Ethical Funding and Good Governance: Does the Design of Funding Matter?

Abstract

Purpose

This paper examines the relationship between corporate governance and subsidies received by hybrid organizations. It is hypothesized that good governance enhances the subsidies embedded in soft loans because lenders are incentivized to care about governance and want their capital back. Conversely, it is hypothesized that there is no correlation between governance factors and grants, as grant providers mainly prioritize the social mission.

Study design

To assess our theoretical predictions, we use audited data about 250 microfinance organizations operating in the global South. First, an exploratory analysis identifies the five main factors of effective corporate governance. Second, we estimate a fixed-effect generalized least squares model and test whether these five factors affect the subsidies received by the organizations.

Findings

The results confirm that soft loans are positively correlated with good governance, while grants are not.

Contributions

Grant and soft loan providers exhibit different levels of appreciation for corporate governance, possibly based on mission segmentation. These findings demonstrate that charitable funders of hybrid organizations have developed a distinct approach to managing the unique challenges posed by the double bottom line of these entities.

Implications

Microfinance managers should align their corporate governance systems with their specific financing needs to optimize their access to different forms of subsidies.