- 20 Apr 2009
- Working Paper
Corporate Misgovernance at the World Bank
Executive Summary — This paper examines the politics of corporate governance at the world's largest appropriations committee, the World Bank's Board of Executive Directors, and exposes a weakness in the design of the World Bank's decision-making structure. Any large public organization faces a challenge of representation and management. Since all decisions cannot be made by all members, founders often grant a more nimble body with decision-making powers. But representatives on the decision-making body may face a temptation to govern in the interests of their own wallet or narrow constituency rather than in the interests of the larger body. In 2008, the Bank's two primary component institutions—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)—committed nearly $25 billion in loans and grants through some 300 development projects around the globe. Where did it go? By exploring the political dynamics and corporate governance of an international appropriations committee, we not only learn about international organizations but also the nature of the international system itself. Key concepts include:
- A majority of World Bank member countries never or rarely get a seat at the table.
- The Executive Board is used as a platform to channel more or greater Bank loans and grants to the home countries of the directors. Countries receive a large increase in Bank loans and grants during years when they have a seat on the board.
- On average, a developing country serving on the board can expect a doubling of its normal funding levels. In absolute terms, board membership is rewarded with a nearly $60 million bonus, on average.
- Finding that countries can take advantage of their position of power has implications for other international appropriations committees like the European Union, International Monetary Fund, regional development banks, and United Nations agencies.
We test for evidence of corporate misgovernance at the World Bank. Most major decisions at the World Bank are made by its Board of Executive Directors. However, in any given year the majority of the Bank's member countries do not get a chance to serve on this powerful body. In this paper, we empirically investigate whether board membership leads to higher funding from the World Bank's two main development financing institutions, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). We find that developing countries serving on the Board of Executive Directors can expect an approximate doubling of funding from the IBRD. In absolute terms, countries serving on the board are rewarded with an average $60 million "bonus" in IBRD loans. This is more likely driven by soft forces like boardroom culture rather than by the power of the vote itself. We find no significant effect in IDA funding. 51 pages.