psychologically and professionally remote from the institution and typically have a range of responsibilities beyond their directorship that permit only a part-time focus on the organization. A nonresident director can more easily transfer their role, resulting in more frequent turnover on the board and diminishing consistency and continuity.
By way of contrast, ADB’s management, board, and shareholders worked closely and continuously for more than three years on whether and how to combine the bank’s concessional lending operations and equity of the Asian Development Fund — a separate $30 billion special fund with its own governance structure — into the central capital and operational structure of the bank. The merger, completed in 2017, would not have been possible without the close collaboration made possible by a resident board.
Tension between management and their corporate overseers is as old as the corporate form itself. But resident directors of IFIs are well-positioned to lead reforms to ensure boards and shareholders are informed and engaged partners, working collaboratively with their institutions for mutual benefit.