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 senior management should be clear, committed and incentivized to achieve the provider’s social goals. Dimension 2 lays out the key practices on how the board and senior management bear strategic responsibility and accountability for decision-making and subsequent operations towards achieving the provider’s social goals. Please refer to EP 7.A.3 of the “Governance and Management structure ensures the implementation and oversight of the environmental strategy”.

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

The board of directors or governing bodies should use social performance information to shape and adjust the provider’s social strategy and hold the senior management to account for achieving the social goals. 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)

Note: There are providers where the founding shareholder is also (still) the managing director. These cases are delicate to audit from a governance viewpoint as one person is wearing two strategic hats. Governance cannot function well if the same person as board member is responsible for evaluating its performance as CEO. In this case, it is good governance practice if the other board members without operational functions decide alone - and in absence of the CEO – everything related to the CEO, like annual performance evaluation, renumeration and so forth. If the CEO assumes lead responsibility for SEPM at the board level, it is important that the deputy CEO or another senior manager assumes lead responsibility for SEPM (and environmental performance) at the senior management level.

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 (SEPM) committee or equivalent body

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

Scoring guidance
  • To score ‘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 SEPM (and environmental) responsibilities are shared among different committees, it is required to stipulate clearly specific terms of reference and how these responsibilities are taken in charge by the different committees as well as when/how SEPM subjects are discussed.
  • To score ‘partially’ if
    1. Only one board member is in charge of SPEM,
    2. The roles and responsibilities in SEPM are not formally defined, or
    3. The board is rather passive in assuming its SEPM responsibilities by taking very few concrete actions.
  • To score ’no’ if no board member assumes responsibilities for SEPM.
Sources of information
  • Board minutes / Committee minutes
  • Terms of reference for SEPM committee/ job description for SEPM champion at the board
  • Interviews with board members
  • Interviews with CEO/managing director and deputy CEO (if the CEO is shareholder)
  • Interview with SPM champion at the board
Evidence to provide

Refer to names/organizational chart/Terms of References/minutes to provide evidence of the regular activity of the SEPM 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 SEPM committee. Potential SEPM committee responsibilities include the following: ensuring the credibility of SEPM information; engaging employees at all levels in SEPM; prioritizing SEPM issues to be addressed by the board and senior management; drawing in relevant expertise for SEPM 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 SEPM, some providers prefer to build in specific SEPM responsibilities into the responsibilities of other board committees and to signal clearly how the work of each committee contributes to SEPM.

Examples: SEPM committee (representatives from Operations, HR, Audit, Risk) meets quarterly to assess progress towards social goals and their targets based on a template defined with senior management and the board. One person, the SEPM champion – who could be the risk or internal audit manager – is in charge of reports to the Board at each board meeting (mostly quarterly).

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 clients, the social strategy defined by the governing body must be based on detailed knowledge of the target clients, which must feed into strategic decision-making. For this, at least one member of the governing body must be able to provide his/her first-hand knowledge and analysis of the needs of the target clients.

Scoring guidance
  • To score 'yes', if the two conditions are fulfilled:
    1. At least one board member must have experience with the provider’s target clients through his/her current work, recent (less than 5 years) previous experiences, studies and advice as verified by her/his profile.
    2. S/he must be a pro-active board member with no operational functions at the provider.
  • To score 'partially', if only one of the above two conditions is fulfilled.
  • To score ‘no’, if none of the two conditions is fulfilled.
Sources of information
  • Board composition and board members curriculum vitae (CV)
  • Attendance and participation of the experienced board members (with the target clients) at the board meetings as reflected by the board minutes
  • Interviews with Board members
Evidence to provide

Share in few key words the experience of the Board members related to the target clients of the provider. 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 that the provider take the voice and preferences of female clients seriously and strives at the  empowerment of women regardless of being clients or managers/employees. The indicator requests that at a minimum, one pro-active woman for small boards, and at least 20% of board members in larger boards should be pro-active women who bring in the ‘gender lens’ into all strategic discussions and decision-making.

Scoring guidance
  • Score ‘Yes’, if the two conditions are fulfilled:
    1. 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, and
    2. They are pro-active board member(s) bringing in the ‘gender lens’ into discussions and decision-making as verified by minutes of board minutes.
  • Score ‘Partially’, if just one of the above two conditions is fulfilled.
  • Score ‘no’, if none of the two conditions is fulfilled.
Source of information
  • Board composition
  • Attendance and participation of the women members at the board meetings as reflected by the board minutes
  • Interviews with women board members
Evidence to provide

Specify the number of women and the total number of board members. Check the actual participation of female board members  in board meetings and interview them.

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

The board’s full understanding of the socio-economic, cultural, religious and other characteristics of the targeted client segments is a prerequisite for its social performance responsibilities in ensuring that client-centric products/services and their distribution channels are offered and do create positive client benefits. This understanding is best ensured if there are at least two board members from the same nationality as the clients and preferably from the main ethnic groups served by the provider. One of the two board members could be a representative of the employees, if the provider has supported a staff association or company as additional shareholder. It is poor governance, if board members are only foreign shareholders with little knowledge of the clients’ livelihood conditions and their social and business environment.

Scoring guidance
  • Score ‘yes’, if the two conditions are fulfilled:
    1. At least two board members are from the same nationality as the clients, and
    2. They are pro-active board members bringing in the ‘client-centric lens’ into discussions and decision-making as verified by minutes of board minutes.
  • Score ‘partially’, if the above two conditions are not fully fulfilled.
  • Score ‘no’, if none of the two conditions is fulfilled.
Sources of information
  • Board composition
  • Board minutes to check attendance and participation of the ‘local’ board members at the board meetings
  • Interviews with ‘local’ board members
Evidence to provide

Specify the number of ‘local’ board members. Explain their actual participation in board meetings.

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

Each board member must understand the provider’s social goals and the role the board should play in managing social performance. SEPM 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 SEPM, how it will benefit the different client segments and the provider, and what role they as leaders must play.

A board orientation to SEPM should include a discussion of SEPM’s importance and how it will benefit the provider and its target clients, a comprehensive look at the 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 to achieve the social goals.

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

Explain the basics: SEPM is a management approach that puts clients at the center of all strategic and operational decisions. SEPM begins with a clear social strategy, which is then carried out by the board, management, and employees. Once they understand what SEPM is, convince them how valuable it is for the provider to serve satisfied and loyal clients. Discuss how stronger SEPM 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 SEPM 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 SEPM initiatives

Boards don’t need to understand the details of national and international efforts to support strong SEPM practices and the SPI social audit tools as global measurement and reporting tool. But they should know that SEPM is a global initiative, 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 SEPM

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

  • Ensuring that client focus is integrated into the strategic and business plans;
  • Reviewing and discussing social performance reports and check for programs and action plans to facilitate the achievement of the social goals to ensure:
    • The provider is reaching its target client segments; and
    • All products and services and their distribution channels are appropriate to client’s needs.
  • Suggesting modifications to the products and services, operations, or social goals/targets, based on review of social performance information;
  • Hold the CEO accountable for achieving the social goals and their targets;
  • 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 the mission statement and social strategy (or “Theory of Change”), 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 the 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
  • Score ‘yes’, if SEPM training material are made available to board members and SEPM training sessions are regularly offered to new board members (in line with board rotation among existing shareholders or board representatives of new shareholders) and if both training material and sessions cover at least the social goals, the role of the board in SEPM and an introduction to the Universal Standards.
  • Score ‘partially’, if SEPM orientation is only anecdotical, not systematically done for new members, informal or covers some topics but not others.
  • Score ‘no’, if board members are only vaguely aware of the social goals and its role in SEPM and new board members receive no briefing at all.
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 SEPM 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
  • Score ‘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 member.
  • Score ‘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.
  • Score ‘no’, if board members just attend meetings without demonstrating active participation or commitment to social performance responsibilities as evidenced by minutes of board meetings.
Sources of information
  • Board minutes
  • Code of ethics, shareholders’ agreement or other formal agreement signed by board members
  • Interviews with board members
  • Interviews with CEO/managing director
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 implies an in-depth knowledge of the situation of clients, their use of services / products and their distribution channels, changes for them, risks and negative consequences as well. For this, members of the Board should be invited to meet with clients, or at least should receive regular and solid client outcomes data to discuss customer feedback and perception of their behavioral and economic changes.

Scoring guidance
  • Score ‘yes’, if the new board members can meet directly with clients from different client segments, and discuss with them their needs, preferences, satisfaction with the products / services and their distribution channels during the first year of joining the board. Furthermore, they receive as board member access to detailed reports on client satisfaction and other client research studies with differentiation per main client segments (gender, location, age, source of income, type of product used, etc.) and discuss them during board meetings and take corrective actions, as required. These board discussions and corrective actions taken are recorded in the minutes of the meetings.
  • Score ‘partially’, if new board members rarely meet with a representative sample of clients and/or have just access to client outcomes data without discussing detailed client satisfaction and other client research studies.
  • Score ‘no’, if the new board members do not meet with a representative sample of clients and/or have only access to client output data (e.g. satisfaction surveys), or small client survey samples (less than 100 clients) that are not representative of the clientele.
Sources of information
  • Board minutes
  • Interviews with board members
  • Interviews with CEO/managing director
  • Impact/outcomes/client surveys reports and/or dashboards 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. The board should adopt a balanced approach to social and financial performance management by reviewing each decision in light of how it will affect clients. 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 the board with regular social performance reports which contain data on the provider’s social goals. Ensure that these reports present information that is needed by the board to fulfil their SEPM responsibilities and they are presented in a meaningful way.

Report contents

Report social data that is important to the board by following its preferred reporting structure. This will promote buy-in and facilitate improved decision-making. The three key content areas with the following minimum contents should be covered:

1) Client Protection

  • Internal audit report on the staff compliance with the Client Protection policy and the Code of Conduct
  • The most recent external client protection assessment
  • Analysis of client dissatisfaction including: client retention/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

2) Social Strategy

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

3) Employee working conditions

  • Employee retention and satisfaction/effectiveness of HR policies disaggregated by gender, position, and location
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 gender, region, main products, or business type).

If these indicators are new to the board, work with them to learn how to understand and interpret social performance data. Start with a simple report that provides concrete information like client satisfaction data, client and 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 to improve the SPM report to make it more useful for the board.

Report frequency

Provide an SEPM board report at least annually, and as frequently as is necessary to ensure the board has relevant and timely information needed for decision-making. SEPM should be on the agenda at each board meeting, regardless of how often data are provided to the board. Best to provide the board for each meeting with an integrated report with social performance alongside financial performance. Additionally, at least annually the board should review the social strategy - particularly the social goals and products/services - and make any changes based on the changing client and institutional priorities, if necessary.

Below are the minimum frequencies for each type of report:

Annual

  • Internal audit report on the staff compliance with the Client Protection policy and the Code of Conduct
  • 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, position, and location

Every 2 years

  • Employee satisfaction surveys

Every 3 years

  • External social audit or social rating
Highlight the risk management implications of SEPM

Many aspects of SEPM 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 risks. 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.

Ensure that board risk discussions include this client perspective. It may simply ask: “how does this decision affect clients?” before choosing a course of action. The board should decide on the best way to introduce this check. Each board agenda might include time dedicated to the “client check”. 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.

For example, Fundación Génesis Empresarial (Guatemala) created a unique “traffic light” system for tracking their SEPM implementation efforts. The traffic light uses the colors green, yellow, and red to indicate the following:

  • Green: the institution currently implements all of the Essential Practices for the standard, and this implementation is well documented and verifiable;
  • Yellow: the institution has already begun planning for or piloting the implementation of the standard (e.g., a strategy exists but has not been implemented);
  • Red: the institution has not yet considered how to implement the standard.

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

A high-risk market can be identified combining different sources:

  • MIMOSA Index score
  • EIU Microscope scores: Economist Intelligence Unit provides benchmarking index that assesses the enabling environment for financial access in 55 countries the existence of adverse news.
Scoring guidance
  • For each detail, score ‘yes’, if the board is provided with regular reports that contain accurate (as checked by internal control and audit), updated, complete, and correctly analyzed data on the level of client protection to take informed decisions.
  • For each detail, score ‘partially’, if client protection data is not fully accurate, irregular, not fully complete, not fully analyzed or not fully discussed for decision-making by the board.
  • For each detail, score ‘no’, if the board is not provided with the status of client protection so that the board is not in a position for taking any corresponding decisions.
Sources of information
  • Board minutes, incl. the SEPM reports submitted to the Board
  • Interviews with board members
  • Interviews with CEO/managing director and Internal Audit manager
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 consistent and complete reports on client protection.
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.

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, 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 meetings and the content of the minutes, as well as the reports submitted to the board (which 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 financial and social performance management to make strategic decisions.

Scoring guidance
  • For each detail, score ‘yes’, if the board:
    1. is provided with regular and timely (at least 1 week prior to board meetings), updated, complete, and well-analyzed data allowing for monitoring effectively the social strategy and
    2. is taking the necessary efforts in studying the report(s) and data received and building its opinion during an informed discussion to take informed decisions.
  • For each detail, score ‘partially’, if one of the above two conditions are not fully met (like the data submitted to the board is not regular, timely, updated, complete, and well- analyzed or the board does not take proper effort in monitoring the social strategy) or both conditions are not fully met.
  • For each detail, score ‘no’, if the above two conditions are met very poorly or if the board is passive despite receiving well-analyzed data regularly and in-time.

Detail 2.A.3.2.1

  • To score ‘yes’ requires, in addition to the above two conditions, that the board receives client outcomes information which is analyzed based on in-depth quantitative and qualitative outcome data.
  • Score  â€˜partially’ or ‘no’, if the board is provided with  mainly or just client output data and limited or no in-depth quantitative and qualitative outcomes data.

Detail 2.A.3.2.3

  • To score ‘yes’ requires, in addition to the above two conditions, that the board  has included how profits can be used to benefit  clients or their local communities as part of its discussion of its last annual profit allocation.
  • Score ‘partially’ or ‘no’, if the board has not discussed how profits can be used to benefit clients or their local communities when it decided on its last annual profit allocation.
Sources of information
  • Board minutes, incl. the SEPM reports submitted to the Board
  • Interviews with board members
  • Interviews with CEO/managing director and Internal Audit manager
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 an external social audit or a social rating.

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.

Monitoring employee satisfaction can also help ensure the smooth functioning of a team and sends a message that the top management values employee feedback.

Scoring guidance
  • For each detail, score ‘yes’, if the board is provided for decision-making with
    1. At least annual staff turnover data and analysis, consistent, broken down by at least gender, and
    2. With at least every 2 years statistically representative staff satisfaction reports/analysis broken down by at least gender.
  • For each detail, score ‘partially’, if the above two conditions are not fully met.
  • For each detail, score ‘no’ , if the above two conditions are largely not met.

Detail 2.A.3.3.1

  • Score ‘partially’ or ‘no’, if the employee turnover rate has not been discussed in the last 12 months or the results were not analyzed by gender or were not shared with employees.

Detail 2.A.3.3.1

  • Score ‘partially’ or ‘no’, 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.
Sources of information
  • Board minutes, incl. the staff turnover/ staff satisfaction reports submitted to the Board
  • Staff turnover analysis, staff exit survey reports
  • HR policy
  • Employee satisfaction survey and report
  • Employees interviews
  • HR manager interview
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.

Field examples / Guidance for implementation

The provider should conduct satisfaction surveys regularly, at least every two years, on at least a representative sample of employees (i.e., the survey should cover all types of employees and broken down by gender). The results should be disaggregated by gender to understand any discrepancies in perception and satisfaction between men and women, but also potentially between managers and employees, newcomers and older staff, permanent and interim staff, staff from HQ and staff from branches, etc. Analysis by position, gender, branch, etc. may help understand reasons for drop-outs and specific actions to be taken (for remote branches and staff lacking information and motivation from HQ, or for women unable to manage their personal obligations with working hours, for example).

The results should be shared with the employees to ensure transparent communication and appropriation of the actions proposed and to give a weight to the level of satisfaction of staff.

When voluntary departures are due to better opportunities, the provider should define financial or non-financial incentives to maintain staff. Firing staff may indicate internal weaknesses or lack of respect and/or confidence between the provider and personnel. Departure upon the end of contract may indicate the provider does not offer employees stable contracts.

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 social targets are not being met to keep in track with the defined social strategy.

Scoring guidance
  • Score ‘yes’, if concrete, major corrective action over the past two years can be shared (major means involving changes in products terms and conditions, staff incentives, organization, trainings, etc.) or no corrective action was needed as the provider has been fully achieving its social goals.
  • Score ‘partially’, if the board took insufficient corrective action to mitigate significantly risks to clients and employees or to meeting social goals.
  • Score ‘no’, if the board has not consistently identified risks to clients and employees for the past two years and/or has not taken corrective action for the past two years although the provider has not been achieving its social goals.
Sources of information
  • Board minutes, incl. the SEPM reports submitted to the Board
  • Interviews with board members
  • Interviews with CEO/managing director and Internal Audit manager
Evidence to provide

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

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 red flag for client protection.  
Resources for indicator 2.A.3.4

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

Board evaluations of the CEO/managing director should be based on the financial performance and the social performance by taking the evaluation criteria directly from the social targets established in the social strategy, like meeting:

  • Outreach targets per client segment or per types of products (borrowers, depositors…);
  • Client retention targets;
  • Client satisfaction targets;
  • Employee retention targets.

Board evaluations of the CEO/managing director may also include operational targets related to the implementation of the social strategy, like implementing the past annual SEPM action plan within a given time period.

The board should oversee the CEO/managing director’s compensation.  If compensation is part-incentive-based, the CEO (and other executives) should be incentivized on both social and financial performance criteria (and maybe also environmental performance criteria). Compensation should be reviewed 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 lower paid employees (new recruits or junior staff, teller or client staff). If the ratio is higher than 25:1, the board needs to justify the reason and confirm that it is in line with the  social goals and strategy.

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

Setting social (and maybe also environmental – see dimension 7) 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. Guidance for indicator 2.A.4.2 discusses how to evaluate CEO performance based on social performance criteria.

Scoring guidance
  • Score ‘yes’, if
    1. the board evaluates annually the performance of the CEO/managing director by considering the progress made on all social targets next to the financial and other targets and
    2. the evaluation influences the level of the annual compensation/bonus level of the CEO. This requires that the board has set clear, actionable, “SMART” social targets according to standard 1A.
  • Score ‘partially’, if the above two conditions are not fully met. For instance, the board does not evaluate the social performance of the CEO/managing director annually or the evaluation does not capture all social targets or the evaluation of the social targets is not done consistently.
  • Score ‘no’, if the board does not evaluate the CEO/managing director against social performance targets.
Sources of information
  • Board minutes
  • CEO evaluation form (filled in)
  • 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 ‘yes’, if every year the board evaluates the performance of the CEO by considering the progress made on all social targets next to the financial and other targets set forth in the past annual operation plan of the provider. This requires that the board has set clear, actionable, “SMART” social targets according to standard 1A.
  • Score ‘partially’, if the board does not evaluate the progress made on all social targets next to the financial and other targets as annually, but only within the timeframe of 1 to 3 years, and/or if the Board evaluates the progress made on only some social targets annually and/or if the Board does not evaluate consistently (because they are not fully aligned with social strategy, not complete, not clear/actionable/SMART).
  • Score ‘no’, if the board does not evaluate the CEO/managing director against social performance targets.
Sources of information
  • Evaluation forms (filled in)
  • 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 evaluation.

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 SEPM, 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.

The board oversees executive compensation that should be partly-based on the achievement  of social performance targets to incentivize the achievement of the social goals. Apart from the CEO/managing director, ‘executives’ include at least the positions of the deputy CEO/managing director and the managers of Operations, Finance, Human Resources, IT & MIS, and Internal Audit.

The board must ensure that the executive compensation is on a comparable level with the ‘triple bottom-line’ competitors within the same sector, like the microfinance industry. This excludes benchmarking with the higher level of executive salaries in the banking sector even if the main competitors are commercial banks. Apart from ensuring that executive compensation is market-oriented, the board has to ensure that it is within an socially acceptable ratio of maximum 25:1 compared to the entry level salary of junior field staff or junior tellers.

Scoring guidance

Detail 2.A.4.3.1:

  • Score is ‘yes’, if the board ensures that the executive compensation is in part incentive-based on the achievement of all social and financial (and other) performance targets. This requires that the board has set clear, actionable, “SMART” social targets according to standard 1A.  
  • Score ‘partially’, if the executive compensation is in part incentive-based on the achievement of just some social performance targets and/or the board has not set clear, actionable, “SMART” social targets according to standard 1A.
  • Score ‘no’, if the executive compensation is not in part incentive-based on the achievement of social (and other) performance targets

Verify consistency with 2.A.4.1 and 2.A.4.2, if the answer there is ‘no’ then the answer here must be ‘no’ as well.

Detail 2.A.4.3.2:

  • Score ‘yes’, if:
    1. the board oversees that the executive compensation is calculated at least annually and
    2. the executive compensation is less than 25 times the salary of a junior field staff.
  • Score ‘partially’, if one of the above two conditions is not met. A formal justification must be made if the executive compensation is more than 25 times the salary of a junior field staff.
  • Score ‘no’, if the executive compensation has not be calculated over the past 3 years or the executive compensation is more than 25 times the salary of a junior field staff without any formal justification.

Detail 2.A.4.3.3:

  • Score ‘yes’, if the board:
    1. reviews the compensation of the CEO/managing director and senior executives at least annually and
    2. ensures that the executive compensation is comparable with the peers of similar social commitment (market level within the inclusive finance sector).
  • Score ’partially’, if one of the above two conditions are not met, like the board reviews executive compensations every second or third year only or the executive compensations exceeds significantly the one of the peers of similar social commitment.
  • Score ‘no’, if both of the above conditions are not met.
Sources of information
  • Incentives policy
  • Board minutes
  • Performance evaluation forms (filled in)
  • Interviews with HR
  • Interviews with board, CEO/managing director
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 lowest paid staff and has set a limit of 20”.

Specify when the last comparative compensation review was done and the 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

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 goals and strategy.

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 three highest paid managers is 100 times that of the three 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 to assess its investees: we score max if the difference is maximum 20, half if the difference stands between 20 and 40, and we score “0” otherwise.

2.A.4.3.3 Reviewing the compensation to ensure that it is comparable to providers with similar social commitment 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.

To keep in line with the social strategy, the board has to oversee that 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 on the same level, compared to market (2.A.4.3.3).

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

The board should safeguard the social strategy at all times, but particularly during periods of major change that make the provider 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 (high 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, the board and management should consider:

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

Mobilizing a new investor requires to balance the need for capital with the desire to bring in an investor who supports the social strategy and shares the social commitment. Some providers have declined donations and investments because they came from organizations whose interests were not aligned with their mission. Even if interests with new investors seem to align, shareholder agreements must include social performance expectations.

New products, target clients, and/or geographic expansion

The board should protect the social goals when making decisions about new products and outreach to new client segments and geographic areas. It should consider both the commercial and social implications of such decisions and the use of 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, the board is 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 needs of the new group are already analyzed and understood, and if so, whether the provider is well-placed to serve those particular new clients and/or new geographical area. Maybe more time is required for consistent client research prior to decide on a new client segments and/or new products?  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 may be the expansion into 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 requires a balanced approach to generate institutional and client value 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 must make decisions regarding which alternative, provider, or service should be chosen in order to achieve both social and financial strategic goals. 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 social strategy at all times, but particularly during periods of crisis that make the provider vulnerable to “mission drift” and during which time there is an increased risk of harm to clients and employees.

Scoring guidance
  • Score ‘yes’, if the board has analyzed and discussed updated, complete and accurate client and employee data (satisfaction, outcomes, complaints) for monitoring consistently all social targets during the crisis within the past three years to ensure that they can be pursued as recorded in board minutes.
  • Score ‘partially’, if the board does not have complete, updated and accurate client and employee data to analyze the effect of the crisis on the social targets and/or does not monitor consistently all key social targets during the crisis.
  • Score ‘no’, if the board does not analyze the effect of the crisis on the social targets and strategy and/or did not receive relevant client and employee data for monitoring the crisis.
  • Score ‘not applicable’, if no major crisis was observed during the last 2-3 years (depending when the previous external social audit/social rating was done).
Sources of information
  • Board minutes, incl. client and employee data submitted to the board
  • Interviews with board and CEO/managing director
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. All countries are still suffering in early 2024, to varying degrees, from the aftermaths of the global pandemic and notably from the Covid-19 lock-downs which has affected the socio-economic livelihoods for many financial providers’ clients negatively.

Field examples / Guidance for implementation

Role of the FSPs in time of crisis:

  • Develop mechanisms for rapid and on-going data collection in particular for specific clients groups and segments that may be more affected by the crisis.
  • Segment and analyze operational and portfolio data on a regular basis to detect shifts in well-being and stress in different segments of clients that might be obscured in aggregate portfolio statistics.
  • Offer flexible and customizable products that can be adjusted to match the specific needs of clients to face the crisis.
  • Support clients’ business adaptation by offering training, business planning support, and coaching either directly or through partnerships.
  • Undertake savings campaigns and incentivize savings to assist clients in building back their resiliency.
  • Take the long view: give clients as much flexibility on payments and as much debt relief as is feasible and necessary to help good clients recover.
  • Invest in digitalization of services and/or additional agents and points of sale to make accessing services easier for clients in future crises.
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 social strategy at all times, but particularly during periods of major change that make the provider 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
  • Score ‘yes’, if the board have used updated, complete, and accurate client metrics for monitoring all social targets and board minutes/interviews can show that the board is analysing them and discussing them during the institutional change period to ensure all social goals can be pursued.
  • Score ‘partially’, if the board does not have updated, complete, and accurate client metrices to analyze consistently the potential effects of the institutional change on the social goals and strategy.
  • Score ‘no’, if the board does not analyze the potential effects of the institutional change on the social goals and strategy.
  • Score ‘N/A’, if no major institutional change was observed in the last two to three years.

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 social 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 targets were presented and discussed during the institutional 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.

Senior management should make all strategic and operational decisions with the goal of balancing the  financial and social (and other) goals, like:

  • Integrating  social performance goals into strategic and operational 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, the social strategy should include target clients, social goals and how to achieve them, social targets, and social indicators. Beyond this social strategy, all business plans, shareholder agreements , and new product proposals should be in line with the 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.  Senior management should discuss how any given plan or decision may:

  • Affect clients;
  • Affect employees;
  • Impact the provider’s ability to achieve its social targets, as well as its public reputation;
  • Influence social performance related risks;
  • Require the collection of additional social performance data; or
  • Require adjustments to the stated social goals.

For example, if a provider were considering pursuing a more aggressive growth strategy, senior 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. 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:

  • Senior management to hold itself accountable to the social targets;
  • Board members and/or investors to hold senior management accountable to the social targets, including holding the CEO/Director accountable to the social targets;
  • Senior management to incentivize employees against social performance targets and reward those with good performance;
  • Senior 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;
  • To demonstrate progress to external stakeholders, improving its credibility in the marketplace; and
  • 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

Senior managers should be particularly accountable to the social goals as they set the tone for other employees, and their level of commitment to the social goals will determine the provider’s overall ability to achieve these goals.

The Example 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 should have such a list of her/his responsibilities and social targets and regular performance reviews should examine her/his success in achieving the social targets.

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

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

Scoring guidance
  • Score ‘yes’, if all social goals and their corresponding targets are included in the business or annual operational plan. This requires that the scoring is ‘yes’ for 1.A.2.1 and 1.A.2.2, and at least ‘partially’ for the essential practices 1.A.1, 1B.1, and 1.B.2.
  • Score ‘partially’, if only some social goals and their corresponding targets are included in the business or annual operational plan. This requires that the scoring is at least ‘partially‘ for 1.A.2.1, 1.A.2.2, and the essential practices 1.A.1, 1B.1, and 1.B.2.
  • Score ‘no’, if only one or none of the social goals and their corresponding targets are included in the business or annual operational plan. The score is also ‘no’, if the scoring is ‘no’ for 1.A.2.1, 1.A.2.2, and for the essential practices 1.A.1, 1B.1, and 1.B.2.
Sources of information
  • Strategy/Business plan
  • Annual Operational plans
  • Interviews with CEO/managing director
Evidence to provide

Specify the sections of the business/operational plan that refer to the social goals and their 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
  • Score ‘yes’, if the CEO evaluates the achievement of all social targets that fall under the job descriptions of the senior managers concerned as part of their annual performance evaluation and if the achievement of the social targets determines their level of the compensation/bonus and career opportunities significantly.  This requires that the Board has set clear, actionable, “SMART” social targets according to standard 1A and that the CEO can break them down to make them more specific to the responsibilities of the senior managers concerned.  
  • Score ‘partially’, if the CEO evaluates the achievement of only some social targets that fall under the job descriptions of the senior managers concerned as part of their annual performance evaluation and/or if the achievement of the social targets does not determine the level of their compensation/bonus and career opportunities significantly and/or if the evaluation is not carried out consistently (e.g. because the social targets are not “SMART”).
  • Score ‘no’, if the CEO does not consider the achievement of any social targets that fall under the job descriptions of the senior managers concerned as part of their annual performance evaluation and/or if the achievement of the social targets does not at all determine the level of their compensation/bonus and career opportunities.
Sources of information
  • HR policy
  • Evaluation forms of the senior managers (filled in)
  • Interviews with the CEO
  • Interviews with HR
  • Interviews with senior managers
Evidence to provide

List the criteria used in staff performance assessments.

Resources for indicator 2.B.1.2

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

Key field managers and staff should carry out a “social performance check” on all daily business decisions to complement the social performance review of the senior managers and the board with field-level experiences and realities. 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.

Monitor Social Performance Risk

Risk management systems tend to focus on financial and operational risks (like fraud), but often ignore risks that are more closely related to serve clients effectively. Internal audit and risk management/internal control should integrate social performance criteria into their regular activities. In addition, external assessments of social performance risks are highly recommended, such as social ratings, external social audits, or client protection certification. The table Monitor Social Performance Risk offers some ideas of common social performance risks.

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. Risk assessment of client protection, client outcomes, and decent work conditions may be carried out internally by a dedicated manager or department (e.g. an annual client protection compliance audit), a specific committee or across different operational areas and/or externally by a client protection assessment, a social rating, or an external social audit.

Scoring guidance

Detail 2.B.2.1.1:

  • Score ‘yes’, if senior management analyses client protection risks systematically and regularly (client over-indebtedness at least every six months, other client protection risks at least annually) based on dedicated internal and/or external in-depth assessments of client protection risks.
  • Score ‘partially’, if senior management analyses client protection risks, but either not systematically as it lacks in-depth assessment reports, or not regularly (client over-indebtedness just annually, other client protection risks not annually).
  • Score ‘no’, if senior management does neither analyse client protection risks systematically nor regularly.

Detail 2.B.2.1.2

  • Score ‘yes’, if senior management analyses negative and positive outcomes for clients and their households systematically and regularly (at least annually) based on dedicated internal and/or external in-depth client research.
  • Score ‘partially’, if senior management analyses negative and positive outcomes for clients and their households, but either not systematically as it lacks in-depth client research, or not regularly (just once within two to three years).
  • Score ‘no’, if senior management does neither analyse client outcomes systematically nor regularly.

Detail 2.B.2.1.3

  • Score ‘yes’, if senior management analyses the decent work conditions systematically and regularly (at least annually) based on dedicated internal and/or external assessments, incl. a representative and updated employee satisfaction survey.
  • Score ‘partially’, if senior management analyses the decent work conditions, but either not systematically as it lacks an in-depth assessment, or not regularly (just once within two to three years).
  • Score ‘no’, if senior management does neither analyse the decent work conditions systematically nor regularly.
Sources of information
  • Management reports, reports to board
  • Interviews with CEO/managing director
  • Interviews with SEPM champion / committee
  • Interviews with internal audit and risk management/internal control
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:  

  • 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 number/levels of targeted clients (women, rural, youth, vulnerable households, etc.); 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 their knowledge of terms and conditions

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. Minimum frequency: every two years. Analysis of decent work conditions should include analysis of gender inequalities and discrimination.
  • Gender inequalities/discrimination – analysis of gender breakdown of staff, remuneration discrepancies
  • All analysis above must be disaggregated by gender, position and other relevant categories.
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

It is important that client protection risks are integrated into the control and internal audit frameworks. These risks are more challenging to spot and quantify than ‘ordinary’ financial and operational risks. Effective risk mitigation is key for implementing the social strategy, as it is closely related to the provider’s ability to serve clients effectively. As the Client Protection Policy and the Code of Conduct are to be mainstreamed across all operational aspects and client interactions, internal control needs to check regularly their full compliance by all employees. In addition, a second level control is required by Internal Audit and/or Risk Department through regular compliance audits of Client Protection Policy and the Code of Conduct. The third level control is carried out by external social audits, social ratings, and client protection assessments.

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

Scoring guidance
  • Score ‘yes’, if the monitoring of client protection risks are integrated fully and effectively into the control and internal audit frameworks at the branch and clients’ level at two institutional levels (i.e. at operational control and Internal Audit and/or Risk Department level). Full and effective integration means that both Operational Control and Internal Audit have  formal check-lists or questionnaires on each of above-listed six client protection criteria and the monitoring reports or internal audits are shared with management to take decision in case of non-compliance.
  • Score ‘partially‘, if the monitoring of client protection risks are integrated only rudimentarily into the control and internal audit frameworks, like monitoring only some of the six client protection criteria, not preparing consistent reports, not including direct client interviews, and so forth.
  • Score ‘no’, if the monitoring of client protection risks has not (yet) been integrated into the control and internal audit frameworks and monitoring of client protection risks  is ad hoc and not consistently.
Sources of information
  • Audit/monitoring check-lists of client protection risks,
  • Reports by operations / risk management and internal audit
  • Minutes of board (quarterly), branch manager meetings (monthly), and operational management committee (weekly)
  • Interviews with internal audit and operational control / risk department
  • Client focus groups (optional)
Evidence to provide

Specify which criteria are integrated into the client protection risk monitoring/audit frameworks. Verify client protection risk monitoring/audit check-lists to see if there are client visits to verify clients’ understanding.

Specify how Internal Audit or Risk Department verifies the loan approval process, and any actions that have been taken to solve incorrect implementation. Does the audit team verify repayment capacity analysis? Use of credit bureau information? Checks for unauthorized refinancing, the presence of multiple borrowers or multiple co-signers within the same household, and other practices that could increase client over-indebtedness.

Verify the internal audit policy is followed. Examples: check 5% of client files annually to ensure calculations are correct and adhere to policy, each branch is audited at least twice a year and double checks 10 client files each time. Is the client data collected validated by internal audit?
Check whether branch audits includes a minimum number of client visits by year and check whether actual visits are conducted by internal auditor to ask questions about the products taken, staff behavior, transparency, client understanding of terms and conditions, collections practices etc.? Give examples of how Internal Audit verifies policies related to fair and respectful treatment of clients.  Specify when Internal Audit last verified the complaints mechanism. If the audit made observations to address, verify that corrective measures were taken.

Verify whether a compliance audit or an internal/external review of the Client Protection Policy and/or the Code of Conduct were carried out with the past two years.

Field examples / guidance for implementation
  • Internal Audit may have a dedicated questionnaire to check on client protection issues, or may integrate checks into the audit of other processes, like:
  • Checking staff understanding of the Code of Conduct and the Client Protection Policy, 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 client sample 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.
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 social targets are not being met to keep in track with the defined social strategy.

Scoring guidance
  • Score ‘yes’, if senior management took concrete, recent, major corrective action  in response of identified social performance and client protection risks .
  • Score also ‘yes’, if no corrective action was needed as the provider is fully achieving its social goals, but senior management regularly assesses the monitoring and audit reports on social performance and client protection risks.
  • Score ‘partially’, if senior management took only minor/insufficient corrective action in response of identified social performance and client protection risks.
  • Score ‘no’, if senior management does not take any corrective action despite clearly identified social performance and client protection risks.
Sources of information
  • Management report
  • Interviews with senior managers, incl. Internal Audit manager
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