4 Current State of IMF Governance

International Monetary Fund. Independent Evaluation Office

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Author: International Monetary Fund. Independent Evaluation Office

Language:: English

Keywords:: IEOR; IEO; IMF governance; governance; committee; evaluation; IMF legitimacy; Board document; Board survey respondent; Board committee; Board code of conduct; Board influence vis-à-vis management; Emerging and frontier financial markets; Auditing; Gender diversity; Purchasing power parity; Global

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Abstract

As laid out in Chapter 3, Fund governance has evolved since the 2008 evaluation, aided by various reform initiatives. This chapter analyzes the current state of Fund governance, considering each of the Fund’s main governance bodies—the Board, Management, and the IMFC—in turn. The assessment in this chapter is informed by a desk review of internal documents; data analysis; the views of EDs, country authorities, Management, and senior Fund staff obtained through interviews; and discussions with external experts. Survey responses are presented as supplementary information but are not used as the primary source for findings given low response rates.24

Executive Board

Representation and voice. Given the Fund’s universal membership and complex representation system, the current size of the Board was generally considered by EDs and authorities as a good compromise that preserves efficiency while enabling members to have their voices heard. That said, some EDs continued to advocate for the creation of an additional chair to increase the representation of African countries,²⁵ as has been done at the World Bank.

The 2008 and 2010 quota and voice reforms are broadly viewed as substantial steps forward in representation at the IMF. Many advanced economy chairs in particular emphasized that quota and governance reforms had come a long way in addressing the representation issue, except in the case of China, which all EDs agreed remained significantly underrepresented.²⁶ In contrast, many other EDs, especially those representing EMDCs, acknowledged that progress had been made but still believed that much remained to be done on the representation front. They argued that emerging market countries are still underrepresented, while European countries remain overrepresented.²⁷ Underlying the issue of representation is the realignment of members’ voting power with their economic weight in the global economy. As shown in Figure 1, which compares voting weight to GDP share (calculated by market exchange rate and in purchasing-power-parity (PPP) terms) and trade share, the degree of apparent over-representation or under-representation relative to economic weight varies significantly across metrics, contributing to the difficulty in reaching consensus.

A number of authorities and EDs expressed disappointment that the intended reduction in advanced European chairs has not yet been fully accomplished and that the shift to an all-elected Board has so far not led to single-member constituencies opening up to other members. Nevertheless, there was general agreement among EDs that in recent years the voice of EMDCs has grown louder and clearer at the Board, enhancing their ability to influence decision-making, although many believed that this reflected the efforts of the EDs themselves as much as the governance reforms.²⁸ For example, informal groups like the BRICS have played a role in this process by facilitating improved coordination among a group of emerging market EDs with significant voting weight. At the same time, many EDs emphasized the heterogeneity of views among EMDCs, which sometimes contrasts with a more articulated position among advanced chairs, particularly those representing Europe. Others stressed that alliances among EDs often shifted across issues and did not always coincide within income groups, which provided opportunities for middle-sized countries to sometimes play a crucial role by providing swing votes.

Going beyond voting shares and income groups, some EDs emphasized that a constituency’s influence at the Board also depends on careful preparation of topics and effective persuasion skills, particularly since Board decisions are normally made by consensus rather than by vote. This underlines the importance of adequate staffing (see discussion below on OED resources). Nevertheless, a clear majority of Board survey respondents believed that the capacity to influence decision-making is broadly aligned with voting power.

Management and some EDs highlighted the significant scope that remains for increasing gender diversity at the Board. Diversity has improved somewhat recently, as the number of female EDs has increased to three, up from only one on average over 2008–16, reflective of recent efforts by the IMFC, MD, and Board (see IMF, 2016 for further discussion). However, gender diversity remains low and is dependent on individual country choices.

Effectiveness. In most EDs’ view, the Board provides value added by offering guidance, shaping the Fund’s views, monitoring the work of Management and staff, and providing legitimacy to the Fund’s decisions.²⁹ In all of these dimensions, EDs emphasized the importance of three contributing factors: (i) early and frequent bilateral consultations between EDs and Management/staff; (ii) staff’s openness to the Board’s views and their feedback, which over time has the potential to shape future work; and (iii) work done by Board members outside the Boardroom. However, in interviews, several EDs did not seem to be fully satisfied with Management and staff receptiveness. Half of Board survey respondents believed their decisions and instructions were incorporated in subsequent work adequately but often with delays. In contrast, 90 percent of senior staff respondents reported that they consult with EDs early on and three-quarters reported that they incorporate the Board’s feedback at least to some extent.

Overall, the Board was viewed by most EDs and authorities as generally effective, especially when compared to other international institutions. In this regard, EDs appreciated the adoption of steps to facilitate early engagement on issues of strategic importance, the efforts to make Board discussions more focused, and the greater attention being paid to risk management (particularly through the role of the ORM). They recognized that continued increase in the use of written statements (Grays) and guidance on speaking times has helped to provide an improved basis for more interactive Board discussions, despite some drawbacks (see Appendix 3), and to build consensus on Board decisions.

EDs particularly welcomed the increased use of informal meetings to seek Directors’ views at an early stage. Time spent in informal sessions has more than doubled— increasing to 35 percent of the total Board hours during 2010–17, up from 15 percent over the period examined in the 2008 evaluation (see Figure 2 and Appendix 3).³⁰ Some EDs noted, however, that it was important to ensure the adequacy of record-keeping for these meetings.³¹ Staff reported that transcripts of informal meetings are now available to EDs on the internal IMF Connect website, as well as that SEC now prepares a Selected Points memo for EDs for these sessions.

Despite an overall positive perception, EDs identified a number of factors that still hamper the Board’s effectiveness. First, they pointed to a heavy workload, packed with both operational and strategic issues and the expanding coverage of emerging macro-critical issues. While IEO analysis of Board activity indicators reveals a slight moderation in Board meeting activity (see Appendix 3), EDs highlighted that the length and complexity of policy papers and flagship reports presented to the Board have increased. While strict limits on length of country documents have helped to contain the sheer volume of paper, several EDs suggested that at times treatment of core issues is cursory as the range of policies discussed has extended.³²

EDs argued for greater prioritization and streamlining of Board items as a means to alleviate the workload but, at the same time, they did not want to see a reduction of the Board’s involvement in day-to-day operations. They unanimously agreed that the Board must remain engaged with day-to-day operational decisions (mainly bilateral surveillance and Fund-supported program decisions) as well as with strategic guidance and oversight. They viewed these two functions as inextricably linked, since the implementation of strategic guidance can only be monitored and made effective by participating in day-to-day operational decision making. They also argued that detaching the Board from Article IV and program discussions would be a disservice to those members for which Board meetings provide the only opportunity to have their economic issues discussed in an international forum.

A second set of issues that has hampered the Board’s effectiveness relates to the Board agenda. In interviews, EDs expressed concern about the uneven distribution of the Board’s workload over the year (bunching) and a lack of prioritization (e.g., they believed that more technical issues should be dealt with outside the Board). IEO analysis of data on monthly activity confirms that bunching, already a concern of many EDs at the time of the 2008 evaluation, continues to be a problem, especially in the months of June and July (see Figure 3 and Appendix 3). In interviews, senior staff explained that a number of measures have been taken in an effort to reduce bunching, but there are structural constraints that hinder further progress in achieving a more even distribution of items throughout the year, including the limitations imposed by the Spring and Annual Meetings, the Board recess (lengthened from two to three weeks in 2013), Management travel, authorities’ preference for the scheduling of Article IV consultations, and the desire to group the major bilateral surveillance meetings with multilateral products.

Further exacerbating agenda and workload issues, some EDs viewed the capacity and resources of their offices as spread too thin.³³ While the revised budget framework provides for greater responsiveness to work pressures, a number of offices are particularly stretched by the need to support multiple members with ongoing programs or program negotiations.³⁴ Moreover, while advanced economy constituencies typically receive considerable support from capitals, other constituencies must be self-reliant in preparing for Board meetings and, at times, in determining policy positions. This forced them to be selective in taking up items for discussion and/or to consider some items only superficially. It was also noted that the capacity of multi-country constituencies may be affected by EDs being practically constrained in choosing staff assigned from constituent countries, making it hard to apply consistent quality standards.

A factor that can influence OED capacity is the length of EDs’ tenure, which has declined in recent years and is believed by ED and authority interviewees to be too short (see Appendix 3).³⁵ EDs generally stressed that, given the Fund’s institutional complexities, experience in the office can be crucial in determining EDs’ role and influence. Hence, they agreed that longer tenure of EDs would improve the effectiveness of the Board and its ability to provide a healthy counterweight to Management and staff. Over 80 percent of Board survey respondents believed there should be a minimum tenure for EDs, with a three-year term being the preferred option.

Another significant consideration regarding OED capacity is Board induction and training. As discussed in Chapter 3, the voluntary Board induction program on key Fund policies and practices has recently been augmented. However, SEC data shows that while highly attended by Senior Advisors and Advisors, ED attendance since 2014 has been low. Additionally, EDs who come on-board outside the biennial cycle of the general election of EDs have more limited opportunities for formal training.³⁶

A final factor impacting the Board’s effectiveness is the uneven contribution of Board committees. EDs considered many committees to be generally ineffective, although there were notable exceptions, while some ad hoc committees and working groups were viewed more positively. Attendance at committees by all OEDs, which some EDs attributed to a hesitance to delegate the work to a smaller group, has led to committee meetings remaining in effect full Board meetings. Nevertheless, EDs were divided on the possibility of restricting attendance to committee members. Over 70 percent of Board survey respondents were of the view that significant changes in the structure and operation would be needed for committees to be effective.

Board influence vis-à-vis Management. Many EDs felt that Management continues to play a dominant role vis-à-vis the Board in Fund decision-making. During interviews, while some EDs were of the view that the distribution of power was balanced, others believed that Management had a firm grip and dominated decision-making through control over agenda setting and access to staff resources and information. EDs shared with the IEO specific cases in which they had trouble getting items onto the Board agenda, despite their right to do so.³⁷ Some EDs also expressed concerns regarding the role played by SEC, which they perceived as serving primarily the interests of Management and not those of EDs, even while the department is, in their view, supposed to serve the Board.³⁸ While it was generally recognized that some tension between the Board and Management is natural and even healthy for the institution, many EDs still felt the need for further progress to bolster the Board’s strategic influence on IMF decisions. Over half of Board survey respondents were not satisfied with the Board’s influence over policy decisions and believed that Management’s views generally prevailed.

Summings Up (SUs). Despite the process improvements discussed in the previous section, most ED interviewees felt that there remains considerable scope for further improvement, particularly on clarity of the process and to a lesser extent on reflecting minority viewpoints. The conclusion of a 2013 EDs’ Working Group on Summings Up report that there could be greater clarity regarding how to reflect Board comments was echoed in interviews. Specifically, some EDs believed that the SU process is not ideal and that the post-Board SU process was still too much of a “black box;” in some cases, they reported not being informed by SEC as to why their requested changes were not accepted.³⁹ Around 52 percent of senior staff and 46 percent of Board survey respondents also believed that SUs are sometimes or often vague or contradictory. While two-thirds of senior staff respondents believed that minority views are given adequate attention in SUs, Board survey respondents were more evenly split.

Transparency and archives. The Fund’s transparency and archives policies have greatly improved and, in the view of EDs, adequately balance the need for the public’s right-to-know against the need for candor at the Board and for safeguarding the Fund and member country confidentiality. Following the 2008 evaluation, the Fund devoted significant resources to catalogue and digitize Board documents and has made available all Board documents permitted to be disclosed on a dedicated online archives website. Notwithstanding some initial implementation issues owing to budget and staffing constraints, a backlog on Board minutes permitted to be disclosed and on responding to requests for declassification of Strictly Confidential documents has been eliminated. Nevertheless, concerns were expressed to the IEO by external stakeholders regarding the user-friendliness of the online archives; they complained, for example, that documents can be hard to find even if one knows what one is looking for.

Self-evaluation. The recently initiated Board self-evaluation exercise was generally viewed by EDs as asking the right questions to enable a candid assessment of the Board’s efficiency and effectiveness and how it could improve. However, EDs still question the efficacy of this instrument. In interviews, while many EDs believed that self-evaluation is worthwhile as a learning tool, many also were of the view that the usefulness of the exercise has been mitigated by Management’s resistance to implementing possible improvements identified in the process. Survey results also suggest that there is not widespread awareness that the Board is now taking a systematic look at its performance.

Ethics. The ethics framework for the Board has been considerably enhanced since 2008 although there are gaps in awareness both within and outside the Fund. The Board Code of Conduct was amended in 2009 and again revised in 2012 to incorporate a special procedure for investigations of alleged misconduct. Although over 80 percent of Board survey respondents reported that they are familiar with the Board Code of Conduct, in interviews most EDs identified the ethics framework as being primarily related to financial disclosure practices at the Fund and not to the Board Code of Conduct. Likewise, no ED reported having attended a Board information session with the IMF Ethics Officer; information sessions, while initially held following the 2008 evaluation, have since been sporadic; and the 2009 revisions are not referenced, and 2012 investigation procedures are not incorporated in the Compendium of Executive Board Work Procedures.

Key takeaways. There have been considerable efforts over the past decade to strengthen the Board’s representativeness and influence in the decision-making process. While these efforts are generally appreciated as leading to distinct improvements, EDs and senior country authorities expressed concerns in areas identified in the 2008 evaluation.

In particular, concerns remain about the balance of influence across the Board, which leads to questions about representativeness and voice. While there has been a significant shift in shares and chairs which are now arguably better aligned with members’ economic weight in the global economy, this process remains a work in progress as discussions on the 15^th General Review of Quotas proceed. EDs appreciated opportunities for frequent interactions with Management and staff as a means for exerting influence going beyond the distribution of voting shares. Nevertheless, most EDs recognized the reality that not all EDs have the same weight in the eyes of Management and staff because, while the Board makes decisions by consensus, this happens only in the shadow of voting power. As a result, the views of Management and staff presented to the Board are likely to be more closely aligned with the interests of the largest shareholders, given the need to ensure support from the majority. EDs from smaller constituencies can exert more influence than provided by their voting share through skillful argumentation, but in the end voting share matters.

There is also a widely held perception that the balance of influence over IMF decision-making has remained weighed in favor of Management over the Board, notwithstanding efforts to engage with the Board earlier in the decision-making process. This balance seems to stem from a combination of structural factors that hamper the effectiveness and traction of the Board, and Management’s control over the decision-making process and information flows.⁴⁰ The Board’s effectiveness continues to be affected by the heavy workload and bunching problems. Short ED tenures limit capacity to build institutional knowledge, develop constructive relationships for consensus building, and challenge Management when needed. Moreover, capacity and resource constraints, including qualified staff, are sometimes a hindrance, particularly for those EDs representing large multi-country constituencies, with a heavy load of program-related work, and receiving limited technical support from capitals.

Management

Management selection. The selection process for Fund Management has remained a cause for concern. Despite changes to the nomination process for the MD, the outcome has continued to be the selection of an MD from an advanced European country. There were different views on why this has remained the case. Many interviewees still perceived the selection process as not fully transparent and merit-based as well as too limited by geographic preference.⁴¹ A number of EDs told the IEO that the continuing selection of a European as the MD shows that the so-called “gentlemen’s agreement” still holds sway. At the same time, other EDs observed that advanced European countries coordinated very effectively during selections, and that large emerging market countries would need to do the same and jointly support their preferred candidate in order to get a different outcome. A number of interviewees also suggested that a departure from the long-standing nationality convention would need to be addressed in the context of a broader reform on the selection of heads across IFIs.

Many EDs expressed concerns about the selection process for DMDs. While EDs are consulted by the MD on requisite qualifications and must ultimately approve the appointment contract of DMDs, most EDs noted that they have little real say given the MD’s prerogative to appoint. In the view of some EDs, this limited input constitutes a significant governance problem, particularly given DMDs’ extensive responsibilities, including as Acting Chair of the Board and their oversight of staff’s work. Moreover, there was a clear perception that nationality preferences have become entrenched, which could jeopardize merit-based selection and also means that there are very limited opportunities for possible candidates from most member countries in favor of a few very large countries. While understanding the institutional interest to ensure that major shareholders and financial contributors felt they were fully involved in steering the institution, the current situation was perceived by many EDs and authority interviewees as an anachronism that exposes the institution to performance and legitimacy risks.

Dual role of the MD. Several stakeholders suggested that the MD’s dual role, by which the MD is the Fund’s chief executive officer (CEO) and chair of the Board, is not in line with what is nowadays increasingly considered state-of-the-art governance practice and raises a number of issues.⁴² They argued, for example, that this arrangement constrains the Board’s role and tilts the balance of influence in favor of Management. Short of creating a new position of chair of the Board (which would require amending the Articles of Agreement), some interviewees considered the possibility of a stronger role for the Dean of the Board or establishing the role of “senior Board representative.” They suggested a reinvention of the position of Dean with more resources and responsibilities, possibly elected by peer EDs rather than being appointed according to seniority. This could help address some of the issues presented by the current framework, such as by helping coordinate among EDs, chairing the Board in the absence of the MD, or strengthening communications of the Board with SEC or Management.

Accountability to the Board. Views are mixed on whether Management has been sufficiently accountable to the Board. While some EDs reported in interviews that the MD has, in general, been sufficiently accountable, others thought that the current framework does not offer real accountability.⁴³ The mutual performance accountability exercise was widely perceived as a formality, with few practical implications, and some EDs reported not participating in the exercise. Many believed that the mutual nature of the framework, while an interesting way to learn, is not sufficiently effective as an accountability tool. They also believed that the Secretary and others’ participation in the discussion generated a conflict of interest. Many EDs believed the accountability framework should also be strengthened for DMDs to give the Board a more direct role in assessing their performance.

A recurring theme that emerged in interviews was the extent to which Management paid attention to different groups of countries. EDs from large economies generally reported receiving adequate and timely information, although at times they felt Management preferred to rely on direct contacts with principals in capitals. They also had no problem in challenging the views of Management and staff without fear of repercussions. EDs from other constituencies felt that they did not receive the same degree of attention from Management as their large country peers, while recognizing as a reality that the largest shareholders would naturally have greater clout. IEO analysis of data on Board chairing practices (see Appendix 3) suggests that the MD has focused on discussions aimed at facilitating consensus on issues of strategic importance to the Fund, while delegating her chairing authority to DMDs for non-systemic country matters. Such a practice may be conducive to the Fund’s efficiency and effectiveness, but at the same time has raised evenhandedness concerns among some EDs.

Key takeaways. The selection process for Management has remained a cause for concern for IMF governance. Notwithstanding some improvements in the nomination process, the outcome that the MD has continued to be a European has not changed. Moreover, an informal nationality convention seems to have become entrenched for the selection of DMDs, which could undermine transparency and the principle of meritocratic selection and expose the Fund to performance and legitimacy risks. The accountability framework for Management, based on a mutual performance assessment between the Board and the MD, is perceived by many as having little practical impact.

International Monetary and Financial Committee

Ministerial-level engagement. Board and authority interviewees expressed nearly unanimous skepticism about the need for, or practicality of, increasing ministerial-level engagement in the Fund’s governance. There was a general view among interviewees that, given their demanding national responsibilities, ministers and central bank governors already do as much as they can and should in providing high-level strategic direction to the Fund, and that the Board is the appropriate body to provide specific guidance and exercise shareholder oversight of Fund operations and policies. There was virtually no support for activating the Council.

Relationship between the Fund and the G20. The relationship between the Fund and the G20 has been complementary in many respects. Interviewees considered that the G20, with its Leaders’ track, had been effective when most needed in bringing high-level political support for the IMF’s response to the global financial crisis and subsequent shocks. In return, and given the absence of a permanent G20 staff, the Fund provided the G20 with useful analytical and policy support. It was also acknowledged that the G20 was much more inclusive than the G7, whose role in international economic coordination was now substantially reduced on most issues compared to earlier periods, and that the Fund’s relations with the G20 had been far more systematized than with the G7.

Despite its effectiveness, in the view of some EDs and authority interviewees (and one third of authority survey respondents), the G20’s influence was excessive and risked overshadowing the IMFC. There was particular concern among interviewees from outside the G20 membership about the G20’s lack of representation as compared to the universal membership of the IMFC. In some cases, there is consultation in advance of meetings and reporting back after meetings between the authorities of G20 members and those of non-G20 regional peers. However, such consultation is often informal rather than institutionalized and is not systematic. Concerns were also raised about the extensive overlap in the agenda and membership of the two bodies. In this respect, it was noted that language in the IMFC communiqué often follows language included in the G20 communiqué, approved a day or so previously.⁴⁴ Some interviewees noted that the G20’s traction as a premier global economic forum has moderated in recent years as the agenda has become more diffuse and given that the areas in which there was consensus for action is limited; however, this was not associated with a resurgence of the IMFC.

IMFC meetings. According to many interviewees, IMFC meetings remain of limited value to many participants. While organizational improvements were recognized, there was a general perception among authorities and EDs that the meetings were too formal, too choreographed, and suffered from a lack of unscripted interaction among officials at the highest level. In the view of some participants, the informal breakfast and Early Warning Exercise session—where participation is restricted and discussion somewhat freer—were the most useful venues. In the view of other participants, greater reliance on restricted sessions had reduced the interest in the IMFC of those principals not invited and had created information flow issues for some multi-country constituencies. The organization of IMFC meetings is subject to a difficult trade-off between inclusiveness, which is valuable for representation and broad ownership, and limited attendance, which is more conducive to candid discussion and the effective provision of strategic guidance. Authority survey respondents widely considered the IMFC a useful forum for a high-level dialogue on economic developments (three-quarters of respondents), but less so for the provision of strategic guidance to the Fund (less than 30 percent of respondents).

Key takeaways. There seems to be little support for a further increase in ministerial-level engagement, as it is generally viewed as already sufficient. Views are mixed on the relationship between the IMFC (more broadly, the Fund) and the G20, reflecting in part the difficult trade-off between effectiveness and representation that underlies the relationship. Moreover, the trade-off may change as the G20’s focus broadens and becomes less aligned with the Fund’s core mandate.

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