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Women on Boards and Performance Trade-offs in Social Enterprises: Insights from Microfinance

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Abstract

Social enterprises combine social and financial goals. Previous studies have theorized the existence of a dual objective and maintain that it can lead to conflicts and create trade-offs. While the literature on trade-offs is extensively developed, empirical evidence is lacking on how the intensity of trade-offs might vary among organizations. We fill the void by investigating the moderating effect of female directorship on the relationship between the social and financial goals of social enterprises. Using data on 1193 microfinance organizations (MFOs) from 108 countries between 2007 and 2019, we find that a high proportion of women in the boardroom attenuates social-financial trade-offs. Further, our results show that the mitigating effect of female directorship on social-financial trade-offs is more pronounced in nonprofit MFOs, in unsubsidized MFOs, in the period since the recent microcredit crisis, and in countries where women are more empowered in terms of access to higher education, leadership positions, and employment opportunities. We attribute our findings to the distinctive skills, competences, and experiences of women, including an ethical social orientation, as well as their transformational and relational leadership style. The findings are supported by predictions based on resource dependence and leadership style theories.

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Data availability

The microfinance data that support the findings of this study are available from the corresponding author upon reasonable request.

Notes

  1. An example of a differentiated hybrid is a Belgian social enterprise called Mobile School, which provides educational materials to street children (beneficiaries) and generates an income by providing corporate training programs and consulting services to regular multinational companies (clients) (Ebrahim et al., 2014).

  2. Some MFOs rely on cross-subsidization by using profits from larger loans to cover the additional costs of small ones (Armendáriz & Szafarz, 2011).

  3. Post and Byron (2015) and Terjesen and Sealy (2016) reviewed the theories expounded in the literature to explain the relationship between gender diversity and firm financial performance.

  4. For an in-depth discussion of various aspects of outreach, please see Schreiner (2002).

  5. Microfinance loans are primarily meant to be used for business purposes. However, the literature recognizes the fungibility of microfinance loans, which means that although the loans may be targeted at a particular group and are expected to be used for a particular purpose, they may, in fact, not be used by the targeted group or for the intended purpose (Garikipati, 2008; Gershman & Morduch, 2015). In this regard, evidence shows that loans granted to women are sometimes used by their husbands or male relatives (Garikipati, 2008). Also, studies have reported that microfinance borrowers may use some loans to repay other loans, to buy consumer goods or cater for other household needs such as wedding ceremonies, instead of investing the money in a business (Johnston & Morduch, 2008). While the use of loans for non-business purposes may be a source of concern for MFOs, some scholars argue that this practice might still benefit clients’ households because it can enhance household assets and free up other resources for business investment in the future (Garikipati, 2008; Gershman & Morduch, 2015).

  6. We would like to draw attention to the distinction between outputs and outcomes. While the former only proxy for outreach (Beisland et al., 2021), the latter signify the actual transformative impact of microfinance. Measuring actual outcomes remains a challenge for microfinance scholars. Studies that use clients’ own testimonies (Kabeer, 2001) and those that use quantitative metrics (Banerjee et al., 2015) yield opposing results. Others draw attention to contextual and institutional effects (Zhao & Wry, 2016). Overall, there is limited evidence regarding the transformative effect of smaller loans. It must be noted that all our independent variables measure short-term outputs rather than actual outcomes. Thus, they do not measure the actual transformative effects of microfinance. For instance, we are unable to show whether poor people receiving smaller loans are really lifted out of poverty. Similarly, we cannot show whether women and rural dwellers experience any improvements in their socioeconomic status after receiving microfinance loans. There are no established ways to measure actual microfinance outcomes, and this remains a core problem in assessing the social performance of MFOs.

  7. In additional regressions we controlled for the number of loans instead of the number of clients. These alternative estimations yielded similar results that are available upon request.

  8. Data on GDP per capita, official development assistance, inflation and foreign direct investment were obtained from a World Bank database (https://data.worldbank.org) while data on democracy was provided by Polity V Project’s Political Regime Characteristics and Transitions data set (http://www.systemicpeace.org/inscrdata.html).

  9. The data is now available free of charge on the World Bank's Data Catalog webpage: https://datacatalog.worldbank.org/dataset/mix-market. However, some of the variables used in our analysis (e.g., age, banking regulation) are no longer included in the publicly available dataset.

  10. We observe in Table 1 that the values of female director vary greatly among MFOs given the standard deviation of 24.8%. Further investigations reveal that the minimum (0%) and maximum (100%) values of female director represent 17.49% and 3.72% of the MFO-year observations, respectively.

  11. A low level of female representation on corporate boards may be viewed as tokenistic (Guldiken et al., 2019; Rixom et al., 2022), since a critical mass of women may be required to enhance board effectiveness and firm performance (Torchia et al., 2011). We performed additional analyses to check whether our results might be stronger with higher levels of female representation on MFO boards. To this end, we analyzed the impact of female director on financial sustainability (ln(OSS) and ROA) separately for two samples: with female director below, and above, the median value of 0.25, respectively. The unreported results showed that the coefficient of female director was positive and significant only in the sample above the median. This finding suggests that a critical mass of women may indeed be needed to positively influence the financial sustainability of MFOs.

  12. Please note that this is when the dependent variable is ln(OSS) and the independent variable is ln(ALS/GNI).

  13. While female-dominated boards are scarce in the banking industry, Périlleux and Szafarz (2021) report that 32% of loans in their sample are granted by microfinance cooperatives with female-dominated boards.

  14. The use of alternative independent variables (female borrower, rural borrower) yields similar results, which are available upon request.

  15. We split the sample according to the profit status of MFOs as reported by the MIX Market.

  16. Cull et al. (2018) show that subsidies per borrower are substantially higher for commercially oriented MFOs such as banks and non-banking financial institutions, which also grant relatively larger loans. NGO MFOs generally rely less on subsidies.

  17. In line with Cull et al. (2018) we find that 65% of for-profit subsidized MFOs are non-banking financial institutions and 26% are banks. It must, however, be noted that subsidies are pervasive in most MFOs, and they exist in the form of donations (monetary and non-monetary), favorable lending conditions (e.g., lower interest rate, grace period), and guarantees among others (Hudon et al., 2021; Reichert et al., 2019). In our analyses, owing to data limitations we only considered donations; hence, we caution the reader against drawing wide inferences from the results.

  18. However, we note that in column (1) there are only 686 observations before and during 2010. The smaller number of observations might have contributed to the nonsignificant results in column (1) of Table 8. Yet, in untabulated results, the use of rural borrower as independent variable yields a significant positive mitigating effect both before and after the 2010 crisis. These results could potentially be driven by a change in the quality of the data that was available before and after the crisis. To rule out this possibility, we first checked for the occurrence of missing values within panels and of outliers (before winsorizing) and found no significant observable differences between the two periods. Second, using t-tests, we compared our main test variables (dependent, independent, and moderating variables) between the two periods and found no significant statistical differences.

  19. In untabulated results, the use of rural borrower as independent variable yields less significant results for women in parliament and women in non-agricultural sectors.

  20. The use of the 3SLS method requires an exclusion restriction where at least one of the control variables in Eq. (1) is not included in Eq. (3). We, therefore, exclude Capital to assets ratio from Eq. (3) since Bibi et al. (2018) report that it has no significant effect on MFO’s social outreach.

  21. As stated earlier, microfinance scholars have mainly proxied MFOs’ social performance by measuring outputs (e.g., average loan amount and outreach to female and rural borrowers). Over the past decade, practitioners, on the other hand, have undertaken several initiatives aiming to help MFOs deliver financial services in a manner that is safe and beneficial to borrowers. Two such interventions are noteworthy: The first is the joint venture between the Social Performance Task Force (SPTF) and Cerise, which develops and promotes universal standards and best practices for the social and environmental performance management of MFOs (https://cerise-sptf.org/). For example, the second universal standard requires MFOs to clearly outline their social goals, and to collect and analyze relevant data from clients on the achievement of those specific outcomes. The second initiative is the work of microfinance rating agencies such as Microfinanza (https://www.mf-rating.com/) and MicroRate (https://microrate.com/), which provide rating, certification, and outcome measurement services to MFOs. Ratings come in two forms: social rating, which assesses the capacity of MFOs to implement and achieve their social mission; and institutional rating, which assesses the long-term financial sustainability of MFOs.

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Acknowledgements

We would like to thank Islam Gazi, Marek Hudon, Marc Labie, Ariane Szafarz, Roy Thurik, the participants at the Centre for European Research on Microfinance (CERMi) seminar, Brussels (Belgium), at the Seventh Inter-Business School Finance seminar, Nice (France), at the 7th European Research Conference on Microfinance (UK), and at the 11th International Conference of the Financial Engineering and Banking Society (UK), the editor, Tina Dacin, and two anonymous referees for many insightful comments and suggestions. This study was carried out within the framework of the Montpellier Business School (MBS) Social and Sustainable Finance Chair funded by the Caisse d’Epargne Languedoc Roussillon and BNP Paribas. The authors are members of LabEx Entrepreneurship, funded by the French government (LabEx Entreprendre, ANR-10-Labex-11-01). We thank Roxanne Powell for excellent copy-editing.

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  1. Montpellier Business School, Montpellier, France

    Moez Bennouri

  2. Montpellier Business School and Centre for European Research in Microfinance (CERMi), Montpellier, France

    Anastasia Cozarenco

  3. Montpellier Business School and CERMi, Montpellier, France

    Samuel Anokye Nyarko

  4. Montpellier Business School, 2300, Avenue Des Moulins, 34185, Montpellier, Cedex 4, France

    Anastasia Cozarenco

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Bennouri, M., Cozarenco, A. & Nyarko, S.A. Women on Boards and Performance Trade-offs in Social Enterprises: Insights from Microfinance. J Bus Ethics 190, 165–198 (2024). https://doi.org/10.1007/s10551-023-05391-3

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