Do Powerful CEOs Determine Microfinance Performance?

Abstract

Recently, microfinance has been coming under public and media attacks. The microcredit crisis following from microfinance‐induced suicides in 2010 in the Indian state of Andhra Pradesh indicates that weak corporate governance and imprudent risk taking have far‐reaching consequences. Yet, analyses of corporate governance mechanisms among microfinance institutions (MFIs) remain underdeveloped. As a response, this study examines the impact of CEO power on MFI risk taking by deriving explicit predictions of this effect from a characterization of the microfinance industry. Based on a sample of 280 microfinance institutions, our results suggest that powerful CEOs of microfinance non‐governmental organizations (NGOs) have more decision‐making freedom than powerful CEOs of other types of MFIs. This induces them to make more extreme decisions that increase risk. Furthermore, the decision‐making freedom powerful CEOs have in NGOs appears to lead to worse decisions, because the presence of powerful CEOs in microfinance NGOs is associated with lower performance.

Keywords: CEO power, governance, managerial discretion, microfinance, risk