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Governance of multilateral development banks: Options for reform

Research report

Written by Annalisa Prizzon, Mandeep Bains, Suma Chakrabarti, Jessica Pudussery

Research report

This paper contributes to a long-standing debate on reform of the governance of multilateral development banks (MDBs). In line with several expert reports that have gone before, in our view, the current governance structures in many MDBs prevent them from maximising their development value.

Improving the effectiveness of MDBs is more urgent than ever, as emerging and developing countries face multiple challenges from the spike in commodity prices, rising inflation, increased indebtedness, the Covid-19 pandemic and the war in Ukraine, in addition to existing development challenges. Applying principles of good corporate governance can make MDBs more effective and relevant institutions. Furthermore, the relevance of MDBs for client countries versus other financiers, including private investors and national development banks, has fallen over time, making the call to modernise these institutions even stronger.

This paper focuses on reforms to the Boards of Directors (BoDs) of MDBs. In most cases, MDB governance structures have three levels: (i) the Board of Governors (BoG), (ii) the BoD, which both oversee (iii) Management, headed by a President.

A resident BoD representing government shareholders is the prevailing model across major MDBs, but it does not seem to meet many of the core requirements for effective corporate governance. This would require that the BoD has a strategic focus; fulfills a supervision/oversight role; and operates according to a clear division of responsibilities between the Board and management. Board members should have the right skillset and a breadth of perspectives. MDB BoDs do not appear to have a primary focus on strategy; indeed, a resident BoD tends to spend only a small share of its time on oversight/supervision and strategy setting, with much of its time spilling into involvement in day-today management. In most legacy MDBs, a clear framework for the division of responsibility does not exist, and where formal delegation exists it is usually only for project decisions. While MDB BoDs are involved in defining strategic direction, setting performance indicators and monitoring the performance of management, they also act as a political counterweight to the technical decisions and proposals of management, notably by allowing shareholders to bring in their national interests. Furthermore, the experience and expertise of prospective Directors are rarely assessed against job descriptions or in view of the skills required to complement those of existing members.