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IMF Survey: Watchdog Releases Report on IMF Corporate Governance
May 28, 2008
The Independent Evaluation Office (IEO) of the International Monetary Fund released on May 28 a report assessing the governance of the institution.
Tom Bernes: the report proposes the creation of a Council of Ministers to set overarching goals for the Fund. (photo: IMF)
Tom Bernes interview
The report calls for changes in the Fund's governance, including clarifying the respective roles of various bodies within the IMF and reorienting the job of the Executive Board.
IEO Director Tom Bernes elaborates in the following interview on the report's findings. Click here for the reaction of IMF's Executive Board and management.
IMF Survey online: This IEO report was an unusual topic for an evaluation. Most IEO assessments have been on Fund policies and their implementation. This is the first time that the IEO has assessed the Executive Board. What challenges did this bring out?
Bernes: Well, it was very challenging, but, in fact, we find all evaluations very challenging. As you suggest, this evaluation differs from our earlier ones, which often start with a Board policy decision and go on to evaluate how it has been implemented and whether it's been effective or not.
In this case, we looked at the entire governance structure of the Fund, focusing on the three most important elements—the IMFC [the International Monetary and Financial Committee], the Executive Board, and Management. We, of course, started with the formal structure of the IMF, which is set out in the Articles of Agreement, but then we also had to understand how that operated in real life because in any organization you have both the formal set of rules and the informal ways of working, and it's very important to understand both of those. To provide benchmarks and comparisons, we needed to look at other multilateral institutions, as well as relevant best practice in the public and private sectors.
IMF Survey online: What were some of your main findings?
Bernes: The study found that some of the structures and practices that had served the Fund well had become obsolete in our view, both because the Fund had changed and because of changes in the environment in which it operates.
Clearly, over 60 years a lot has changed. Still, the Fund remains relatively effective, especially compared with other international organizations with almost universal membership. However, we did find a lack of clarity on the respective roles of the IMFC, the Board, and Management.
Key points
The evaluation focuses on three major elements of the IMF's governance structure—the International Monetary and Finance Committee (IMFC), the Executive Board, and the Fund's Management. It finds that effectiveness has been the strongest aspect of Fund governance, while accountability and voice have been the weakest. If left unaddressed, these weaknesses would likely undermine effectiveness over time.
The evaluation suggests a number of ways to address the main areas in need of reform, including clarifying the respective roles of the various governance bodies within the Fund, and reorienting the Executive Board's activities away from executive day-to-day operational activities towards a supervisory role—thereby enabling it to play a more effective role in formulating strategy, monitoring policy implementation to ensure timely corrective action, and exercising effective oversight of Management. Significant ministerial-level involvement from member countries will be needed to implement these reforms, as well as in the future governance of the Fund, perhaps through the activation of a Council of Ministers.
The IMFC often operates as the main channel for Ministers to provide guidance, even though formally it is only an advisory group. We believe that a more active and transparent role for ministers is needed both to strengthen accountability and legitimacy.
Executive Board practices have evolved over time gradually, particularly from the time when it started, when there were 12 directors representing 44 countries. We now have 24 Executive Directors with staffs and we have 185 member countries. Many of these practices need to be reformed so as to be better aligned with the current situation and with current thinking on good governance—the benchmarks I mentioned earlier in terms of what is good practice elsewhere.
As you know, the Board still discusses and approves most operational issues. Our view is that this doesn't leave the Board sufficient time to focus on strategic issues and to develop a broader perspective because it is so intimately involved with virtually every action which the Fund formally takes.
The last finding is on an accountability framework for the Board and the Managing Director. Although such a framework has been formally established, it has not yet been operationalized so as to monitor Management's performance, to provide feedback and to ensure corrective actions.
IMF Survey online: What were your key recommendations, based on these findings?
Bernes: We have four broad recommendations, complemented with a long series of practical ones that would contribute to implementing the wider reform. The four main ones we set out were to clarify roles of the various bodies, to activate the Council of Ministers, to shift the focus of Board activity towards a more supervisory role with a greater focus on oversight and strategy design, and to establish and operationalize an accountability framework for Management.
We have a number of other specific recommendations which include creating a Board Audit committee; clarifying and strengthening the ethics and conflict of interest framework for Board and Management; establishing whistle blower mechanisms (an area where some activity seems to be under way); improving the summing up process for Board meetings so as to provide greater clarity both internally but also in terms of communicating to the outside world; and making more active use of committees by the Board to streamline their work processes.
IMF Survey online: You recommended that the Board become more strategic and less involved in day-to- day operations. How do you see this working together with the idea of a Council?
Bernes: This is a good question. The division of labor between the Council and the Board would flow directly from their respective composition as well as from the fact that the Council would likely meet only a few hours probably twice a year—not too different from the IMFC today. The Council would focus on setting the overarching goals of the organization, on decisions that require discussion and endorsement at the highest political level, and on oversight of the Board. The Board itself would develop strategies for Council approval, and would track implementation of these strategies and policies. It would also effect oversight over Management for the day-to-day operations.
We believe that the activation of a Council would formalize these roles, and by clarifying who does what it may reduce the overlap with the Board. At a minimum, it would also enhance transparency and put accountability for important decisions more clearly where they belong.
Indeed, one of the things that we heard in our interviews with ministers, both current and previous members of the IMFC, was a feeling of disengagement, only endorsing items that had been worked through. So the message came through to us that, in fact, if there were key issues where Ministers were making the decisions, then there would be greater engagement and sense of ownership.
IMF Survey online: The IEO conducted a number of surveys for this report. What did your surveys reveal? Any complementary/contrasting views?
Bernes: Well, of course, surveys are important instruments for evaluations. We did undertake surveys at three levels; one, of current and past Board members; the second, of senior officials in capitals (both from finance ministries and central banks); and the third, of senior IMF staff (those at the B level, who have had experience with the Board and with the IMFC). We also sought views from civil society. The full details of the responses are set out in the background documents to the Report.
It's reassuring that the differences in responses between the various groups were largely of degree rather than of sharply contrasting views, and I think that is reassuring. But there were some messages that did come through clearly to us. One was a widely shared view that accountability mechanisms for the Board and for Management are inadequate or insufficiently used.
A second shared view was that a majority of member country authorities consider Board financial oversight inadequate, or they simply were unaware of the framework, which given that Governors have to sign off on the financial statements at the Annual Meetings, clearly indicates an area that needs to be addressed.
IMF Survey online: In a way, the Executive Board is evaluating itself in discussing this report. Are you satisfied with the outcome of the Board discussion?
Bernes: We were very pleased with the outcome, and certainly one left the discussion with the sense that the report was taken seriously. Of course, the proof of the pudding is in the eating. The fact that some action is already occurring is a very positive indication, and certainly the Board and Management indicated that they welcomed the report, that it contained a number of insights and suggestions that they wanted to consider very carefully.
These are not easy issues. What we try to do in the report is provide a platform for discussion because there is no single corporate structure that is a model that one can just apply wholesale.
As we try to indicate in the report, there are a number of dimensions which any structure would have to satisfy in terms of effectiveness and efficiency of the organization, in terms of accountability, and in terms of providing voice for all the various stakeholders. And there are trade offs in those dimensions.
Let me give you one example. Research and experience indicates that once you've moved beyond a Board of 8 to 12 members, the efficiency of that process starts to break down, which impedes their ability to be effective in strategy design.
On the other hand, you have to ensure voice and legitimacy. That's very hard to do for a 185-member organization with only 8 to 10 Executive Directors, so there is a trade off and the question becomes where do you want to put the weight. And, while you cannot ever achieve 100 percent in all of the dimensions, the objective is to find the balance that will largely satisfy the membership. By doing so, you'll allow the organization to be effective.
IMF Survey online: What are the next steps for the IEO on this report?
Bernes: I think there will be a two-part process. Executive Directors have decided to launch a process to identify those actions that could be implemented in the near future to improve their processes. And, at the same time, they also believe that a process of consultation with other stakeholders is needed to get views and decide on the other issues. So, we will be contributing to that consultation process through dissemination of our report, to authorities in capitals, to think tanks, and to civil society.
Comments on this article should be sent to imfsurvey@imf.org