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

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 enterprise 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 findings hold when we perform several robustness tests and endogeneity tests.

Theoretical/Academic Implications

We contribute to the corporate governance literature 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 showing 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 performance 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.