The FMO governance team: a consultative approach that targets long-term sustainability
Good governance plays a critical role in ensuring that the companies and projects with which FMO works are sustainable throughout their life cycle, enjoying the confidence of investors and counterparties. Even after FMO completes its dealings with a company – for example, when a loan is repaid – our goal is to leave the business or project in the best possible position to raise finance from commercial sources in the future, to grow and to achieve its long-term strategic objectives.
How we get involved
Every deal that FMO considers is subject to early screening - something that is far from a box-ticking exercise. As FMO, we consider it important to ensure professional advice is available to our clients that can help them improve their governance processes, and make their corporate structures both more robust and more transparent.
Therefore, FMO maintains an in-house team of corporate governance specialists, experienced in dealing with emerging and frontier markets. Their role is to use the opportunity created by FMO’s engagement to discuss governance with the board and management of companies. The governance team works closely with investment teams where it is felt we can add value and help to advance the interests of the companies we deal with.
“We frequently become engaged in new areas for the bank, be it new markets or sectors, new types of projects, and when FMO has the right to nominate a director to the board of an investee company. In those cases, our unit supports the investment team to find the best possible individual for the board seat, typically nominating external candidates with the most complementary skills and expertise”, says Rebeca Sanchez de Tagle White, FMO's senior corporate governance officer. FMO also works with other partners, for example private equity funds that are involved as a co-investor alongside FMO.
Why good governance matters to FMO
Governance issues for a development bank often go deeper than board-level personnel matters. “We require a more granular level of analysis, and ask questions about working practices, strategy setting and decision-making. While these may be difficult questions, they can help our clients to avoid difficult and damaging situations in the future”, says Rebeca.
“We often deal with family-owned businesses where founders and their relatives are employed in senior executive or board-level roles. We need to be sensitive to these circumstances and to the goals and concerns of firms' creators.
Our methodology includes a deep assessment of the company,” adds Rebeca. “We need to explain to the owners why various governance reforms will benefit the company. We want their company to be alive and well for the long haul.”
Governance in the financial sector
Cultural sensitivity is particularly important for clients in the financial services sector, where FMO sometimes needs to push back against arguments centred on local or cultural issues that are used to justify why banks and other financial institutions are shirking governance responsibilities.
While there may be an awareness of what good financial industry governance looks like, principals at banks and other institutions will often have arguments as to why things are different in their particular market, which will need to be addressed.
“With debt clients it can sometimes be tough to explain why an independent board may be necessary, and conversations can take a while to digest,” says FMO corporate governance officer Jasper Veel. "But, in the end, financial institutions come to appreciate an outside opinion - it helps them to think more broadly about their business."
A consultative approach to governance
While the governance team at FMO is small, albeit growing, the expertise of its members is on hand for clients in cases where there is perceived to be a need. Jasper adds: “we take a highly consultative approach, requiring us to understand how our clients have been established and have grown to where they are now.”
While these functions are in many ways similar to the consulting services offered by the management consultants at major banks, the markets in which FMO operates require to be both sensitive to local situations and able to come up with non-traditional solutions.
Ultimately, the aim of the governance team at FMO is to help companies - and other investors - minimise their risks, and reduce the possibility of a corporation or project going out of business, while ensuring long-term success. The main added value of a good governance proposition is that it can help firms raise further funding from commercial parties in the future and enable the business to mature and grow over the long term.