World Bank: Its Role, Governance and Organizational Culture

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The World Bank: Its Role, Governance and Organizational Culture
April 1994


The 50th anniversary of the founding of the Bretton Woods institutions in 1994 prompted a flood of initiatives aimed at assessing the role played by the World Bank and the International Monetary Fund and debating their future. Most of such reassessments begin by stressing how much the world has changed in the 50 years since both organizations were established. From the collapse of communism to the communications and transportation revolution, and from the radical transformation of financial markets to the population explosion, the inventory of the new conditions under which the Bretton Woods institutions have to operate is certainly long. The implication, of course, is that the institutions should adapt their goals and policies to the new realities and then reorganize accordingly.

It will not be that easy. Among other reasons, adapting goals and strategies effectively to new conditions requires a shared view of the fundamental purpose of the institutions. Even though the purposes of the Fund and the Bank are often stated in official documents, the expectations and the behavior of the different groups with influence over their policies frequently tend to reflect very different assumptions about these fundamental purposes.

There are significant differences among the governments that "own" the Bank and the Fund. Top managers and the staff of the institutions have different views about the core purpose of their organizations and, needless to say, public opinion is also divided. Many of these differences have little to do with the changes in the environment in which the Fund and the Bank have to operate.

In the case of the World Bank, the lack of consensus about its basic mission, limitations in its governance system, and other conditions have led to a proliferation of goals-which in turn has had important organizational repercussions. Furthermore, the size, complexity and relative independence of the Bank create a substantial margin for inconsistencies among its environment, its strategy, and its organization. Usually, competitive pressures do not leave decision-makers much choice but to adapt goals and strategies to environmental changes and to make the necessary internal adjustments to support the new strategy. But, without intense competition, or other external challenges, organizations like the Bank-large, complex, relatively autonomous, and with a significant capacity to influence its environment-can postpone, or even avoid, the difficult decisions required to minimize incongruities between strategy and internal organization. They can often afford the added costs and inefficiencies that result from the ineffectiveness of an internal structure whose objectives and policies do not respond adequately to the new external threats and opportunities. Furthermore, in large organizations, the structure, operating procedures and systems, internal culture, inertial behavior, and other such factor end up shaping the strategy, not vice-versa. Therefore, while the World Bank will certainly have to adjust its policies and operations to new challenges, its internal structure will significantly constrain the range of strategies it can consider seriously or implement effectively.

These are the themes of this paper. Its central message is that while the anniversary of the Bretton Woods institutions will generate many welcome reappraisals, evaluations and proposals about new roles, objectives and policies, a major reconsideration of the way in which they are governed and the internal factors that influence the Bank's performance is also in order. The Bank urgently needs a more focused mission and a smaller number of operational priorities. Designing the process through which priorities are defined may well be more important-and difficult-than coming up with a new mission or new goals for the Bank. The new circumstances faced by the Bank also call for changes in its organizational culture. The "privatization' of the Bank's culture means more competition and more emphasis on external results than on internal priorities Greater attention and proximity to the clients is also recommended.

The Bank's Role: Different Definitions, Conflicting Expectations

The lack of consensus about the World Bank's specific role (and how it should be translated into an operational mission, measurable objectives, and policies) has burdened the institution for years. Differences of opinion about the fundamental role of the Bank go beyond the fact that some shareholding countries borrow from the Bank while others provide the funds.

While there are many expectations and definitions of the fundamental role of the Bank, four different models or perspectives are the most common. The first is the view that the World Bank is a financial intermediary, the Bank-as-a-bank model. A second perspective or model is the view of the Bank as an evangelical agent in charge of changing the behavior of governments in developing countries. The fourth is the view that the World Bank is a mechanism to transfer financial resources from richer to poorer countries.

From the Bank-as-bank perspective the World Bank's role is, quite simply, to be a bank. Therefore, maintaining the institution's long-term financial integrity is a crucial purpose on which all other goals depend. The second model views the Bank as an instrument for the advancement of the national interest of the countries with more influence on its decisions. Such national interest is expressed in their policies towards other countries, in procurement goals for their companies in projects financed by the Bank, or even in expanding employment opportunities at the Bank for their nationals. The third is the evangelical model. A growing constituency sees the Bank's combination of money, access, knowledge, and expertise as a powerful instrument to convert the souls of governments implementing misguided public policies. This is, in fact, a more concrete manifestation of the expectation that the Bank's main role is to support a liberal (or market-based) economic system, as expressed in the promotion of liberal trade and investment regimes.

Another version of this approach sees the Bank as an instrument for the promotion of values not readily accepted by the traditional power structures within developing countries. Increasing investment in and attention to women, environmental protection and better governance in terms of respect for human rights or accountability and transparency in government decisions are the prime examples of the sort of objectives that flow from this perspective of the Bank's role.

Still others maintain that the advisory and "imprimatur" roles of the bank will grow even faster in the future, as economic and institutional constraints will increasingly limit its role to act as a financial intermediary. The argument is that the Bank's accumulated developmental expertise and its capacity to generate and disseminate policy-relevant knowledge have been gradually replacing its financial resources as its main assets. As donor countries face increasing fiscal constraints and aid budgets cannot cope with mounting demands, the Bank's capital will not grow as fast as the needs of the borrowers. This trend will presumably accelerate in the future, pushing the Bank towards its knowledge-intermediary, research-center, consulting-company role.

Finally, the fourth widely held view is that the Bank exists to transfer resources to poor countries. It is impossible, according to this view, for an institution that has the promotion of development at the core of its existence, not to have the supply of capital to developing countries as its basic function. This perspective stands in sharp contrast with the first model, which takes the view that the Bank is a financial intermediary.

The assumption that the Bank is, first and foremost, a bank leads naturally to the assumption that it is an institution that has a fiduciary responsibility to its depositors and has to administer its loan portfolio accordingly. The Bank raises funds in the capital markets at premium interest rates thanks to the guarantees provided by its shareholding governments and government guarantees it secures for the loans it makes. It then lends these funds to developing countries at lower interest rates that those they would normally secure on their own.

But for those who assume that the Bank exists to transfer badly needed resources to poor countries, having its essential purpose defined as that of a financial intermediary is confusing means and ends. For the resource-transfer model, development is the objective and finance the instrument. Therefore, it assumes that the bank is a developmental institution first and a financial intermediary second. The Bank-as-bank perspective responds that while this may be true, in practice, if the capacity of the Bank to raise cheaper funds from international financial markets is impaired, money for all the other developmental objectives will be less readily available.

The resource-transfer perspective counters by stressing the need for the industrialized countries to do more for developing countries. In its more extreme formulation, the resource transfer model of the Bank leads to a view that expects the institution to resemble less a bank than a fund that must be periodically replenished by its richer shareholder-donors. In fact, this is the role played by the Ban's concessionary credit arm, the International Developmental Association (IDA), which instead of loans gives "credits" to the poorest countries (defined as those with per capita incomes of less than $1200 per year), charging only a small "service fee" and no interest rate. But according to the resource-transfer perspective, IDA's geographical and financial scope is too narrow. It argues that more money to more countries should be transferred if the developing world is going to have a serious chance to overcome its immense obstacles. Furthermore, in recent years this "resource transfer" role has been declining. The Bank's net disbursements have tended to decrease substantially and, in some developing regions, the Bank often extracts more funds that it transfers. The "negative net transfers" of the Bank to the developing worlds have thus become the focal point of most of the speeches of the Governors of the Bank representing borrowing countries at their annual meetings.

But, for those assuming that the World Bank is a bank, negative transfers should not be a cause of alarm. According to a Bank official,

I think it perfectly normal that after a period of strong growth, the Bank has now reached a period of maturity. The bank's exposure cannot be increased without significant dangers for the rating of the institution by financial markets. It would be dangerous to define any net transfer target, since it would mean that the bank would constantly increase its exposure and, in practice, refinance its own interest charges. I would insist on strengthening the balance sheet, both on the asset side, improving the quality of the portfolio, and on the liability side, building a stronger capital base through larger provisions for losses and more reserves.

Such widely differing assumptions about the basic role of the World Bank naturally engender very different visions about its goals and policies. The standards by which to judge the organization's performance or the changes needed to respond to new problems are also very dependent on the assumptions about the Bank's role. The quality of the bank's loan portfolio, for example, should not be the top priority if the main operational goal is to approve as many loans per year as possible. This is the resource-transfer model. If, instead, maintaining a top credit rating for the Bank by financial markets is seen as a condition without which its other developmental objectives cannot be achieved-the Bank-as-bank model-then the quality of the loans becomes a central objective. Therefore, transferring resources to clients should not take precedence over the quality of the loan portfolio.

Some also argue that these two objectives need not be mutually exclusive and that the quality of the portfolio can be interpreted simply as an operational constraint on the goal of maximizing the resources transferred to borrowing countries. But part of the difficulty in the debate over the Banks role and objectives is that what for some are objectives for others are means-or policies-to achieve other, higher order goals. For some, transferring resources is the goal. For others, poverty reduction is the goal and transferring resources-including knowledge-is a means to advance towards that objective.

Lending to the countries of Eastern European and the former Soviet Union provides a very illustrative example of the practical repercussions of the lack of consensus over the Bank's role. The World Bank (together with the IMF) has been publicly criticized by some governments in the G-7 for not reacting quickly enough to the needs and the emergencies of these new clients. This accusation is valid for those who think the Bank's role is to transfer resources to its clients. It is invalid, however, for those who think the Bank is a bank, as some G-7 governments have stated. This example is also cited by those who hold the view that the Bank is simply an instrument to advance the interests of its more influential shareholders. From this viewpoint, even the adoption of the different perspectives about the fundamental role of the Bank by the more powerful shareholders responds to their circumstantial interests and, therefore, changes through time. Proponents of this perspective cite as an example the fact that the same countries that had urged caution and restraint in the Bank's actions during the debt crisis-citing the need to imperil the Bank's financial integrity-had no qualms in checking these sound financial principles at the door when pressing the Bank to take immediate and massive actions to aid the former Soviet Union.

The consequences of the lack of consensus among its owners about the fundamental role of the World Bank have become more visible in recent years as a result of changing international circumstances, notably the end of the cold war. But different views about the basic function of the Bank have shaped its evolution since its inception, and will probably continue to coexist in the foreseeable future. Development is a multifaceted process and the shareholders of the Bank are political actors subject to simultaneous contradictory pressures. This obviously limits the Bank's capacity to focus its efforts. As a senior bank official put it,

These different views are held by the same sets of shareholders-indeed, often by the same shareholder. Which view predominates depends on the subject and time. An institution that gets such diverse and variable guidance as a steady diet will have problems in focusing on fewer objectives far greater than those created by internal constraints…

The Purpose of the World Bank: From Mission Ambiguity to Goal Congestion

Growing needs and external expectations, rapid changes in its environment, and a governance structure that inhibits a more sharply focused strategic agenda have naturally led to mission ambiguity and goal congestion.

Officially, poverty reduction is-as constantly emphasized by the Bank's official statements-the fundamental purpose of the institution. But the very different ways through which this goal was pursued over the years, the growing diversification of the Bank's more operational priorities, and the highly political nature of the agenda-setting process, have eroded the usefulness of poverty alleviation as the anchor providing a solid grounding against the strong pressures for diversification. AS a result, while knowing that poverty alleviation is the official line, Bank staff hold as diverse views as those outside the institution of what in reality the Bank's mission is-and ought to be.

The Bank's charter, drafted in 1944 and called "Articles of Agreement," defines five purposes for the institution but does little to clarify the goals. Three purposes provide some general strategic direction and two have a more operational orientation. According to the Articles of Agreement, the three strategic purposes of the Bank are: 1) to help member states to reconstruct and develop by facilitating capital investment; 2) to promote foreign private investment, and 3) to promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments. This should be achieved by encouraging international investment aimed at mobilizing domestic resources and thus "…raising productivity, the standard of living and conditions of labor." The other two, more operational, mandates in the Articles emphasize the need to coordinate with other lending agencies and the need "to conduct its operations with due regard to the effect of international investments to business conditions…"

These purposes have been interpreted in a variety of ways in the last half-century. In his writings, even the Vice-President and General Counsel of the Bank wonders how, in this changing environment, the Bank managed to avoid having to modify its constituent charter in any significant way. His explanation is that,

This is in large part due to he broad scope of the Articles of Agreement and the extensive power of the Board of Directors to interpret these articles.

After its role in postwar reconstruction, the Bank concentrated in financing infrastructure in developing countries. It eventually became a major source of financial and technical assistance for the newly formed governments of the former colonies that gained independence in the 1950s and 1960s. In the early 1970s, poverty, rural development, support for agriculture and concerns about population issues gained a significant prominence in the Bank's agenda. In the 1970's the financing of industrial development -often to state-owned enterprises-intensified. The debt crisis propelled the IMF and the Bank into center stage and gave rise to policy-based lending: loans disbursed in exchange for policy reforms aimed at correcting macroeconomic imbalances and boosting the productivity of the economy through structural reforms. The last decade of the century finds the Bank with a growing consensus about its developmental doctrine-the "market-friendly" approach-and with the challenge of figuring out how to deliver on the environmental front and how to minimize the costs of the transition out of centrally-planned economies. In 1992, the Bank's region-oriented organizational structure was complemented with the creation of three new, goal-oriented vice presidencies dealing with the environment, the development of the private sector and poverty and human resources (health, education etc.)

Throughout this evolution, as the Bank adopted new goals, it never she its previous ones. This created a "sedimentary" approach to goal formulation that clearly contributes to its congestion. New goals were adopted not only as a result of the Bank's own propensity to grow and diversify. Pressing needs were certainly there and few other institutions have been available to tend to such needs. In other cases, existing institutions were perceived as inadequate. For example, widespread disappointment with the performance of other agencies of the UN system increases the pressures for the bank to intervene, and more happily than grudgingly the Bank often obliged. As the institutional decay of UNESCO intensified and donor frustration about their lack of control over it increased, the Bank boosted its efforts at assisting countries in education and science. In health, child nutrition, population, industrial development, trade policy, agriculture, technical assistance and, more recently, the environment, the Bank's expansion was often justified by the need to "complement" the efforts of UNICEF, the UN Fund for Population, UNCTAD, UNIDO, FAO, UNDP, or the UN Environmental Program.

Goal congestion at the Bank was also intensified by the growing influence of legislatures in donor countries which, in turn, have become much more sensitive to the pressures of non-governmental organizations (NGOs) than was the case just ten or twenty years ago. The explicit incorporation of the environment or the role of women in development into the Banks; agenda and the growing concerns in the Bank's operations for issues like human rights, military expenditures, the quality of governance in borrowing countries, democracy, corruption and the like, owes itself in no small measure to the active role of NGOs and congresses.

Practical realities are also shaping the Bank's agenda. As countries privatize most of their state-owned firms, some clients are inevitably lost. In the past, Bank loans were often used to establish or expand these companies. So, paradoxically, while the Back could provide funds to a country to upgrade an electricity company, the Bank cannot lend directly to it once the company is privatized because it does not have a sovereign guarantee. The International Financial Corporation (IFC), the subsidiary of the Bank that invests and lends to the private sector in developing countries, does not have the capital base to cover huge needs in private infrastructure investments that are being faced by these counties.

Another important reality that is bound to shape the Bank's agenda is the growing integration of capital markets and increasing capacity of successfully reforming countries to access these markets directly. Countries that have been successful in stabilizing their economies and achieving a substantial degree of political and institutional stability, can now secure through the international capital markets the funding for projects that in the past could not only be financed through the World Bank. Developing countries perceived as good risks will increasingly be able to access funds from international capital markets under conditions that are competitive to those offered by the Bank. This, of course means that the Bank's portfolio will be increasingly concentrated in the more unstable and, therefore, more risky, countries or projects. Again, some may regard this as a very positive evolution and as proof of the Bank's effectiveness. Others, instead, will worry that in the long or even the medium run this trend could impair the capacity of the Bank to operate.

The Bank's Governance System: From Constructive Gridlock to Dysfunctional Stalemate

One of the reasons for the Bank's accumulation of goals is that its governance system is not very good at sorting out priorities, at least formally. Once an objective is incorporated as part of the Bank's agenda, it becomes almost impossible to delete it from the list. Political factors, organizational inertia and the way strategic decision-making is formally organized make it very difficult to explicitly exclude an item from the Bank's priorities. One of the more insidious effects of this goal-overload is that it impacts more negatively the weaker countries. Countries with little bargaining power have to accept the conditions and objectives that, in a given period, acquire great visibility and priority within the Bank. Instead, stronger countries can-and often do-manage to persuade the Bank to be more lax on conditions that are not central to the loan being negotiated.

Given the practical impossibility of incorporating into all the operations the complete set of priorities that may form part of the Bank agenda at a given time, and given that these priorities vary through time and that it is politically difficult to formally announce that the Bank is dropping one of its priorities, the solution has been to reduce their importance tacitly. When this happens, budgets assigned to these objectives stagnate or shrink, the frequency with which they are expressed in actual operations declines, visibility and internal status of the staff working on them decrease and, in general, the staff becomes rapidly aware that these are not the issues on which successful careers are built. While this mechanism lacks transparency, over the years it has served the purpose of containing what otherwise would be an even more confusing and wasteful accumulation of goals.

In many aspects the governance system of the Bank has worked well. Even its more scathing critics recognized that the Bank has been able to avoid some of the profound governance and management problems that plague other multilateral organizations. The Bank's reaction to the debt crisis, to the need for a more balanced use of markets and states in development, to the need for more effective protection of the environment to the challenges posed by the transition of the former communist countries, are for many objective observers, the most effective responses possible under prevailing circumstances. To others these are misguided policies that actually harm borrowers, fleece donors, or even manage to combine both effects. Still, most of these critics accept that the Bank's accumulation of technical capacity on issues relevant to developing countries is one of the best in the world, if not the best.

While political considerations often shape the Bank's decisions, technical considerations and objective criteria also play a major role in the decision-making process. In fact, it is not rare for political pressures to be deflected by technical arguments. The promotion of staff, especially at the higher levels, is certainly influenced by the political dynamics typical of all large organizations. But the Bank has been able to avoid the blatant patronage and politically motivated recruitment that are often in quasi-public bureaucracies. Careers advanced on the Bank's internal merit system continue to be much more frequent than those based on the influence of shareholders.

Balancing the political nature of the institution with a strong technical orientation was, after all, one of the main objectives of the drafters of the Bank's charter. The design of its governance system reflects the attempt to isolate as much as possible the Bank's operations from the interference of shareholders. These are represented by the Board of Governors, composed by cabinet members or governors of central banks of the shareholding governments. While all the powers of the Bank are vested in the Board of Governors, most of them are delegated to the Board of executive directors. The only decisions that, according to the Articles, are not delegated to the board are the admission of new members or the suspension of a current member, the increase or decrease of the Bank's capital, the establishment of permanent arrangements of a non-administrative nature with other international organizations, the allocation of the net income (profit) and the termination of the Bank. As already noted, any question of interpretation of the provisions of the Articles has to be submitted to the executive directors for their decision.

The Articles of the Bank also provide for an "Advisory Council" (Article V, Section 6). The Advisory Council met twice and then fell into disuse despite the Article's admonition that it "meet annually." Another advisory body, the Development committee, established in 1974, is formed by a subset of the Governors of the Bank and the IMF and meets twice a year to discuss matters relating to the "transfer of resources to developing countries". Originally, it was envisioned to be, if not a counterpart, at least as a parallel body to the "Interim Committee" of the Governors of the IMF. While the IMF committee issues a communiqué that on occasion has had some important repercussions on international financial markets, the statements of the Development Committee have rarely provided more than general expressions of concern about the conditions of poor countries and vague exhortations about the actions needed to improve such conditions. It would be very hard to argue the Development Committee really provides any concrete guidance or has any significant influence in shaping the Bank's operations or that its meetings are much more than a wasteful ritual.

In any case, the drafters did envision that ministers acting as Bank governors would have to rely on their envoys at the board for overseeing the Bank's functioning. The drafters probably envisioned a board with more influence than it has had in practice over the years. In fact, the first president of the Bank, Eugene Meyer, resigned a few months after his appointment over what was, in his judgement, the excessive interference of the board. One of the most polemic provisions in the Articles of Agreement is that,
The Executive Directors shall function in continuous session at the principal office of the Bank and shall meet as often as the business of the Bank may require.

This can be interpreted merely as an organizational arrangement. But it really was an attempt to resolve a major political dilemma: how to make the organization accountable to its shareholders while at the same time protect its operations from their undue political interference. The answer was to internalize the political body in charge of overseeing the institution. A board with almost all the powers in the institution but without operational responsibilities and composed of full-time political appointees of the shareholders, certainly appears to be a legitimate oversight mechanism. At the same time however, the executive directors were made, for all practical purposes, employees of the Bank. They worked there full time and their salaries and other employment condition were those of the Bank and not those of the governments they represented. The hope was that under such an arrangement, the executive directors would become "part" of the institution and therefore would behave less like ambassadors representing the interests of their country and more like trustees with the long-term interest of the Bank as the value guiding their decisions.

While many other factors contributed to endow the Bank with a significant degree of relative autonomy, this arrangement clearly helped. The full-time board provided a buffer from unwarranted external political influences and allowed internal merit criteria and objective technical standards to flourish and become well embedded in the culture of the organization. This orientation was also supported by the Articles, "Only economic considerations shall be relevant [in the Bank's] decisions, and these considerations shall be weighed impartially in order to achieve the [Bank's] purposes."

The actual influence of the board varied over time. From the personality of the president of the Bank (who is also the Chairman of the Board) to geopolitical and international economic conditions, many different elements defined the power that the board wielded in practice. However, in the second half of the Bank's existence, the influence of the board has been waning, while the power and independence of the president and administration has increased.

Many factors account for this decline in the actual power of the Board.

Size. From 1944-1994 the Board doubled in size (from 12 to 24 executive directors) as a result of the World Bank becoming a truly global institution (its member countries grew from 44 to 176 in 1993). This increase in size made directors a more heterogeneous group, thus making their integration and cohesion more difficult.

High Turnover. Directors are appointed for a two-year, renewable period. In practice, the average tenure has been around three years, but the majority (65 percent) leave before three years. Obviously, some directors, especially those representing only one country tend to stay for much longer periods. Even though the number of the members of the board has increased, the number of Directors representing a large number of countries has also increased as more countries joined the Bank (the executive director of one of the African chairs, for example, represents 25 countries). This has meant an increase in turnover, as countries are eagerly awaiting their turn in the rotation in their group to appoint one of their nationals to the Board. Thus, reappointments after the first two-year term is completed, are decreasing in frequency. The acceleration of political change in both borrowing and non-borrowing countries has also contributed to a more frequent replacement of executive directors, even though, formally, once appointed they cannot be removed by their authorities until the two year period is completed.

Complexity. While the tenure of the directors is short and decreasing, the complexity of the operations they have to oversee is high and increasing. The volume and complexity of the Bank's work makes it very difficult for directors to be informed and effective participants in all of the discussions where Bank policies and decisions are made. Even though the support staff (alternate directors, advisors, assistants, secretaries, etc.) of executive directors has expanded substantially, and some directors receive additional support from public agencies in their capitals, the volume and the intricacy of the work has expanded even more. In the two or three years that most directors stay at the Bank, it is impossible, even for the few that have a good prior understanding of the institution, to master the overwhelming array of complex issues on which they are supposed to develop an independent opinion.

The Functioning of the Board. The procedures guiding the functioning of the board are woefully outdated and, in fact, reduce the influence of the board by making it inefficient and often irrelevant. The difficulty that the board has traditionally exhibited in modernizing its ways and means and increasing its relevance is an excellent example of the decision-paralysis that plagues its operation. In essence, executive directors spend their time at board meetings (twice a week the entire morning and often the entire day), being briefed by staff, in committee meetings, receiving delegations from their constituent countries or reading the materials for the next meeting. It took almost two years of prodding and debate for the board to reluctantly agree-in 1992-to reform some of its procedures, streamline its functioning and increase the policy-relevance of its discussions. While these changes implied a significant progress in comparison to the previous situation, they still fell very short of the more drastic revamping needed to adjust the board to the circumstances faced by the Bank.

From this perspective it is even easier to understand why, in an institution with a board that has such difficulty deciding how to modernize the way it operates, decisions what focus more sharply the Bank's priorities would be close to miraculous.

A Divided Board. It is not clear how much the directors were able in the early stages of the Bank, to tilt the balance of their dual loyalty towards the Bank and avoid the interference of circumstantial interests of their countries with the Bank's long term health. It is, instead, very clear than in latter stages this balance shifted toward the more "ambassadorial: model of behavior. Directors receive explicit instructions from their capitals, actively lobby for the appointment of their fellow nationals to top management positions or for easing the conditionality of a loan to one of the borrowing countries in their constituency. While the east-west divide somewhat influenced alignments in the board, the most important cleavage was - and is - between directors representing borrowing and non-borrowing countries. Given that non-borrowing countries. Given that non-borrowing countries are the majority owners of the Bank, their policy preferences are determinant and tend to be communicated directly to the staff or interpreted in advance by it. For many fundamental policy issues, this shifts the arena for decision making - or at least for the building of a sufficient agreement - out of the boardroom and into the offices of the largest shareholders, and notably to those of the neighboring US Treasury. The G-7 summits or the series of meetings of representatives of donor countries (the IDA's deputies) that center around the replenishment of IDA's funds, often have much more impact over the Bank's policies and priorities than an entire year of board meetings.

The debates that do take place in the board often tend to be divided along a predictable line between what, in the Bank's jargon, are called part 1 (non-borrowers) and part 2 (borrowers) countries. This trend has created an internal culture in the board, where executive directors representing borrowing countries almost never criticize -or, even less, oppose-a loan, regardless of how poor the project may be. On the other hand, some part 1 directors, attempting to compensate, occasionally overstep, creating time-consuming discussions that rarely result in major modifications of the project.

With the incorporation of the former communist countries into the Bank, the number of directors representing "mixed-constituencies" with both borrowing and non-borrowing countries has also increased. Together with the eventual consolidation of European integration and other such groupings elsewhere, it is likely that the traditional coalitions within the board will be replaced by new ones. The likelihood of a less divided board, however, is very small.

The Quality of the Board. It is never easy to have objective assessments of the overall quality of a human group, other than those related to its measurable performance. Give that the board has no formal responsibility for concrete results, its performance is impossible to evaluate objectively. Nonetheless, the generalized, and admittedly subjective, anecdotal and perhaps even uninformed perception among observers is that the caliber of the board has tended to decline. While this may well be an unfounded and slanderous evaluation, the fact is that there are many factors negatively affecting the recruitment patterns of executive directors. First is that, perhaps as a result of the increasing perception of the board as a rubber-stamping, powerless and inefficient body, the status of executive directors has decreased. Second, the position of the Bank (or IMF) executive director has been increasingly "captured" by the bureaucracies of shareholding governments. The post has been incorporated - explicitly or implicitly - in the organizational charts, career plans and expectations of the bureaucracies in charge of the Bank in its shareholding countries. This has often lessened the political influence of the director is his or her home country as its communications and instructions are usually managed by "handlers" in the bureaucracy that are normally not at the higher levels of government. In contrast, the Bank's top management usually has direct and frequent access to ministers and heads of state.

The Growing Autonomy of the President and the Administration. It is not surprising that, under these circumstances, the relative balance of power between board and managers has been shifting away from the board. A divided board of overwhelmed directors, many of whom cannot afford to irritate the Bank's management, and usually leave by the time they begin to be more effective, is no match for a usually brilliant group of professionals with decades of experience at the Bank.

Some argue that maintaining an ineffectual board can serve some valid objectives, such as maximizing the Bank's autonomy. In the long run, however, all institutions suffer if the body to which they are formally accountable is not effective or credible, or if its influence or shareholders is lower than that of management.

In all organizations, finding an adequate balance in the relationship between the board and management is difficult. If boards coddle management and depend too much on it, their effectiveness is eroded and the institution is not well served. Situations where boards are too antagonistic to management are equally harmful, even though a certain degree of tension between the board and management is inevitable and should be welcome. Management everywhere has a natural propensity to maximize growth, autonomy and its scope for operations. Shareholders and their representatives tend, instead, to be more worried about minimizing risk, exposure and the need for the next capital increase. When well managed and organized, this contradictory relationship between board members and managers can become the source of great strength for any organization. When this is not the case, it can lead to an environment of distrust, resentment, and inefficiency and could even reach the point of inducing fundamental distortions in the behavior of the institution.

It is increasingly obvious that some of the explicit rules and informal arrangements that now govern the relationship between board and management at the Bank are perilously outdated. Rituals, rules, and procedures that in the past provided adequate solutions for specific involving the role of the executive directors, or served to define expectations and realities about the division of responsibilities between top management and the Board, are losing their effectiveness at great speed.

The Influence of the G-4: The Impact of the Unwritten Rules.

While the G-7 has a substantial influence in shaping the content of the policies pursued by the Bank, the G-4 effect greatly shapes the way these policies are executed. The G-4 is not a grouping of countries. It is the designation of the US visa that non-US citizens on the Bank staff hold as long as they are employed by it. Together with other benefits to which Bank employees are entitled, it creates a critical dependency on the Bank and significantly shapes its internal culture. In turn, the organizational culture of the Bank affects policy implementation and creates internal rigidities that limit its range of strategic options.

More than 60 percent of the almost 7,000 people employed by the Bank have a G-4 visa. Upon termination of their bank-sponsored residency they-and their family-have only a few weeks to leave the United States (as do their nannies and housekeepers with the G-5 visa accorded to the foreign household employees of the G-4 holders).

Losing a job is always a traumatic experience. The trauma increases with the length of the tenure in the job being lost (average tenure at the World Bank is ten years and a large number of staff is recruited at mid-career, when they are in their late thirties and early forties). When the job loss also entails the instantaneous loss of the G-4 visa, the tax exemption status, education and health benefits and the rest of the prerequisites enjoyed by Bank staff, losing a job at the Bank becomes an event of catastrophic proportions. This extreme dependency transcends foreigners, affects all the staff equally and is a pervasive and crucial element of the Bank's culture. The Bank pays very well and offers benefits that are not easily found elsewhere. Furthermore, for many, the Bank is one of the few places in the world where there is a demand for their highly specialized skills. The point is that the "G-4 effect" is a metaphor for an institutional characteristic that makes Bank staff more dependent on their employment by the Bank than is normally the case in other professional organizations where job mobility is less rigid and traumatic.

Therefore, while job retention tactics influence behavior in all organizations, at the Bank, such tactics acquire an importance that overrides all other concerns. The G-4 effect greatly heightens the importance of office politics. It stimulates the emergence of clan-like groups whose members support and promote each other in a muted but intense rivalry with members of other clans. It encourages the building of informal coalitions and mutual support groups, raises the aversion of individuals to taking risks, and increases the resistance to organizational change. The sensitivity to unwritten rules of behavior is amplified and the importance of informal but deeply grounded routines, codes, and values create a very powerful organizational culture. Together with the significant autonomy the Bank enjoys vis-à-vis its clients, the Bank's culture makes promotion and job stability much more dependent on the person's internal reputation than on the opinions of those outside the organization.

A strong internal culture has many positive effects. The widespread attachment to common, albeit unwritten, values and implicit codes of conduct makes an organization more cohesive. In as large and complex an organization as the World Bank, which is subjected to powerful centrifugal forces that erode cohesion and make internal coordination very burdensome, a shared culture acts as a glue that helps hold together the disparate pieces of the system. But a strong organizational culture is also a formidable impediment to the internal changes that all organizations have to undertake periodically to adapt to changes in their environment. A strong internal culture is seldom the factor that prevents the adoption of a new organizational structure. But a strong culture can certainly undermine the effectiveness of any new arrangement that, while attuned to the new environmental demands, may run counter to the tacit understandings that are embedded in the organization and are critical in shaping its functioning.

Staff "knows" that, in order to progress in the Bank, ideas are more important that actions, solid technical writing is more important than public eloquence, economic reasoning is respected while "soft," sociological-type analysis is belittled, and the opinion of colleagues and others in Washington matters more that the opinion of clients. Staff also knows that concentrating on one problem or one country for too long is too risky and that, therefore, moving every few years is necessary for rapid career advancement. The organization has also learned from experience that every new president reorganizes the Bank and that, given the periodic reshufflings, it is important for employees to build self-protection mechanisms. Becoming an accepted member of one of the many pyramidal clans that exist at the Bank and that usually have a senior manager at their apex is therefore a good idea. So when a new president arrives and moves boxes around in the organizational chart, in practice he has been moving the different informal clans. The arrangement of boxes may look different. But after some time, the same general clusters of people tend to regroup, replicating in the new arrangements their same old values, habits and operating styles. Thus, actual behavior inside the boxes is not likely to have changed much.

Given this internal culture, it becomes only natural for Bank staff to have an internal-inward looking-set of organizational values and habits. Under the circumstances prevailing at the Bank, it is crucially important for staff members to concentrate attention on what others inside the Bank are up to and to build a constituency of contacts, friends, allies, and mentors throughout the organization. Again, this propensity is not exclusive to the Bank and can be found in most large, multinational, organizations. But very few other organizations have the combination of extreme job-dependency, lack of competition and aloofness from the clients that allow the internal culture to be as self-absorbed as that of the Bank.

The Strong internal orientation of the Bank's culture is reflected in actual practices. An internal-albeit limited and not statistically representative-study showed that during a specific week a division chief spent 81 percent of the time interacting with colleagues (52 percent) or documenting his or her work (29 percent). Time spent interacting with borrowers: 2 percent. According to the same preliminary study, a task manager also spends about 80 percent of the time talking to others (36 percent) and documenting the work (45 percent). He or she also spent more time with borrowers than a division chief: 7 percent in total. Perhaps this much interaction with others at the Bank has something to do with the long time it takes to approve a loan. A survey of 12 projects showed that, on average, it took slightly more than 300 days for a project to move from its initial appraisal to its approval by the board.

Quality control, project complexity, weak borrowing institutions, overwork, and congestion at the Bank are very likely to explain such long gestation. But it is hard not to suspect that what we have called the G-4 effect may also have something to do with the number of meetings and time spent "interacting within the Bank."

Paradoxically, internal incentives-in an institution that has the promotion of the private sector as one of its main priorities-are not very dependent on results. The long gestation and execution of projects and the shorter time spent by staff in any one position make it almost impossible to link individual performance with practical results. In the rare instances where problems are clearly attributable to mistakes made by the Bank, the staff members responsible for the problem have long since moved on to another department and might have even been promoted to senior positions.

The implication of these observations is not that the Bank's performance can be improved by changing the visa status of its non-US employees. It is, rather, to use the G-4 effect to highlight the importance of subtle but powerful forces acting within the Bank and that are often ignored when discussing grand plans about the Bretton Woods institutions. In practice, these almost invisible factors often get in the way of such grand designs. The challenge is how to alter the more dysfunctional aspects of the Bank's culture without losing the advantages derived from the strong sense of attachment, long-term commitment, and institutional loyalty that is common among its staff.

Conclusions: A Focused Mission, Better Governance and the Privatization of the Bank's Organizational Culture

The fact that the 50th anniversary of the Bretton Woods coincides with a time of radical changes in the world order will certainly inspire bold new ideas. New institutions will be proposed, as will drastic redesigns of existing ones. Reality, however, is very likely to foil the actual adoption of radical changes. Effecting radical change requires a degree of consensus and international leadership that does not currently exist. In the 1990s the world lacks a rallier of nations that can mobilize the many governments crippled by weak electoral mandates, rising unpopularity, and severe domestic problems.

This does not mean that major progress cannot be achieved in improving the relevance of the Bank to new world conditions. Some of the changes may be viewed as too small or "managerial" for a time calling for revolutionary measures. But concentrating in these "small" changes has the advantage that they are much more likely to generate a return. Also, while small in comparison to grandiose ideas they may, in fact, be quite a revolution compared to the current situation.

A step in the right direction, for example, would be to build a wider consensus about the precise role of the Bank. For this exercise to yield a more focused strategic direction, it is as important to define what the Bank should not be expected to be, as to define a more precise role for it. In theory, clarifying the primordial nature of the Bank's constituencies, the variety of expectations and needs to which the Bank has to respond, the confusions resulting from the many and simultaneous political, economic and institutional changes that are currently taking place in the world, and the subtle but powerful internal forces that shape the organization's behavior.

Coming up with a reasonably valid statement about the Bank's role and the operational mission and goals that flow from that role is certainly necessary. We will not, however, attempt to do so here. It is almost irrelevant to define missions and principles without also ensuring that such definitions will really serve, in practice, as the generally accepted principles that guide the Bank's operations and its interaction with the external environment.

From this perspective, the process through which roles, missions, and goals are debated, sorted out and eventually adopted, is as important and merits as much, if not more, attention than the definition of a statement that may sound right to those proposing it.

For this process to be relevant-or even possible--significant changes in the governance of the World Bank should take place. Hurried governors cannot be expected to become too distracted with Bank affairs. But an enlightened group of governors could decide that it is high time to take more effective action and upgrade the governance system of the Bank. Among other measures, they may consider the following:

• Strengthen the role of the Governors. Ministers should be enrolled more effectively and systematically in the governance of the Bank. It is probably a good idea to have an executive committee of governors to provide long-term political guidance to the Bank. This proposition may sound simple and obvious enough, but in practice, it is legally and politically burdensome and very difficult to implement. It requires that the constitution of the Bank be modified and that almost 200 countries agree on a subgroup of governors to represent all of them for a given period. Nonetheless, and despite these and other difficulties, a mechanism must be found to strengthen the goal -setting and oversight roles played by shareholders. One small step in that direction could perhaps be the redefinition of the structure and the functioning of the Development Committee. The urgent need for a complete overhaul of the Committee is evident. It is indispensable to make it less ritualistic, predictable and irrelevant. A biannual occasion for governors to meet and discuss the Bank should not continue to be the missed opportunity that it has hitherto been. The Development Committee could increase its role as one of the bodies through which the governors convey policy guidelines to the Board and management of the Bank. On the other hand, recent attempts at reforming limited but useful ways the Development Committee have encountered so much resistance that a major reformulation of the role of this body is also bound to be a titanic task.

• Upgrading the board of executive directors. Governors should also agree to upgrade the level of their representatives to the board of the Bank. This might seems a subtle change with minor bureaucratic consequences. Nonetheless, given the circumstances that will be faced by the institution in coming years, it could well prove to be a momentous decision. Among other effects, the appointment to the board-even by two or three shareholders-of individuals with high visibility and prestige is bound to spur similar decisions by others, thus creating a quantum leap in the relevance of the board.


• Extending the tenure of executive directors. Board relevance would certainly be enhanced by increasing the tenure of executive directors. A minister who has to appoint an executive director for an extended period of time (four years?) and who cannot remove the director once he or she is appointed is probably going to pay more attention to the selection of the candidate. Also, as noted, directors will have the time that they now lack to become effective interlocutors before their term of appointment to the board ends.

• Redefining the functioning of the board. Major improvements in the Bank's governance can be achieved through the modernization of the board's procedures, support systems and general organization. Board committees have great limitations to induce the drastic changes in procedures that the board urgently needs. An external consulting company, with experience in the design of working methods, support systems, and organizational design of boards of directors of complex organizations, should be retained. It should report its recommendations to a special committee of the Board of Governors.

These are some specific avenues that can be explored in order to strengthen the governance of the Bank. For some, agreeing on the role of the Bank, finding creative ways to engage governors in serious discussions about long term objectives of the institution, recruiting executive directors with high internal and external credibility and influence, redesigning the roles of the board, its operations, and its relationship with management may be minor "technocratic" changes. They will, however, be hard to achieve and are, perhaps, unrealistic. Yet without these small, difficult changes, lofty ideas about the Bank are very likely to remain only ideas.

Furthermore, improving the arrangements and procedures through with the Bank is governed is not enough. The need to modify some of the organizational characteristics and the practices they engender is also necessary. The Bank's own examination of its portfolio-the Wapenhans report-highlighted problems that has as much, if not more, to do with internal organizational aspects as with external financial, economic, and institutional complications.

The Bank developed a five-point "action plan" aimed at solving or alleviating some of the problems it its loan portfolio and preventing their recurrence in future operations. One of these five actions stresses the need to "create an internal climate that encourages better management of the portfolio" which according to the Bank's President is aimed at creating

"…a change in institutional behavior and attitudes over time which will reflect the crucial importance of managing the implementation of our operations well and of judging out effectiveness in terms of development impact.

This emphasis on changing some aspects of the Bank's climate and internal behavior is certainly well placed. Organizational changes should target the informal, subtle aspects of the internal culture rather than centering exclusively in the more mechanistic redesign of the explicit structure and formal procedures of the institution. The Bank's report notes that these internal changes are being sought through changes in the skill mix of its staff and changes in the rewards and incentives structure.

These are valid first steps. But the Bank would also do well to use the advice it normally gives to its clients and inject much more competition into its organization. As one of the Bank's publications recommends,

Since competition is an important factor in determining institutional performance, a logical implication is to increase the competitive atmosphere…[and] design managerial or organizational solutions that stimulate competition in entities which are not exposed to it…Competition [can be] expanded to include not only external economic competition but also three surrogates: external pressures derived from clients, beneficiaries or suppliers; external pressures derived from the political establishment and controlling or regulatory agencies, and internal pressures derived from managerial or administrative measures. Mechanisms can be found in all four categories for introducing or simulating competitive conditions.

Examples of the changes that might contribute to the adaptation of the organization to new realities are:

• Make the external clients more important that the internal ones. The search for mechanisms that introduce more competition will have to be guided by a much stronger client orientation than the organization now has. The main challenge-and recommendation-is to create the conditions that shift the staff attention from pleasing the many constituencies and "clients" inside the Bank to center much more on the real-outside-clients and their needs and limitations. This would, of course require major changes in the structure of incentives and in the personnel practices of the Bank. It would also require a very deliberate and sustained effort to break some of the habits that are deeply embedded in its organizational culture. Spending more time with clients and less with colleagues would be a very important goal in this respect.

• Pay more attention to the marketing of ideas. A stronger client orientation would increase the importance of persuasion and the marketing of ideas and the promotion of change. It will make staff members that are effective in helping public officials in borrowing countries to bring about the desired changes more recognizable and successful that those whose main skills are writing technically sounds reports and the design of sophisticated loan conditions. "Practice development" in the same sense that is conducted by international consulting firms and adapted to the specific needs of the Bank's clients would also contribute to make sure that the practical lessons that are learned by staff in operations get more effectively disseminated to the other "is ands" within the organization.


• Make the Bank's research more "practitioner friendly". Worrying about how to disseminate effectively what the Bank knows should be as important as worrying about how to improve the current knowledge. Investing in the distribution of knowledge to developing countries and to practitioners should be as important as it is now is to produce highly technical documents that are disseminated to the authors' peers in universities and research centers.

• Move staff to the field. Such heightened attention to clients would also mean spending more time with them away from Washington. It may also mean that more resources, people, officers, and decision making should be nurtured, followed, and supported more consistently. The proximity of the staff to the clients should be increased beyond what is now the case (one or two short supervision visits each year).

In short, the main challenge for the future of the Bank's management is the privatization of its organizational culture, in the sense of making managerial effectiveness and responsiveness to the outside environment the fundamental driving forces inside the institution. The Bank certainly has all the evidence and the knowledge to move effectively in this direction. Will it have the incentives?

End of document
 
Source http://carnegieendowment.org/1999/09/04/world-bank-its-role-governance-and-organizational-culture/2bkj

In Fact

 

45%

of the Chinese general public

believe their country should share a global leadership role.

30%

of Indian parliamentarians

have criminal cases pending against them.

140

charter schools in the United States

are linked to Turkey’s Gülen movement.

2.5–5

thousand tons of chemical weapons

are in North Korea’s possession.

92%

of import tariffs

among Chile, Colombia, Mexico, and Peru have been eliminated.

$2.34

trillion a year

is unaccounted for in official Chinese income statistics.

37%

of GDP in oil-exporting Arab countries

comes from the mining sector.

72%

of Europeans and Turks

are opposed to intervention in Syria.

90%

of Russian exports to China

are hydrocarbons; machinery accounts for less than 1%.

13%

of undiscovered oil

is in the Arctic.

17

U.S. government shutdowns

occurred between 1976 and 1996.

40%

of Ukrainians

want an “international economic union” with the EU.

120

million electric bicycles

are used in Chinese cities.

60–70%

of the world’s energy supply

is consumed by cities.

58%

of today’s oils

require unconventional extraction techniques.

67%

of the world's population

will reside in cities by 2050.

50%

of Syria’s population

is expected to be displaced by the end of 2013.

18%

of the U.S. economy

is consumed by healthcare.

81%

of Brazilian protesters

learned about a massive rally via Facebook or Twitter.

32

million cases pending

in India’s judicial system.

1 in 3

Syrians

now needs urgent assistance.

370

political parties

contested India’s last national elections.

70%

of Egypt's labor force

works in the private sector.

70%

of oil consumed in the United States

is for the transportation sector.

20%

of Chechnya’s pre-1994 population

has fled to different parts of the world.

58%

of oil consumed in China

was from foreign sources in 2012.

$536

billion in goods and services

traded between the United States and China in 2012.

$100

billion in foreign investment and oil revenue

have been lost by Iran because of its nuclear program.

4700%

increase in China’s GDP per capita

between 1972 and today.

$11

billion have been spent

to complete the Bushehr nuclear reactor in Iran.

2%

of Iran’s electricity needs

is all the Bushehr nuclear reactor provides.

78

journalists

were imprisoned in Turkey as of August 2012 according to the OSCE.

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