A Guide to Assessing and Implementing the Universal Standards for Social and Environmental Performance Management

Dimension 2 - Committed Leadership

Commitment to social performance starts at the top. A social strategy is only strong if the Board and senior management understand and uphold it.  In order for social performance to be fully embedded in the organization, the governing bodies and senior leadership must build it into the organization’s plans and accountability structures. The governance and management should be clear, committed and incentivized to achieve the provider’s social objectives. Dimension 2 lays out the key practices that leadership should make a standard part of operations and decision-making. There are 2 standards.

Standard 2A. Members of the board of directors hold management accountable for achieving the provider’s social goals.

Your governing bodies should use social performance information to shape and adjust your strategy and hold the senior management to account for achieving social objectives. It should also protect the provider’s social focus in times of transformation, growth or crisis.

This standard has 5 essential practices:

Resources for Standard 2A
  • Nordic Microfinance Initiative's Board Participation in Svasti (watch the interview here)

2.A.1 Board composition reflects the provider’s social strategy and sound governance practices.

2.A.1.1 Board has an active social performance management (SPM) committee or equivalent body

A formal SPM committee (or at the minimum, a designated SPM person) ensures the board receives key social performance information, helps challenge the provider when social objectives are not met, keeps the board updated on new trends, resources, social and environmental risks, etc.

Scoring guidance

To answer ‘yes’, the provider should have a formal social (and environmental) performance management committee or equivalent body at the governance level, with defined terms of reference, identified persons, and regular role in Board/ governance discussions as summarized in Board minutes. If the SPM responsibilities are shared among different committees, specific terms of reference and how these responsibilities are taken in charge by the different committees, when/how SPM subjects are discussed should also be clearly identified to answer ‘Yes”.

If only one person is in charge, if the roles and responsibilities are not formally defined, or if concrete action taken are rarely identified, the answer is ‘partially.’

Sources of information
  • Board minutes / Committee minutes
  • Terms of reference for SPM committee/ job description for SPM champion
  • Interviews with board members
  • Interviews with CEO/managing director
  • Interview with SPM  champion
Evidence to provide

Refer to names/organizational chart/Terms of References/minutes to provide evidence of the regular activity of the SPM committee/champion.

Field examples / Guidance for implementation

Review the activities and mandate of the existing board committees. There should be a committee explicitly tasked with SPM/SEPM responsibilities. If no committee is covering these responsibilities, consider adding a designated SPM committee. Potential SPM committee responsibilities include the following: ensuring the credibility of SPM information; engaging employees at all levels in SPM; prioritizing SPM issues to be addressed by the board and management; drawing in relevant expertise for SP research and analysis; and proposing corrective actions for social performance risks identified by the board. In addition to having a designated committee that is the focal point for SPM in your institution, some institutions find it help to build in specific SPM responsibilities into the responsibilities of other committees as well to signal clearly how the work of each committee contributes to SPM.

Examples: SPM committee (representatives from Operations, HR, Audit, Risk) meets quarterly to assess progress towards social objectives based on a template defined with senior management and the board. One person, the SPM champion – who is the risk manager – is in charge of twice yearly reports to the Board.

Resources for indicator 2.A.1.1

2.A.1.2 At least one board member has direct work experience with the provider’s target clients.

To reflect the needs and preferences of its customers, the strategy defined by the governing body must be based on detailed knowledge of the target population, which must feed into strategic decision-making. For this, at least one member of the governing body must be able to provide his/her firsthand knowledge and analysis of the needs of the target population.

Scoring guidance

To answer 'yes', at least one member of the Board must have experience with the provider’s target population through his/her current work, previous experiences, studies and advice, profile, etc.

If the members of the governing body only have a theoretical or old knowledge (more than 5 years) with the target populations, the answer will be 'partially'.

Sources of information
  • Board composition and board members curriculum vitae (CV)
  • Interviews with Board members
Evidence to provide

Share in few key words the experience of the Board members related to the target population of the provider. If the board has a board composition policy or targets, share that as well. If the board has a board composition policy or targets related to board member experience, share that as well.

2.A.1.3 At least 20% of board members are women.

Only a truly diversified leadership structure can begin to address existing inequities at a systemic level. Women’s representation at the strategic level is key to ensure the voice and empowerment of women from the leadership to the clients. The indicator requests that at a minimum, one woman for small Boards, and at least 20% of board members in larger board should be women.

Scoring guidance

The score is ‘Yes’ if at least 20% of board members are women, or if in a small board of 5 or less members, at least one woman is a member.

Sources of information
  • Board composition
Evidence to provide

Specify the number of women at the Board and total number of board members.

2.A.1.4 The board includes members whose nationality/ethnicity is representative of the provider’s target clients.

The leadership structure can address existing inequities and answer to target clients’ needs with a local representation at the governance level.

Scoring guidance

To answer 'yes', at least one member of the Board must be of nationality/representative of various groups linked to the target population of the provider in order to be able to bring their needs and preferences, challenges, constraints, risks.  

The answer will be 'partially' if a member of the governing body only represents a minority of the provider’s clients.

Sources of information
  • Board composition and board members curriculum
  • Interviews with Board members
Evidence to provide

Share in few key words the profile of the Board members related to the target population of the provider.

2.A.2 The provider trains board members on their social performance management responsibilities.

In order for your board to manage your institution’s social performance, each board member must understand your social goals and the role the board should play in managing social performance. SPM can seem like a lofty abstraction that board members don’t associate with their own day-to-day work. Effective boards need information on the concrete importance of SPM, how it will benefit the institution, and what role they as leaders must play.

A board orientation to SPM should include a discussion of SPM’s importance and how it will benefit the institution, a  comprehensive look at your institution’s social strategy, as well as updates on local initiatives (e.g., regulation; national Codes of Conduct) and international initiatives such as the Universal Standards for Social and Environmental Performance Management and the board’s role in managing social performance.

Discuss the importance of SPM and how it will benefit the institution

Explain the basics: SPM is a management style that puts customers at the center of all strategic and operational decisions. SPM begins with a clear social strategy, which is then carried out by the board, management, and employees. Once they understand what SPM is, convince them that it’s valuable for the institution (see Box 1). Discuss how stronger SPM practices will help the FSP serve clients better, strengthen the institution’s financial performance, and help to solve operational challenges. Use language that your board will find appealing. For example, the terms “balanced performance management” and “responsible finance” may be more palatable for financially minded board members. For more tips on discussing SPM with your board, check out Suggested Talking Points on the Benefits of SPM and Does good client protection impact financial performance.

Discuss the Universal Standards and key industry SPM initiatives

Many board members will not be aware of national and international efforts to support strong SPM practices, such as the SPTF Universal Standards for SPM and the CERISE SPI4 social audit tool. Boards don’t need to understand the details of each complementary initiative. But they should know that SPM is a global phenomenon, that there are communities of practice dedicated to helping FSPs improve performance, and that impact investors are paying increasing attention. Key message: you aren’t acting alone!

Discuss the board’s role in SPM

As a part of this orientation, discuss with your board members their specific responsibilities related to the social performance management of your institution. Such responsibilities include:

  • Ensuring that client focus is integrated into your institution’s strategic and business plans;
  • Reviewing and discussing social performance reports provided by your institution check for programs toward its social goals and to ensure:
    • Your institution reaches target clients34; and
    • Your institution’s products and services are appropriate to client’s needs.35
  • Suggesting modifications to the institution’s products, operations, or social goals/targets, based on review of social performance information;
  • Hold the CEO accountable for achieving the social goals;
  • Make strategic decisions about growth, prices, and profits that balance social and financial performance;
  • Reviewing Human Resources policies to evaluate social responsibility to employees;
  • Ensuring your institution is in compliance with national/regional/ international regulation, including codes of conduct;
  • Reviewing and updating your institution’s social mission, as necessary

Confirm that each board member agrees to uphold the responsibilities that your institution specifies by having them sign an agreement that details their social performance responsibilities. Essential Practice 6C1 provides further guidance on ensuring that investor board members are aligned with your institution’s social goals.

In addition to providing board orientation, consider pairing newer board members with existing ones (“mentors”). Ask the pair to meet one or more times to discuss your institution’s history, mission, social goals, and related topics. Board members should visit client businesses and branch offices within the first year after joining the board; understanding the institution’s field operations helps the institution’s social goals “come alive” to the board.

If you find that your board resists or deprioritizes its social performance responsibilities, consider using the terms “client-centered,” “responsible finance” and “balanced performance management” instead of “social performance.” You can also position it within the broader corporate ESG framework for financial service providers. Choose terms that appeal to the financial orientation of board members and describe the financial benefits of pursuing social goals. Often, the lack of interest in social performance is based in a misperception that SPM is a costly distraction from prudent oversight of the provider’s financial performance.

2.A.2.1 During new member orientation or subsequent training, the provider trains each board member on the following:

2.A.2.1.1 The provider’s social goals.
2.A.2.1.2 The board’s role in managing the provider’s social performance.
2.A.2.1.3 The Universal Standard for Social and Environmental Performance Management

In order to successfully support and safeguard an institution’s social strategy, board members need to understand what that strategy is and how they can help uphold it. New board members should be oriented to social performance and global trends in the area so they know they are part of a larger movement dedicated to socially responsible governance.

Scoring guidance

Answer is ‘yes’ if training material and training sessions are available and regularly proposed to Board members, in line with Board rotation.

Answer is ‘partially’, if orientation is only anecdotical, not systematically done for new members, informal or covers some topics but not others.

Sources of information
  • Board minutes
  • Presentation used to train the board
  • Interviews with board members
  • Interviews with CEO/managing director
Evidence to provide

Give the date of the board minutes where information is found, or reference to examples cited during interviews with board members or CEO. Note the frequency of such training (e.g., annual or sporadic). Board turnover rates are often high and therefore annual refreshers on SPM may be warranted in these cases.

Resources for indicator 2.A.2.1

2.A.2.2 Each board member signs an agreement that details his/her social performance responsibilities.

Asking board members to formally confirm commitment to the social strategy and values reinforces the importance of the social goals and their role in upholding it. The agreement can give an overview of the responsibilities related to social performance for the governance bodies.

Scoring guidance

Scoring is ‘yes’ If there is a formal agreement (code of conduct, terms of reference, shareholder agreement) that specifies the social strategy and role of the governing bodies, and if this document is signed by each Board.

Scoring is ‘partially’ if the document is informal, not signed by all Board members, or if board commitment is strong, but not formalized in any document or committee. In this case, active participation around social performance and client-centric issues in board meetings (as evidenced in board minutes) can be highlighted as an example of commitment, but scoring remains ‘partially’.

Board meeting attendance alone is not considered active participation or commitment to social performance responsibilities.

Sources of information
  • Board minutes
  • Code of ethics or other formal agreement
  • Interviews with board members
  • Interviews with CEO/managing director
  • Interview with HR
Evidence to provide

Specify how board members demonstrate their commitment to the social strategy

Resources for indicator 2.A.2.2

2.A.2.3 New board members have direct exposure to clients within the first year of joining the board.

The involvement of members of the Board to carry the social strategy of the provider implies an in-depth knowledge of the situation of customers, their use of services and products, changes for them, risks and negative consequences as well. For this, members of the Board can be invited to meet with customers, or at least should receive regular and solid client outcomes data to discuss customer feedback and perception of changes.

Scoring guidance

The score is ‘yes’ if the new board members can meet directly with a sample of clients, and discuss with them on their needs, preferences, satisfaction with the provider’s products and services.

The score is ‘partially’ if  the Board members rarely meet with clients or if they are just access to outcomes data, directly collected from clients, segmented by the main categories of clientele, and shared and discussed as a detailed report with analysis of outcomes for clients by main segment (gender, location, age, source of income, type of product used, etc.).

The score is ‘no’ if they have only output data (e.g. satisfaction surveys), or small sample – less than 100 clients – not fully representative of the clientele.

Sources of information
  • Board minutes
  • Interviews with board members
  • Interviews with CEO/managing director
  • Impact/outcomes/client surveys reports shared and discussed with Board
Evidence to provide

Share how the exposure to clients is organized.

“Direct exposure to clients" includes things like field visit, client visit to board meeting, or equivalent.

2.A.3 The board makes strategic decisions based on social and financial data.

Many boards view their role as primarily financial, and as such, they focus on corporate oversight and fiduciary responsibilities. However, this attitude creates a gap between the provider’s purpose (benefiting clients) and the board’s management priorities. Your board should adopt a balanced approach to performance management, drawing on both social and financial information. To achieve this balance, the board must:

  • Have on-going access to social performance information;
  • Use this information to make decisions; and
  • Understand how social and financial performance can reinforce one another.

Provide your board with regular social performance reports which contain data on the institution’s social goals. Ensure that these reports present information that is needed by the board to fulfil their SPM responsibilities and they are presented in a meaningful way.

  • Report contents
  • Report structure
  • Report frequency
  • Highlight the risk management implications of SPM
  • Consider effects on clients
  • Field Examples
Report contents

Report social data that is important to your board. Decide on the content of the report together with your board. This will promote buy-in and facilitate improved decision-making. Three key content areas that should be covered by all institutions are: client protection, social strategy achievement and alignment, and employee working conditions. At a minimum, the report contents for each area should include:

Client Protection

  • Analysis of client dissatisfaction including: client retention40/feedback data or satisfaction surveys/exit survey data
  • Analysis of the risk of client over-indebtedness
  • Interest rates and whether they are responsible
  • Reports on the state of systems and policies for data privacy and security, including any failures and breeches
  • Reports on any fraud or corruption, including any extorsion or bribery

Social Strategy

  • Outreach to target clients38
  • Social outcomes indicators that measure progress toward social targets39
  • The most recent social audit.
  • Profit allocation and data/discussion on “responsible prices and profits”44 and the alignment of profit allocation with the social strategy

Employee working conditions

  • Employee retention and satisfaction/effectiveness of HR policies42 disaggregated by gender
Report structure

Consider a dashboard report that includes thresholds that trigger decision points around key indicators. In the report, provide a mix of short-term indicators (e.g., client retention by month; progress toward client outreach goals by quarter) and long-term indicators (e.g., change in client poverty levels over two years; results of annual employee satisfaction survey). Together with the board, decide which short-term indicators are relevant to their decision- making timeline and are sensitive enough to provide early warnings.

Think beyond quantitative information. Qualitative information adds richness to data by giving an insight into the reason behind trends (e.g., provide client exit rate numbers, bolstered by data such as narrative answers from focus groups with exiting clients). Segmented information is also a powerful tool for comparative analysis, allowing your board to understand performance variations between different groups/products/branches in relation to key issues (e.g., client exit or level of satisfaction segmented by region, main products, or business type).

If these indicators are new to your board, work with them to learn how to understand and interpret social performance data. Start with a simple report that provides concrete information about the institution (e.g., client satisfaction data, employee retention rates, % female/male clients). Discuss the report and allow the board to discover how the information is useful for decision-making. Use the same report format for several meetings in a row so that members become accustomed to reading the report. Then, discuss with board members how your institution might improve the SPM report to make it more useful for the board.

Report frequency

Provide an SPM board report at least annually, and as frequently as is necessary to ensure the board has relevant and timely information needed for decision-making. SPM should be on the agenda at each board meeting, regardless of how often data are provided to the board. Eventually, you should provide an integrated report with social performance alongside financial performance, for each board meeting. Additionally, at least annually the board should review your institution’s strategy—particularly the social goals and products/services— and make any changes based on the institution’s changing priorities, if necessary. Below are the minimum frequencies for each type of report:

Annual

  • Client risk of over-indebtedness
  • Client dissatisfaction including dormancy, drop-out, exit surveys and complains
  • Interest rates
  • Data privacy and security, including any breeches or failures
  • Fraud, corruption, extorsion, bribery
  • Client outcomes
  • Profit allocation alignment with social strategy
  • Employee turnover rate by gender

Every 2 years

  • Employee satisfaction surveys

Every 3 years

  • Social audit
Highlight the risk management implications of SPM

Many aspects of SPM need to be integrated into your risk management strategy: a failure to deliver positive outcomes for clients will lead to client exit (if the products and services are not helpful, why would clients keep using them?); failure to protect clients will have similar negative impacts and will lead to reputational damage. Conversely, clients who use products and services that help their businesses thrive and improve their well-being are more likely to recommend the provider to their peers, remain clients in the long-term, and be able and willing to repay loans. The table Monitor Social Performance Risk offers some ideas of common social performance risks.

Ensure that board discussions about risk include this client perspective. To make this practical for board use, segment client data according to characteristics that highlight clients who are most at risk. For example, segmenting exit clients by loan cycle may show that the majority of exit cases happen in the first and second cycles, which is highly costly for the provider, as the recruitment investment is not recovered. If you find this to be the case, providing additional data on those clients—such as demographic and business information as well as exit interview data can help the board make fully informed decisions about how to manage the risk of client exit.

Consider effects on clients

The board should review every decision in light of how it will affect clients. This check may be as simple as asking: “how does this decision affect clients?” before choosing a course of action. The board should decide on the best way to introduce this check. For example, one board member might be in charge of raising the issue, or each board agenda might include time dedicated to the “client check.” With time, the board should naturally begin to raise and discuss the positive and negative effects of decisions on clients.

2.A.3.1 The board uses the following data, provided by management, to monitor client protection. Minimum frequency: annually.

2.A.3.1.1 Analysis of the risk of client over-indebtedness.
2.A.3.1.2 Analysis of client dissatisfaction: rates of client dormancy and drop-out, results of exit surveys, and client complaints.
2.A.3.1.3 Interest rates and whether they are responsible.
2.A.3.1.4 Reports on the provider’s systems for data privacy and security, particularly any failures or breeches.
2.A.3.1.5 Reports on any fraud or corruptions, including extorsion and bribery.

The board’s priorities should be consistent with the provider’s social strategy. The board should adopt a balanced approach to performance management, using both financial and social information to make decisions. The first priority is to focus on client protection as the minimum “Do No Harm” policy under the Board responsibility.

Scoring guidance

For each detail, the answer is ‘yes’ if the board is provided with regular, updated, complete, analyzed data to take informed decisions

The answer is ‘partially’, if data is irregular, not fully complete, not fully analyzed, not fully discussed for decision-making as checked in the Board minutes.

Sources of information
  • Board minutes
  • Interviews with board members
  • Interviews with CEO/managing director
Evidence to provide

At least once a year, the board minutes should reflect discussions on the topics listed in the details, based on updates from management and complete reports.

Give the date of the board minutes where information is found, source of information for discussion, or reference to examples cited during interviews with board members or CEO.

A high risk market can be defined combining different sources:  

  • MIMOSA Index score (https://www.e-mfp.eu/mimosa)
  • EIU Microscope scores: Economist Intelligence Unit provides benchmarking index that assesses the enabling environment for financial access in 55 countries (http://www.eiu.com/landing/Global-Microscope)  
  • The existence of adverse news.

In case of high risk, check that the Board takes into account in strategic decisions any information highlighting human rights violations (client protection issues / labor right issues).

To justify compliance, please elaborate on the reporting line to the board (reporting from Internal Audit to the board, without undue interference from management, and potentially through a dedicated committee; check the frequency of committees and the content of reports (should include a section on corruption and/or fraud cases).

Resources for indicator 2.A.3.1

2.A.3.2 The board uses the following data, provided by management, to monitor the provider’s social strategy (with the listed minimum frequency):

2.A.3.2.1 Outcomes data. Minimum frequency: annually.
2.A.3.2.2 The provider’s most recent social audit. Minimum frequency: every three years.
2.A.3.2.3 How profits are allocated, and whether profit allocation is aligned with the provider’s social strategy. Minimum frequency: annually.

The board’s priorities should be consistent with the provider’s social strategy. The board should adopt a balanced approach to performance management, using both financial and social information to make decisions.

Scoring guidance

For each detail, the answer is ‘yes’ if the board is provided with regular, updated, complete, analyzed data to take informed decisions.

The answer is ‘partially’, if data is provided less than annually, not fully complete, not fully analyzed, or not fully discussed for decision-making as checked in the Board minutes.

Analyzing growth targets vs actuals in terms of profitability is not enough (score NO).

For 2.A.3.2.1

To score ‘yes’, analysis should address the outcomes from the clients,. The answer is ‘partially’ if the Board is not provided with in-depth outcomes data but just satisfaction surveys.

For 2.A.3.2.3

Discussion of profit allocation should include how profits can be used to benefit to clients or the community.

Sources of information
  • Board minutes
  • Interviews with board members
  • Interviews with CEO/managing director
Evidence to provide

At least once a year, the board minutes should reflect discussions on the topics listed in the details, based on updates from management and reports. Once every three years for social audits.

Field examples / Guidance for implementation

Decisions on dividend distribution, donations to the community, plans to reduce interest rates, etc. are     examples of how the Board can use profits to reach its social strategy.

Resources for indicator 2.A.3.2

2.A.3.3 The board uses the following data, provided by management, to monitor decent working conditions for employees (with the listed minimum frequency):

2.A.3.3.1 Employee turnover rate, by gender. Minimum frequency: annually.
2.A.3.3.2 Analysis of employee satisfaction surveys. Minimum frequency: every two years.

Employee turnover rate is an indication of employees’ (dis)satisfaction. It is a potential proxy for decent work conditions. The provider should monitor turnover and understand the reasons for employee exit by analyzing employee exit surveys/interview responses. Analyzing turnover by gender can help identify conditions in the workplace that discriminate against women or create a difficult or hostile environment for them.

The level of employees’ satisfaction can be a proxy for decent work conditions in the organization. Monitoring employee satisfaction can help ensure the smooth functioning of a team and sends a message that the top management values employee feedback.

Scoring guidance

For each detail, the answer is ‘yes’ if the board is provided with annual (turnover) or every 2 years (satisfaction) reports data to take informed decisions.

The answer is ‘partially’, if data is provided less frequently than expected, not fully analyzed, or not fully discussed for decision-making as checked in the Board minutes.

For 2.A.3.3.1

If employee turn-over rate has not been discussed in the last 12 months or the results were not analyzed by gender or were not shared with employees, the answer is ‘partially’.

For 2.A.3.3.1

If an employee satisfaction survey has been done in the last 2 years or the results were not analyzed by gender or were not shared with employees, the answer is ‘partially’.

Sources of information
  • Staff turnover analysis, exit survey reports
  • HR policy, Employee satisfaction survey and report
  • Employees interviews
  • HR manager interviews
Evidence to provide

Specify the employee turnover rate, and how employee exit is monitored and analyzed.

Specify when the last employee satisfaction survey was conducted, and what kind of analysis was done on results.

2.A.3.4 The board takes corrective action when it identifies risks to clients, risks to employees, or when the provider is not achieving its social goals.

The board’s oversight role means that it is responsible for taking action when targets are not being met to keep in track with the defined strategy.

Scoring guidance

The score is ‘yes’ if concrete, recent, major corrective action can be shared (major means involving changes in products terms and conditions, organization, trainings, etc.). It can also be ‘yes’ if it is considered that no corrective action is needed as the provider is fully achieving its social goals.

The score is ‘partially’ if actions are more than one year ago, or only minor change (no visible at clients’ level for example, such as change in MIS system to better collect client data).

For CP Certification, the analysis should look exclusively at risks to clients. Risks to employees and social goals are only relevant in SPI evaluation.

Sources of information
  • Board minutes
  • Interviews with board members
  • Interviews with CEO/managing director
Evidence to provide

Give the date of the board minutes where information is found, or reference to examples cited during interviews with board members or CEO.

Field examples / Guidance for implementation

Examples of corrective actions:

  • Financial provider X has missed its target to have 60% of its portfolio in solidarity group lending, leading the board to request management to review the incentive system which currently incentivizes individual loans more than group loans.
  • Financial provider Y fell short of its target to have 2% of clients between 18 and 25 years of age, despite a ”youth-specific” product, leading the board to request a market study to better understand the barriers facing this target population.
  • Financial provider Z’ board has taken action to discuss pricing of products as pricing levels were considered to be not consistent with the provider's policy on returns, with ROA above 7.5%, a redflag for client protection.
Resources for indicator 2.A.3.4

IDEPRO (Bolivia) takes corrective action and launches Pro-Cadenas

2.A.4 Board oversight of senior management is aligned with the provider’s social goals.

Balancing social and financial performance is not a board “activity”; it is a way of doing business. Board evaluations of the CEO/Director should be based on the financial performance and the social performance of your institution. The board should take the evaluation criteria directly from the social targets established in the social strategy.

Example evaluation criteria include:

  • Institution serves target clients;
  • Institution meets client retention targets;
  • Institution meets client satisfaction targets;
  • Institution makes progress toward achieving its social targets, as measured by the social indicators that the institution tracks;
  • Institution meets employee retention targets;
  • Institution implements an SPM action plan within a given time period; and
  • Institution responds to issues highlighted in market research report by modifying a product or service.

The board should oversee the CEO/Director’s compensation. If compensation is part-incentive-based, the CEO (and other executives) should be incentivized on both social and financial performance criteria. Compensation should be review annually to ensure that the CEO and other senior executives’ compensation is comparable to other providers with similar social commitments. The board should also calculate annually the difference between the average annual compensation of executives and field employees. If the ratio is any higher than 25:1, the board needs to justify the reason and confirm that it is in line with the organization’s social goals and strategy.

2.A.4.1 The board includes social targets in the CEO/Managing Director’s performance evaluation.

Setting social targets as part of the CEO/Managing Director’s performance evaluation process sends a strong message about the importance of achieving those criteria. The importance can be further emphasized by basing compensation on social performance criteria. The CEO/managing director’s compensation should take into account the results of his/her evaluation, including social performance criteria. Guidance for standard 2A4.2 discusses how to evaluate CEO performance based on social performance criteria.

Scoring guidance

The score is ‘yes’ if performance evaluation of the CEO comes with clear, actionable, “SMART” social target set by the board.

If the CEO/managing director is not evaluated against social performance targets, the answer is ‘no’. This indicator cannot be answered N/A.  

Sources of information
  • Board minutes, evaluation form
  • Interviews with board, CEO/ managing director
Evidence to provide

Give examples of what the CEO/managing director is evaluated on.

Resources for indicator 2.A.4.1

2.A.4.2 The board formally assesses the CEO/Managing Director on achievement of social performance targets. Minimum frequency: annually.

Assessing the CEO /managing director against social performance targets (in addition to other criteria) sends a strong message regarding their importance.

Scoring guidance

Score is ‘yes’ if every year, a formal assessment by the Board takes clear and actionable social performance targets into account to discuss the achievements with the CEO.

Score is ‘partially’ if assessment is not done annually, or if targets are not fully aligned with social strategy, not complete, not clear/actionable/SMART.

Sources of information
  • Evaluation form if it exists
  • Board minutes
  • Interviews with board members
  • Interviews with CEO/managing director
Evidence to provide

Provide the list of criteria used in the evaluation of the CEO/Managing Director and date of last review.

Field examples / Guidance for implementation

Examples of evaluation criteria to evaluate the CEO in relation to social criteria:

  • outreach to target clients
  • client retention rate
  • employee retention rate
  • client satisfaction
  • implementation of an action plan for SPM, within a given period corrective action taken by management in relation to market research, by changing a product or service to better fit clients’ needs, etc.

2.A.4.3 The board oversees executive compensation.

2.A.4.3.1 If executive compensation is in part incentive-based, executives are incentivized on both social and financial performance criteria.
2.A.4.3.2 The board calculates the difference between the average annual compensation of executives and field employees and is able to justify any ratio higher than 25:1. Minimum frequency: annually.
2.A.4.3.3 The board reviews the compensation of the CEO/Managing Director and senior executives to ensure that compensation is comparable to providers with similar social commitment. Minimum frequency: annually.

To keep in line with the social objectives of the provider, the executive compensation should take into account the social performance targets to incentivize achievements of social goals (2.A.4.3.1), must be balanced within the organization, not creating inequalities (2.A.4.3.2) and be reasonable/ on the same level, compared to market (2.A.4.3.3). It is the responsibility of the Board to oversees these aspects.

Scoring guidance

If incentives are offered and are only based on financial performance, the answer is ‘no’ as 2.A.4.3.1 is looking at social criteria. Verify consistency with 2A4.1 and 2A4.2, if the answer there is ‘no’ then the answer here cannot be ‘yes’.

If the ratio of executive to field officer compensation is greater than 25:1, a formal justification must be made.

The review of compensation levels must have been carried out in the last 2 years to count for this indicator.

Sources of information
  • Incentives policy
  • Board minutes
  • Performance evaluation form
  • Interviews with HR
  • Interviews with board,
  • CEO/ managing directors
Evidence to provide

Give examples of criteria used for incentives and what share of the salary is based on incentives.

Specify how the executive to field officer compensation ratio calculation is done, for example “HR regularly calculates the difference between the average annual compensation of its top three management positions and it bottom three field staff and has set a limit of 20”.

Specify when last comparative compensation review was done and source of information, as information may be complex to obtain. Possible sources for data on compensation levels for similar institutions: salary survey done by local consultants, data obtained through the national microfinance network, data obtained through an organization that evaluates HR practices such as Great Place to Work.

Field examples / Guidance for implementation

For 2.A.4.3.1

Basing incentives on performance criteria sends a strong message about the importance of achieving those criteria. Incentive-based compensation including social performance criteria will help motivate management and ensure commitment to the social mission.

For 2.A.4.3.2

The provider should make sure that the spread between annual compensation of its top level executives and its field employees is appropriate, and in line with the social objectives of the institution. A provider might find that the average salary of the five highest paid managers is 100 times that of the five lowest paid field officers, raising questions as to whether the salary spread reflects institutional values of fairness and equity.

One social investor has set the following rule: we score max if the difference is maximum 20, half if the difference stands between 20 and 40, and we score “0” otherwise.

For 2.A.4.3.3

Reviewing the compensation to ensure that it is comparable to institutions with similar socially-driven organizations comes as a reality check and verification of local alignment with social objectives. If there are large differences (e.g., high salary required to attract someone with a rare talent that is critical to the provider at the time), the board should determine if the discrepancy is justified.

2.A.5 The board is responsible for preserving the provider’s social goals during times of crisis or institutional change.

Your board should safeguard the institution’s social strategy at all times, but particularly during periods of major change that make your institution vulnerable to “mission drift” (e.g., serving relatively wealthier clients over time) or in time of crisis when clients or staff may be in difficult situations.

Institutional change can be linked to:

  • New investors
  • New products, target clients, and/or geographic expansion
  • Digital transformation which leads to management change.

Times of crisis are for example :

  • Health crisis (Covid, Ebola),
  • Security crisis (local, national tensions),
  • Economic crisis (inflation, sudden rise in unemployment),
  • Environmental crisis (flood, drought).

It is important for the Board to monitor which guidance is being provided to employees to understand, adapt and manage changes (information, training, tools, etc.).

New investors

Before accepting a new investor or donor, the board and management should consider:

  • whether the investor has already made a commitment to, or is likely to commit to your institution’s social goals; and
  • whether the investor brings experience and/or resources for social performance

Non-profit providers generally have more freedom to choose board members that represent the institution’s values. For-profit providers have to balance the need for capital with the desire to bring in investors that reflect the providers values. Nonetheless, all providers should be careful when considering a new investor or donor, to avoid bringing in a stakeholder who could steer them away from their mission. Some providers have declined donations and investments because they came from organizations whose interests were not aligned with their mission. Even if interests between your institution and new investors seem to align, you should include performance expectations in shareholder agreements.

New products, target clients, and/or geographic expansion

Your board should protect the institution’s social goals when making decisions about new products and outreach to new target clients and geographic areas. They should consider both the commercial and social implications of such decisions, and they should use client data during the decision-making process. For example, if the board is deciding whether to add or adjust a savings product, they should consider what percentage of clients are currently saving, over time. If the number is low (i.e., only a small percentage of clients are savers) this suggests that the current saving product is a “finance-only” decision meant to generate capital for the institution rather than to address the multiple needs of clients. Additionally, if average savings balances are higher than average loan sizes, it might suggest that the current savings product does not meet the needs of the majority of target clients. Using relevant indicators, your board will be well-positioned to ask critical questions about the social impact of their new product decisions.

Similarly, when deciding whether to pursue new target clients and/or a new geographic area, the board must question whether the institution already understands the needs of the new group, and if so, whether the institution is well-placed to serve those particular needs. Alternatively, does your institution need more time to research the needs of the new group and to consider which products and services will meet their needs? Additionally, the board should think through both the commercial and social advantages of expanding client outreach, and whether the institution will achieve both, or only one. An example of achieving both: the institution expands to more rural areas, meeting the social goal of financial inclusion and the financial goal of reducing the risk of client exit based on poaching from other urban lenders.

The digitalization of services is a key moment to employ a balanced approach to decision making. The decision to launch into digitalization must be based on generating value both for the institution and the client since it requires a large financial investment in terms of staff’s time and focus. Digitalization is accompanied by a specific implementation plan in which the Board of Directors must make decisions regarding which alternative, provider, or service should be chosen in order to achieve both social and financial strategic objectives. These decisions must be guided by clear objectives. Financial services digitalization creates the opportunity to advance many social and financial objectives—but not all at the same time! To learn more about client-centric digitalization, see A Guide to Digitalization: Steps to Launch Digital Financial Services with a Client-Centric Approach.

Responsible exits

As equity investors play an outsized role in the financial inclusion sector, they should enter into active dialogue on what responsible exits should look like, and how to ensure that they do not undermine efforts to protect clients, both now and in the future. To learn more, download this joint paper by e-MFP and Cerise+SPTF: Rethinking responsible equity exits: A call to action for impact investors

2.A.5.1 During times of crisis, the board monitors how clients and employees are affected and takes action to protect and support them.

The board should safeguard the institution’s social strategy at all times, but particularly during periods of crisis that make the institution vulnerable to “mission drift” and during which time there is an increased risk of harm to clients and employees.

Scoring guidance

The answer is ‘yes’ if Board have used client and employees data (satisfaction, outcomes, complaints) for monitoring social goals and Board minutes/ interviews can show that the Board is analyzing them and discussing them during the crisis to ensure social goals can be pursued. The answer can be ‘Yes’ or ‘N/A’ if no major crisis was observed in the last year.

The answer is ‘partially’, if the Board does not have complete client or employees data to analyze the effect of the crisis on the provider’s social goals and strategy.

The answer is ‘no’ if Board discussion does not take crisis into account to understand the potential effects on the provider’s social strategy.

Sources of information
  • Board minutes
  • Interviews with board
  • CEO/ managing directors
Evidence to provide

Give examples of information requested/shared with the Board during time of crisis, and decision-making process and actions taken to help clients and/or employees face the challenges linked to the crisis.

Resources for indicator 2.A.5.1

2.A.5.2 During periods of institutional change, the board uses client data to check whether strategic decisions are consistent with the provider’s social goals and target clients.

The board should safeguard the institution’s social strategy at all times, but particularly during periods of major change that make the institution vulnerable to “mission drift” (e.g., serving relatively wealthier clients over time). Major changes may include legal transformation, bringing in new investors, introducing new products, target clients, and/or geographic expansion, digital transformation, etc.

Scoring guidance

The answer is ‘yes’ if Board have used client metrics for monitoring social goals and Board minutes/ interviews can show that the Board is analyzing them and discussing them during the change period to ensure social goals can be pursued. The answer can be ‘Yes’ or ‘N/A’ if no major institutional change was observed in the last year.

The answer is ‘partially’, if the Board does not have complete client data to analyze the effect of the changes on the provider’s social goals and strategy.

The answer is ‘no’ if Board discussion does not take changes into account to understand the potential effects on the provider’s social strategy.

Sources of information
  • Board minutes
  • Strategy/business plan
  • Interviews with board members
  • Interviews with CEO/managing director
Evidence to provide

Specify the document where the strategy is laid out, whether the way the institutional changes can impact the strategy is presented, and whether plans to avoid/ mitigate mission drift/change in social goals are proposed.

Specify whether Board minutes reflect that indicators related to their social goals were presented and discussed during the change period.

Resources for indicator 2.A.5.2

Standard 2B. Senior management is responsible for implementing the provider’s strategy for achieving its social goals.

Managers should make all strategic and operational decisions with the goal of balancing the institution’s financial and social goals. In practice, this means:

  • Integrating your institution’s social performance goals into strategic planning; and
  • Considering all decisions for their potential effects on clients and employees and monitoring these over time

This standard has 2 essential practices:

2.B.1 The provider includes social goals in its operational plan and the CEO/Managing Director holds senior managers accountable for achieving social targets

As described in standard 1A your institution’s overall strategy should include the mission, target clients, social goals, targets, and indicators. Beyond this institutional strategy, all business plans (e.g., contracts with investors; new product proposals) should be in line with the provider’s social goals. A practical way to achieve this alignment is to require a social performance review of all business plans/contracts/strategies/operational decisions before they are finalized.  

Management should discuss how any given plan or decision may:

  • Affect clients;
  • Affect employees;
  • Impact your institution’s ability to achieve its social targets, as well as its public reputation;
  • Require the institution to collect additional social performance data; or
  • Require adjustments to the institution’s stated social goals

For example, if a provider were considering pursuing a more aggressive growth strategy, management and the board would need to consider not only the financial implications, but the effects on staff and clients. Will the strategy help achieve the provider’s goal of increasing financial inclusion for unbanked people? (most likely). Will it place additional strain on busy staff? (yes, unless new staff are hired or other efficiencies introduced). Will clients experience aggressive sales due to new, higher case load targets for staff? (likely, unless mitigating measures are taken).

Compare performance to targets

A provider cannot truly know how it is performing against its social targets unless it measures and monitors its performance in a regular, objective, and deliberate way.49 Anecdotal evidence and impressions can be misleading and even grossly inaccurate. Therefore, managers should use social data to track progress on social targets on a regular basis. Such tracking will allow:

  • Management to hold itself accountable to the targets;
  • Board members and/or investors to hold management accountable to the targets, including holding the CEO/Director accountable to the targets;
  • Management to incentivize employees against social performance targets and reward those with good performance;
  • Management and the board to investigate the reasons for poor results or unexpected results, and to respond—for example, by modifying products, services, and delivery channels;
  • The provider to demonstrate progress to external stakeholders, improving its credibility in the marketplace; and
  • All non-management employees to see how the provider is progressing (or not) toward its social targets, building awareness about what the provider wants to achieve.
HOLD SENIOR MANAGERS ACCOUNTABLE FOR THE INSTITUTION’S SOCIAL GOALS

While your institution should evaluate all employees based on their ability to perform their social performance related duties,53 senior managers should be particularly accountable to your institution’s social goals. Senior managers set the tone for other employees, and their level of commitment to your institution’s social goals will determine your institution’s overall ability to achieve these goals.

The EXAMPLES OF SOCIAL TARGETS FOR SENIOR MANAGERS table provides a list of senior management positions, along with examples of institutional goals for which they are responsible and example targets they should meet. Each senior manager at your institution should have such a list of their responsibilities and targets and their regular performance reviews should examine their success in achieving these goals.

2.B.1.1 The provider includes its social goals and targets in the business plan or operational plan.

It is important to include social goals and targets in the business or operational plan to ensure that they are integrated into the institution’s strategic decisions, planning and operations.

Scoring guidance

In the case where the provider defines only one social goal and target and it is included in the business or operational plan, the answers under Essential Practice 1A3 may be ’partially’, and the answer under 2B11 may be ‘yes’.

If the provider defines several social goals and targets, but only one is included in the business plan, then the answer is ‘partially’.

Verify consistency with 1A21, 1A22 – if the answer is ’no’ to these indicators, then the answer here is most likely ‘no’.

Sources of information
  • Strategy/Business plan
  • Operational plans
  • Interviews with CEO/managing director
Evidence to provide

Specify the sections of the business plan that refer to the social goals and targets. Give concrete examples.

2.B.1.2 The CEO/Managing Director formally assesses senior managers on their achievement of social performance targets. Minimum frequency: annually.

Incentives can have a powerful impact on performance. Assessing senior management against social performance targets sends the message that they are a priority.

Scoring guidance

The score is ‘yes’ if performance evaluation of the senior managers comes with clear, actionable, “SMART” social target set by the board / CEO.

If the senior management is not evaluated against social performance targets, the answer is ‘no’. This indicator cannot be answered N/A.  

Sources of information
  • HR policy
  • Staff evaluation forms (filled in)
  • Interviews with the CEO
  • Interviews with HR
  • Interviews with senior managers
Evidence to provide

List the criteria used in assessments.

Resources for indicator 2.B.1.2

2.B.2 Management makes strategic and operational decisions based on social and financial data.

In addition to management and the board considering the effect of strategic decisions on clients, you should ask managers at all levels to do an automatic “social performance check” on all daily business decisions. This check can be as simple as asking: “how does this decision affect clients?” before choosing a course of action. Discuss with managers how this check might play out in the normal course of daily business and how it might cause them to change current operations or planned activities. Identify key middle management employees and field employees who can help answer this question by bringing field-level experiences and realities to the discussions.

Monitor Social Performance Risk

Risk management systems within many providers tend to focus on financial and operational risks like fraud. But your institution may also face risks that are more closely related to your ability to serve clients effectively. Internal audit and/or risk management should integrate social performance criteria into their regular activities. In addition, your institution can use external assessment of social performance risks such as social ratings, audits, or client protection certification. The table Monitor Social Performance Risk offers some ideas of common social performance risks. Generate your own list of risk factors to monitor based on your social goals and market context. Discuss preliminary findings that signal possible threats and monitor these more closely.

Resources for 2.B.2

2.B.2.1 Senior management analyzes the following data and assesses risks. Minimum frequency annually.

2.B.2.1.1 Analysis of client protection risks (over-indebtedness, unfair treatment, lack of transparency, privacy of client data, complaints, fraud, corruption and bribery)
2.B.2.1.2 Analysis of outcomes for clients and their households.
2.B.2.1.3 Analysis of decent work conditions (health and safety, compensation and benefits, working conditions)

Social performance risks are an integral part of a complete risk management framework. Indeed, many social performance criteria can serve as warning signs of crisis, institutional and operational weaknesses.

Scoring guidance

Risk assessment may be done by a dedicated manager, a specific committee or across different operational areas.

If there is evidence of regular (at least once a year) risk assessment, with the intent of identifying social performance risks, the answer is ‘yes’.

If risks are assessed in an ad hoc way (i.e., no formal or aggregated report), but with intent to manage social performance risk (data shared and discussed with management, actions taken to mitigate the risks, etc.), the answer is ‘partially’.

If risks are assessed in an ad hoc way, but with no real intent to manage them, the answer is ‘no’.

Sources of information
  • Management reports, reports to board
  • Interviews with CEO/managing director
  • Interviews with SPM champion / committee
  • Interviews with internal audit/risk management
Evidence to provide

Specify how risks are assessed (frequency, by whom). Refer to management reports and/or give examples cited in interviews with senior management.

Field examples/ guidance for implementation

For 2.B.2.1.1

This includes:  

  • Analysis of the risk of client over-indebtedness. Minimum frequency: every six months
  • Rates of client product usage, by product. Minimum frequency: quarterly
  • Interest rates and whether they are aligned with the provider's social goals. Minimum frequency: annually
  • Mission drift and reputation risk – monitor levels of targeted clients (women, rural, youth, poor); market studies to assess provider’s image in the market
  • Incidents resulting in harm – monitor client complaints; analyze staff misconduct; abusive/aggressive collection practices
  • Client exit or dissatisfaction – conduct satisfaction surveys, analyze reasons for client exit
  • Incentives that can lead to negative behavior – review incentive schemes annually to check for unintentional, negative consequences (e.g., client recruitment incentives that lead employees to recruit clients who already have loans with multiple institutions)
  • Lack of transparency – ensure audit interviews clients to assess knowledge of terms and conditions Gender inequalities/discrimination – analysis of gender breakdown of staff, remuneration discrepancies

For 2.B.2.1.2

Analysis of outcomes integrates both positive and negative changes for clients and their households. Minimum frequency: annually

For 2.B.2.1.3

Analysis includes:

  • Employee turnover rate, by gender and by position. Minimum frequency: every six months.
  • Analysis of employee satisfaction surveys, by gender Minimum frequency: every two years. Analysis of decent work conditions should include analysis of gender inequalities and discrimination
  • Analysis must be disaggregated by gender and other relevant categories . Minimum frequency: annually
Resources for indicator 2.B.2.1

2.B.2.2 Internal audit and/or risk management integrates the following criteria into regular monitoring activities:

  • Client repayment capacity, loan approval analysis, prevention of aggressive sales
  • Transparency to clients
  • Compliance with code of conduct; prevention of fraud and corruption
  • Collateral seizing and appropriate debt collection practices
  • Client data misuse and fraud
  • Complaints handling, including review of a sample of cases

With all policies, it is important to ensure uniform application by conducting regular audits or controls. This is a function typically carried out by the internal audit department. Additionally, the internal audit and/or risk departments have the job of identifying gaps that pose a risk to the institution. They tend to focus on financial and operational risks, but there are risks that are more closely related to an institution’s ability to serve clients effectively. These risks should be integrated into the verification framework.

Scoring guidance

The answer is ‘yes” if internal audit/ risk management team have a formal check list to verify client protection issues are well managed at the branch and clients’ level and if the reports are shared with management to take decision in case of non compliance.

If the internal audit process does not include direct client interviews and visits to verify understanding , treatment and repayment capacity analysis, then the score should be ‘partially’.

Sources of information
  • Audit check lists, audit reports
  • Board minutes
  • Interviews with internal audit / risk departments
  • Client focus groups (optional)
Evidence to provide

A provider may not have a stand alone transparency policy, but transparency checks can still be integrated into existing audit checklists. Auditors or internal controllers can verify client understanding and complete product documentation during client visits, or out-going calls to clients as part of satisfaction surveys.

Specify which criteria are integrated into the audit framework. Verify audit check list to see if there are client visits to verification understanding.

Specify how audit/risk verifies the loan approval process, and any actions that have been taken to solve incorrect implementation.

Internal audit checks for unauthorized refinancing, the presence of multiple borrowers or multiple co-signers within the same household, and other practices that could increase indebtedness.

Specify the internal control process used to verify transparency policies.

Give examples of how audit verifies policies related to fair and respectful treatment of clients. Give information on frequency of audits and extent of verification.

Specify when audit last verified the complaints mechanism. If the audit made observations to address, verify that corrective measures were taken.

Field examples / guidance for implementation

Audit may have a dedicated questionnaire to check on client protection issues, or may integrate checks into the audit of other processes. Examples of audit checks may include:

  • Checking staff understanding of the Code, for example, through random tests administered to different
  • types of employees (e.g., various tenures, various geographic locations).
  • Conducting business/household visits and client interviews on a representative sample of clients each year. Check that clients understand their rights, including the right to respectful treatment from employees, and the right to complain.
  • Interviewing exiting clients to investigate reasons for leaving the institution (e.g., inappropriate
  • products, employee behavior, difficulties meeting loan obligations).
  • Verifying that employees comply with institutional policies on rescheduling/refinancing loans using client visits and loan files.
  • Examining data on insurance claim processing, including promptness of claim settlement, and a
  • sample of claims rejections.
  • Examining a case of disrespect toward clients—including client and staff interviews—to determine breakdowns in policies and procedures.

Verify the audit check list used for branches/front offices: do they include client interviews and check on issues like client understanding of terms and conditions? Collections practices and staff conduct? Uniform application of complaints handling  procedure?  

Does the audit team verify repayment capacity analysis? Use of credit bureau information? Is the client data collected validated by internal audit?

Verify the internal audit policy is followed. Examples:

  • Provider X's policy states that internal audit will check 5% of client files annually to ensure calculations are correct and adhere to policy.
  • Provider Y's internal controls unit visits each branch at least twice a year and double checks 10 client files each time.

QUESTIONS FOR CLIENTS

Have you ever had the visit of an internal auditor, to ask you questions about the products you've taken, staff behavior?

Resources for indicator 2.B.2.2

2.B.2.3 Management takes corrective action when it identifies risks to clients, risks to employees, or when the provider is not achieving its social goals.

The senior management is responsible, under the supervision of the Board, for taking action when targets are not being met to keep in track with the defined strategy.

Scoring guidance

The score is ‘yes’ if concrete, recent, major corrective action can be shared (major means involving changes in products terms and conditions, organization, trainings, etc.). It can also be ‘yes’ if it is considered that no corrective action is needed as the provider is fully achieving its social goals.

If an audit was conducted of the complaints system but corrective measures not taken, the answer is ‘partially’.

The score is ‘partially’ if actions are more than one year ago, or only minor change (no visible at clients’ level for example, such as change in MIS system to better collect client data).

For CP Certification, the analysis should look exclusively at risks to clients. Risks to employees and social goals are only relevant in SPI evaluation.

Sources of information
  • Management report
  • Interviews with managers
Evidence to provide

Review corrective actions taken when risks or adverse impacts to clients and employees have been identified and specify the results of the correction actions. Give examples of corrective action with the identified risks it is supposed to mitigate.

Resources for indicator 2.B.2.3