In recent years, especially since the start of the first global crisis of the new millennium, reforming the governance of global finance, particularly the Bretton Woods institutions, has attracted increasing attention from analysts and policymakers involved in international financial issues. The related debate hosted by Vox is a reflection of the broad range of views spanning the issue. The G20 has put political pressure on the need to adapt global financial governance to the changed reality of today’s world economy, and the official sector has come up with processes to identify possible steps to this end.
In 2008, following the report by the Independent Evaluation Office of the IMF on Fund corporate governance, the Managing Director appointed a committee of eminent persons chaired by Trevor Manuel, Minister of Finance of South Africa, to advise on the adequacy and effectiveness of the Fund’s decision-making process. On the World Bank’s side, President Zoellick took a similar step by inviting former President of Mexico, Ernesto Zedillo, to lead a high-level commission to explore ways to modernise World Bank governance. While the Zedillo commission plans to produce its recommendations later this year, the Manuel committee has already released its final report. As I have been involved on the issue of global governance for quite a while now, and from different perspectives and roles, I would like to share with readers a few remarks on the Manuel committee report, starting with praising it for its extreme clarity and its well-defined set of proposals.
Importantly, the committee has recognised the world’s need for a multilateral institution at the center of the global economy to help anchor international financial stability, and it has acknowledged that the IMF is well placed to be this institution – although, pitifully, it has given no indication as to the role that the renewed centrality of the institution would imply in terms of its relationship with the various agencies active in the area of international policy cooperation (e.g., standard-setting bodies, international financial supervisory committees, the Financial Stability Board, etc.)
The committee has proposed a package of measures, including
- the activation of a high-level ministerial council to foster political engagement in strategic and critical decisions,
- an acceleration of the quota and voice reform begun last year,
- a broader mandate for surveillance,
- clearer lines of responsibility and accountability between various decision-making entities in the Fund,
- a consideration of decision-making rules to facilitate broader consensus, and
- the introduction of an open, transparent, and independent-of-nationality selection process for the Managing Director.
If accepted by members, these measures will no doubt improve the institution’s effectiveness and legitimacy.
Bold reform of the executive board is needed
Regrettably, however, these measures would also fall short of what would be needed to make a real difference in the oversight and accountability of the institution – a bold reform of its executive board. True, the committee has rightly called for re-balancing the quota shares and adjusting the size and composition of the board. Yet, this is only one of the many radical changes that would be required to enable the board to be a more effective reviewer of Fund policy effectiveness and to empower it for assessing management performance.
In fact, I am afraid that forming a council might even bind the executive board to irrelevance, if adequate strengthening of board independence would not be provided in parallel. The very idea of a council – launched years ago by former Managing Director Michel Camdessus1 and revived recently by the Independent Evaluation Office report – originates from the realisation that the executive board is not seen as carrying the political legitimacy to decide on the institution's direction. A board that largely consists of middle-career country officials, acting under short mandates and undefined terms of reference, and mostly regarded as country representatives executing instructions from capitals, cannot possibly be taken as an authoritative decision-making body – hence the idea of setting up a ministerial council to which the board would become an advisor.
At the same time that the board’s role would be (further) diminished by the presence of a council, it would be left without powers to hold management accountable for its performance. Note that, although statutorily mandated to oversee management, executive directors are reluctant to challenge the Managing Director (and his deputies). The latter enjoys far superior status than that of Board Members, is not selected by the Board (irrespective of the IMF charter), and has direct contacts with the highest-level national authorities, unlike some Board members. In some cases, executive directors who challenged management have been rebuked by their capitals. In others, directors representing borrowing countries have refrained from prompting management reactions that could upset their countries’ relationship with the Fund. As pseudo-ambassadors of their constituent countries, executive directors are in no position to exercise any relevant accountability power. Moreover, the dual capacity of the Managing Director (and his deputies) as both chief executive officer responsible for management performance and as chair of the board responsible to hold management to account gives him no incentive for accountability.
Therefore, if the Manuel committee’s recommendations were accepted and no reform were enacted to strengthen the board, executive directors would be left with no more than a rubber-stamping role, caught in between a plenipotentiary ministerial body, on one side, and an all-powerful management on the other; directed by the former, and subjugated by the latter. It only takes a quick look at the current situation of the boards of the IMF and the World Bank to realise how sidelined they are in the conduct of both institutions, and how little they count for capitals and managements.
But a multilateral organisation with a largely skewed member voting power and without a collegial and independent (from capitals and management) board is bound to operate under inadequate oversight and likely to compromise the consistent and fair treatment of its members. The fact that today the board fails on both counts should lead to measures aimed to strengthen it, not weaken it further, and should suggest a role for a board that would act as a diaphragm between the interests of individual countries (especially the largest quota holders), the objectives of the institution, and the needs of the weakest members and stakeholders. There is no doubt that decision-making power must ultimately rest with shareholders, but when shareholders take decisions for the institution they should hear from an independent and collegial board the voice of the institution and its membership as a whole.
What measures should a coherent reform agenda contemplate that are not in the Manuel committee report?
The alternative proposal of the “Group of Lecce”
Recently, experts of international law, finance, and economics – reunited in a group named after the Italian city where the idea was born – have submitted a proposal to the Leaders of the G20 for an agenda to reform global economic governance.The proposed reform agenda of the “Group of Lecce” would intervene on all the governance levels of the Fund (and the Bank), attributing clear responsibilities to each governing body, exploiting their comparative advantage, and enhancing their complementarities. Accordingly,
- The ministerial committee of the IMF should be transformed into a Governing council, representative of all Fund members, and with responsibilities to set strategies, oversee the executive board, and coordinate international policies
- The executive board should be made independent and accountable to the Governing council, and
- Management should be made accountable to the board.
The council would become the forum where top-level policy officials of member countries discuss international policy issues and decide on collective action. As political entities with quasi-universal representation, the Councils should coordinate the activities of all major agencies operating in their relevant policy areas. International country groupings should operate exclusively within their framework. As the highest policy forums for member governments, the council would pursue international cooperation, and intervene on individual members through peer pressure instruments to strengthen their cooperative response when necessary. It would set strategic directions for the institutions under their jurisdictions, and identify areas where the institutions should improve their policy response to country needs. The council would request the executive boards to take appropriate action, and hold them to account for the performance of their institutions. Finally, it would select the Executive Board chairpersons. In this regard, the reform should
- Introduce open and transparent procedures for the selection of the chairperson of the executive board
- Include Articles of Agreement provisions that grant the Board of Governors with the power to dismiss the executive Board, upon proposal of the Governing council, and
- Ensure, through bilateral cooperation agreements between the Fund and all the other major agencies operating in their relevant policy areas, that the council provide political oversight of global governance.
An independent board
The executive board, on its part, would have to ensure that the Fund served the interests of all its members effectively and evenhandedly. As board members, executive directors should be administrators of the institution they serve, not ambassadors of their constituent member countries. In coming to their positions on issues before the board, they should inform and advise their constituent member countries, but should ultimately exercise their individual judgment in the interest of the institution and its membership as a whole, and not be expected to execute instructions from individual countries. Executive directors should always be in position to explain openly the reasons and the interests motivating their decisions, and the executive board should be accountable to the Governing Council. The reform should
An accountable management
- Introduce election procedures for all executive directors
- Introduce a staggered election process whereby no more than one third of the executive board members would be up for election in each election year
- Include Articles of Agreement provisions sanctioning the independence, role and responsibilities of the executive directors
- Introduce terms of reference for executive directors and their offices
- Introduce requisites of high seniority and professional reputation for the selection of the executive directors
- Lengthen the term of the executive directors (to 4-6 years)
- Introduce a non-removal from office clause of executive directors (except for unethical conduct), and
- Provide that the removal of an executive director may be decided only by the Board of Governors, with a qualified majority, upon proposal of the Governing council.
Finally, a clear division of responsibilities should be introduced between the board and management, requiring (and empowering) the former to exercise full oversight of the activity of the latter. In pursuing this objective, the reform should
- Separate the role of chair of the board from that of chief executive officer
- Introduce open and transparent executive board procedures to select the chief executive officer and his/her deputies
- Provide for the board to adopt a system of periodic evaluation of management performance, and
- Provide that, under the oversight of the board, management ensures consistent and evenhanded implementation of Fund policies across member countries.
A final remark
The individual components of the reform agenda just described should be seen as parts of an organic whole. Partial implementation of the agenda might not necessarily bring improvements and might actually result in unbalanced governance structures. Governing councils that, on occasions, might be polarised by conflicting national and regional interests or might be dominated by narrow majorities should find in an independent executive board a re-balancing mechanism that helps reflect the interests of the institutions and the voice of all its members. Also, more accountable Managements to non-independent executive boards would likely end up being more subjected to the influence of the largest member countries. Furthermore, granting executive directors with independence from individual member countries requires, in parallel, the establishment of a political body that acts as an effective “country forum” with full powers to hold the executive board to account for its conduct. Any reform plan of global economic governance will have to pay special attention to the need to preserve the overall coherence and balance of the resulting framework.
It would be hoped that, in working out its own recommendations to the World Bank, the Zedillo commission would consider the issues of coherence and balance with due care and devote more attention to the role of the executive board as the core governance instrument to ensure effective oversight and to deliver full accountability of the institution.
1 See also Camdessus M., “The IMF at the start of the twenty-first century: what has been learned? On which values can we establish a humanized globalization?”, 2000 Cyrill Foster Lecture, University of Oxford, delivered 9 November, reprinted in Vines, D. and C. L. Gilbert (eds.), 2004, “The IMF and its Critics. Reform of Global Financial Architecture, Cambridge University Press, 417-32.