Banking reform required

Editor's Note: In this international financial crisis, Chinese banks' internal systems and corporate governance structure did not show obvious defects. Xiao Gang, chairman of Bank of China Ltd, said Chinese banks should build corporate governance with Chinese characteristics.

The modern corporate governance concept and models in China were basically borrowed from the West.

The models in Europe and the United States were once admired by developing countries. Chinese companies also tried to follow suit.

However, over the past two years, many large financial institutions in Europe and the United States became mired in the global financial crisis or even went bankrupt.

Most of these companies were once regarded as shining examples of corporate governance. Some good practices also failed. As a result, corporate governance returns to be a hotly discussed topic. Reflection over the past experience is under way among various countries and institutions.

In this international financial crisis, banks' internal systems and corporate governance structure did not show obvious defects. Directors' visions, capabilities and performance were generally satisfactory.

However, the identification of major risks and strategic decision-making by the board of directors went wrong. These problems stemmed from insufficient attention to social responsibility by the board of directors.

Many banks' boards emphasized short-term interests, but ignored sustainable profits in the long run. They boasted about the role of banks in economic development and society, but neglected the basic activities of material production and exchange.

They relied on the financial innovation of the "elites", but failed to do more to help the majority of employees in their career development. In this sense, it is high time for the board of directors to think about social responsibility seriously.

Social responsibility

At present, State-owned commercial banks in China have diversified their shareholding structures. The State takes a controlling stake in these banks.

We built our own corporate governance systems by learning from different countries. We found there are both advantages and shortcomings in our systems from years of experience.

First, our board of directors emphasizes social responsibility. We firmly believe that economic development comes before finance. The banking industry has a strong correlation with the economic cycles.

Banks can deliver excellent results only when the real economy is in good shape. Banks should undertake to support economic development, but not stimulate bubbles in the economy.

Second, we ensure an effective system of checks and balances for the incentive and discipline mechanism at the banks.

For example, we impose a ceiling on the remuneration of our management team, which definitely discourages them from taking excessive risks to seek short-term interests and unsustainably high profits.

While designing the remuneration system, we stressed that abnormally high profits could not come solely from the efforts of the managers, but that other unexpected factors might be involved.

Third, our board of directors does not focus only on the shareholders' interest, but is also responsible to society, customers, the bank and employees.

When giving consideration to the shareholders' best interest, we also take into account the benefits to the customers, the bank and employees. Although we often receive criticism for this practice, we will continue to make efforts to achieve a good balance among the benefits on all sides.

Creditworthiness

Last but not least, when the State takes a controlling stake in banks, the banks actually are supported by the national credit system. This enhances the creditworthiness of the financial institutions.

In case of a crisis, it is very helpful to maintain public confidence. As a result, the stability of the financial system, society and the economy can be preserved.

Of course, the decision-making mechanism is also very important to the banks. We need capable management members and sound supervision of the employees.

But we do not encourage individual heroism. Collective decision-making is important, because it addresses different interests and helps us to move in the right direction.

I know well that the new corporate governance system only has a short history in China's banking industry. There are still a lot of improvements to make in system development and operation mechanisms.

Particularly in the wake of the international financial crisis, banks' boards face even greater challenges and will take increasing responsibilities.

The market and shareholders demand short-term interests, but still we need to find a way of sustainable development in the long run.

In the future, we need to stick to and refine the corporate governance structure with Chinese features in our banking industry.

The recent financial crisis gave us a strong impetus to do so. Taking a look at the problems exposed at the banks in Europe and the United States, we may find these problems are quite different from the past ones.

There were three major corporate governance crises since the 1990s, each followed by a tide of reform.

In these crises, we saw arbitrary senior executives, fraud, damage to the minority shareholders' interests and other scandals.

Accordingly, past reforms focused on restructuring, tightening discipline, higher requirements for honesty and more protection of minority shareholder interests.

However, the situation is much different after the recent crisis. In the post-crisis era, changes are happening to the imbalanced global economy and the growth modes of different countries.

When the economy is growing more complex, higher standards for corporate governance are needed. Strengthening prudent regulations, international cooperation and coordination are high on the agenda. Companies from different countries also need to work together on how to improve corporate governance.

The board of directors plays an important role in the corporate decision-making system. It should concentrate efforts on making key decisions, setting strategies and monitoring systemic risks.

China's banking industry needs to further improve the corporate governance structure, including the composition of the board and the appointment of independent directors.

More importantly, the boards should go all out to promote better decision-making, and to identify and monitor major systemic risks. We will further open up and cooperate with international leading banks. With a mind to learn from others, China's banking industry will work hard to improve the corporate governance system with Chinese characteristics.

(China Daily 11/30/2009 page2)