Source: Modern Bankers, No. 5, 2010
After 22 years of struggle, IB grew from a local bank, then to a regional bank, national bank, and eventually to a listed bank and became one of the top ten banks in China.
A few days ago, we had an exclusive interview with Gao Jianping, IB’s Board Chairman.
Three Improvements of IB’s Corporate Governance Concept
Mr. Gao said, “Generally speaking, in the course of its development over the past ten years, IB has seized important opportunities and avoided serious risks, which shows that our decision-making mechanism is scientific and our corporate governance concept is in keeping with the actual conditions of our bank.”
To look at IB’s development in retrospect, the development of the bank’s corporate governance concept underwent three stages. At different stages of development, the bank has gained different understanding of value creation, from shareholders’ interests foremost, through due consideration to the interests of all parties concerned, to promoting harmony in the environment, society and economy and the bank’s sustainable development.
Stage 1 lasted from 1988 when the bank was founded to the late nineties. In order to meet the requirements of the development of national economy and financial reform, IB constantly endeavored to enhance its capital strength via capital contribution by initiators and later by new investors, thus laying a solid foundation for IB’s development in the early stage. The objective of IB’s corporate governance in this stage was to maximize shareholders’ interests and enable shareholders to share benefits from the bank’s growth. Therefore, the level of dividends at this stage was very high.
Stage 2 came between 2000 and 2005. In the practice of banking, IB had come to realized that as special public enterprises, the daily operation of commercial banks benefited from the support of shareholders, customers, staff and all walks of life, and the operating results of commercial banks were closely related with their interests as well. Therefore, the bank should not focus only on shareholders’ interests as its governance objective, but should also give due consideration to the interests of customers, staff and the public.
Stage 3 lasts from 2006 up to the present. Against the backdrop of increasingly conspicuous environmental problems like global warming, IB, after going public, further reflected on the relations between fulfillment of social responsibilities and the bank’s sustainable development. It proposed the practice method of assuming social responsibilities by integrating profit with uprightness and explored innovative business models to fulfill its social responsibilities. In order to bring about the harmonious co-existence of mankind, nature, the environment and society, IB established the governance concept of sustainable development.
Origin of the “Green” Governance Concept
With three improvements of its corporate governance concept, IB’s decision-makers have broken through the concept of merely pursuing profit, and have incorporated the undertaking of social responsibilities into the scope of corporate governance. “To study and formulate strategies and policies concerning our bank’s social responsibilities, and to supervise, examine and assess our bank’s performance of social responsibilities” have been explicitly written into the bank’s Articles of Association as the responsibilities of the Board of Directors. “We believe that the implications of corporate social responsibility are closely related to the principles of sustainable development. The two expanded the scope of traditional business ethics and enriched the contents of corporate governance”, Said by Mr. Gao with theoretical and philosophical wisdom.
Mr. Gao also said that under the scientific guidance and promotion of the Board of Directors, the concepts of IB’s social responsibility and sustainable development have been implemented in IB’s management and operations, including operation and management systems, business processes, financial instruments, product innovation, report system, etc.
It’s understood that IB became officially involved in carbon finance through cooperation with IFC in the energy-efficiency finance program in May 2006. In the course of conducting energy-efficiency finance businesses and with the involvement of the whole bank, the concept of sustainable finance was gradually exalted from a concept of business practice to a common view of corporate governance. Due to the implementation of the energy-efficiency finance program, IB became aware of challenges and opportunities brought about by environment problems ahead of other domestic peers and began to apply international prevailing standards and terms to the evaluation of environment protection and social responsibilities. In October 2008, IB officially pledged to the public that it would adopt the Equator Principles.
During the transitional period after the adoption of the Equator Principles, IB reconstructed its environmental and social risk management system, fully reformed the traditional loan process and set up a dedicated management organ (Sustainable Finance Division) to promote the transformation of its operational model. In December 2009, the 2×300MW expansion project of Fujian Huadian Yong’An Power Generation Co., Ltd., the first domestic project to which the Equator Principles were applicable, was officially launched.
Under the influence of the green concept, IB has been dedicated to developing a series of sustainable business models in recent years and has established its own characteristics and brand in market segments such as inter-bank cooperation, energy-saving & emissions reduction, sustainable finance, agent of precious metals trade, cash management and so forth, and has constantly enhanced its inherent competitive advantages.
Thanks to its ceaseless efforts in sustainable finance, IB has been awarded one honor after another in various appraisal and selection events organized by domestic and foreign authoritative institutions, awards include the “Champion of Asian Sustainable Bank of the Year”, “Best Green Bank Award of the Year”, “China Baogang Environmental Excellence Award”, “Best Corporate Citizen Award” for three consecutive years, etc. Gao Jianping, IB’s Board Chairman was successively awarded honorary titles, including the “Board Chairman with the Best Sense of Social Responsibility” and “China Banking Man of the Year”.
Former IB Board Chairman and Bank President, present IB Board Chairman: My experiences
One important aspect of corporate governance is to define the boundaries of various corporate subjects. However, how shall we define the boundaries of responsibilities of the Board Chairman and Bank President? How can we properly handle the relationship between Board Chairman and Bank President? Gao Jianping used to serve concurrently as IB’s Board Chairman and Bank President but now only as Board Chairman. He is keenly aware of the problem.
Gao Jianping said that Board Chairman is different from Bank President because the job role is different and job responsibilities are also different. As far as job role is concerned, a Bank President focuses on execution and leads an execution team; while a Board Chairman focuses on decision-making and leads a decision-making team; in respect to job responsibilities, Bank Presidents takes charge of the operations and management and implements various strategic decisions made by the Board of Directors to ensure the fulfillment of operation and management objectives; while the Board Chairman mainly coordinates members of the Board of Directors in decision-making in order to ensure that the Board of Directors calls decision-making into play in a scientific way.
As to how to properly handle the relationship between the Board Chairman and Bank President, Mr. Gao said that four priorities shall be well taken care of as far as the Board Chairman or the Board of Directors is concerned:
Firstly, an excellent execution team must be selected. It’s the responsibility of the Board of Directors to select an excellent execution team. Quality of the execution team must be ensured to realize the intent of decisions made by the Board of Directors.
Secondly, decisions must be made on important issues, the right direction must be maintained and operation objectives must be determined. The execution team is not concerned with formulating development objectives but to fulfill the operation objectives set by the Board of Directors.
Thirdly, operation systems and mechanisms, including incentive mechanisms and constraint mechanisms, must be perfected to ensure that the execution team attains the objectives.
Fourthly, coordination work must be properly done. In the course of operation and management, it’s necessary to coordinate not only various internal interests of the bank and but also relations with supervision departments and shareholders. The Board Chairman must coordinate properly.
Two fundamental systems to improve decision-making efficiency
When a decision is being made, one outstanding dilemma encountered by the Board of Directors is that there is little time to deliberate upon matters of great importance. Moreover, many directors are from different industries but sometimes they have to vote by raising hands before having their doubts cleared up, which might adversely affect the efficiency and quality of decision-making.
Gao Jianping said that IB has established two systems to solve this problem. One is to establish a professional committee system. Several professional committees are set up under the Board of Directors to function as deliberative organs. In 2004, we realized that issues submitted to the Board of Directors for deliberation were generally very important but most of the directors held two or more positions concurrently and some directors were important economic and financial experts who were pretty occupied with their daily work. The efficiency of deliberation at the board meetings could be very low if some of the directors were informed of issues to be deliberated upon only by means of materials submitted or brief information exchange before a board meeting. It then occurred to us to set up a few professional committees, each of which was made of directors specialized in the subject that the committee was created to deal with. In this case, issues on which decisions must be made by the Board of Directors are first submitted to a corresponding professional committee for deliberation and the professional committee will provide opinions after deliberation as decision-making reference for the Board of Directors. In this way, we have improved the efficiency of decision-making and ensured the quality of decision-making.
The other is to establish a preparatory meeting system. It’s impossible for a board meeting to last very long. Generally speaking, a board meeting takes only one or half a day; it’s also impossible to have a full exchange of opinions on many issues within such a short period of time. For instance, an acquisition proposal involves many specific issues, such as law, finance, risks and personnel placement. If we submit the acquisition proposal directly to the Board of Directors for a decision, it’s imaginable that the board meeting will be about questions and inquiries, which on the one hand, is very time-consuming as we must make more time for questions and inquiries and on the other hand is very manpower consuming as chiefs of departments concerned must provide data and make explanations.
In fact, the board meeting, as the major form of performing the functions of the bank’s highest decision-making organ, is a very serious occasion. It’s impossible to have many people sit in on the board meeting because there are many issues submitted for deliration and some can be very sensitive. In view of this fact, we established the meeting preparation system for the board meeting. Before a board meeting is convened, a preparatory meeting is called. The preparatory meeting is not a formal meeting where decisions are made. Chiefs of functional departments concerned and execution officers may sit in on the preparatory meeting, at which directors may be fully informed of technical problems so as to effectively improve the decision-making efficiency of formal board meetings. Up to now, in case of any important matter that involves in depth background investigation, for instance, strategic development planning, capital supplementing plan, IB’s Board of Directors will convene a preparatory meeting for discussion.
“After the two systems are established, IB’s operation in corporate governance gives due consideration to both efficiency and rationality and achieves very good effects.” said Gao Jianping.
Solution to Dissension: Art of Decision-Making
“It’s common that directors disagree upon some important decisions. When directors disagree upon important matters, we are not in a hurry to vote but reconvene the board meeting for voting after reaching consensus through further communication and investigation”, commented Gao Jianping.
One typical case is IB’s acquisition of The Commercial Bank of Foshan in November 2004. From 2003 to 2004, various local governments had been focusing on neutralizing risks in small and medium-sized financial institutions and there were many problems existing with The Commercial Bank of Foshan. When the acquisition motion was put on the agenda of the board meeting, keen disputes arose.
The emphasis of the original argumentation for the acquisition plan was laid upon how to expand the scale of the bank through outlet expansion, but many directors objected to the argumentation for the following reasons: I. They were not in favor of acquisition merely for the purpose of expansion. II The subject, contingent asset and risks of the acquisition plan must be specified. III. The negotiation partner and specific conditions must be specified. IV. Different plans must be available for comparison and selection.
Despite that facts that we formally submitted the motion and there was a heated discussion at the board meeting, it was decided at the board meeting that the general principle of “overall risk control and cost lock-in” for the acquisition should be adopted and that no decision should be made on the acquisition plan until after a field investigation was made. Following the spirit of the board meeting, the Board of Directors and the Board of Supervisors sent a team to make field investigations in Foshan. After conducting direct dialogues with the local government and related departments, ideas on the acquisition got into shape as follows: integrating bank acquisition with business transformation and vigorously promote retailing business through acquisitions; the negotiation subject and details were specified; in addition, in respect to the acquisition subject and staff placement, pioneering innovation was made with reference to international experience and in light of the domestic situation.
In retrospect, the decision made by the Board of Directors was very successful. After acquisition, the reorganization and development of The Commercial Bank of Foshan was relatively stable, with both fame and wealth achieved, so to speak. Profits gained in the year of acquisition almost covered the acquisition costs of RMB 430 million. Meanwhile, our network was extended to Dongguan, Zhongshan, Nanhai, Sanshui and Shunde, and thus put a finishing stroke to our network layout in the Pearl River Delta.
Back then, a stock bank was equal to a city bank in some senses, mainly choosing to establish branch institutions in tier 1 and 2 cities. In order to better serve the development of developed areas and optimize the layout of its outlets, quite a few IB’s branch institutions were established by acquiring problematic small and medium-sized financial institutions, including IB Yiwu Branch, Wenzhou Branch, Taizhou Branch, and Harbin Branch, in addition to the IB Foshan Branch in this case. The practice not only helped local governments neutralize financial risks but also improved our service channels.
It should be admitted that in the acquisition of the Commercial Bank of Foshan, IB’s Board of Directors, with its independence, professionalism and prudence, played an active and driving role in the bank’s important decisions. The acquisition provoked strong repercussions in society and was highly spoken of by the China Banking Regulatory Commission and local governments of Guangdong. Liu Mingkang, Chairman of China Banking Regulatory Commission, spoke highly of the way IB’s Board of Directors decided on the acquisition and described the role IB’s Board of Directors played as an example for other banks.
Core Responsibility of the Board Chairman: Competent Coordinator
According to the Company Law and the Articles of Association, the most important role a Board Chairman shall play is to be a coordinator. Mr. Gao believed that as far as a company’s operation is concerned, one of the most critical factors is to balance various interests. As the highest decision-making organ, the Board of Directors represents different interest demands, including shareholders’ interests, staff interests, national interests, carrying out the intent of the supervisory authority, undertaking social responsibilities, etc. Therefore, an excellent Board of Directors or a good corporate governance structure must be able to balance various interests and prevent monopolized interests so as to ensure the sustainable development of various undertakings.
Throughout IB’s history of development, IB was more concerned about shareholders’ interests in its early stage, which conformed to the reality back then. As profit was essential for continuous operation and survival, economic benefits were put before everything else.
“Later, the Board of Directors came to realize that mere emphasis on profit maximization excessively highlighted shareholders’ immediate interests but was not favorable for the bank’s long-term development. The bank became aware that appropriate social responsibilities must be undertaken and due consideration must be given to interest demands of other parties. Even for shareholders’ interests, there were different demands of large, middle and minority shareholders. After the bank went public, we also gave consideration to the interests of public shareholders”, said Mr. Gao.
Thus, the healthy situation is to achieve harmonious co-existence of multiple interest subjects, which is conducive to orderly and effective corporate governance. As the most critical role in corporate governance, one of the most important responsibilities of the Board Chairman is to balance the relationship of subjects with different interests.
The dividend policy can best demonstrate an enterprise’s interest orientation. Over the past three years, IB has distributed dividends in cash every year. The amount of dividends accounted for 20% of the net profit of the year. “In fact, different interest subjects have their own ideas about the dividend policy. Large shareholders, particularly domestic legal person shareholders, often expect to receive an appropriate amount of cash dividends so that investment income may be recorded in the financial statements; minority shareholders, particularly institutions and individual shareholders, desire gift shares because their average shareholding period is relatively short and it would be even better to have some cash dividends; but for overseas shareholders, they do not want cash dividends given that IB ranks among the top banks in China in terms of return on capital. They want IB to reinvest the cash dividends. Different shareholders have different ideas”, said Mr. Gao.
“As far as the bank’s management is concerned, it’s best that no cash dividend be given because the capital strength of a commercial bank is the most important guarantee for its sustainable development and risk defense. After China Banking Regulatory Commission was founded, one of its priorities is to ensure the achievement of capital adequacy ratio. For IB, if we do not give cash dividends but solidify the core capital with net profits made over the years, considering that the amount of net profit made in each of the recent years exceeded RMB 10 billion, then a great difference would be made in our overall strength and our ability to defend against risks and grasp market opportunities in the future.”
For the Board of Directors or the Board Chairman, interest of different parties must be balanced at this point. Consideration must be given to the bank’s long-term development as well as interest demands of different shareholders. In recent years, our cash dividend ratio has been maintained at around 20%, which enables us not only to satisfy the interest demands of different interest subjects but also to retain a considerable amount of profit to improve the bank’s ability for further development and defense against risks.
Under the guidance of an excellent corporate governance concept, IB has been growing in a steady and fast manner in various undertakings in recent years. By the end of 2009, the total amount of IB’s assets had reached RMB 1.332162 trillion, up by 30%; the balance of various deposits amounted to RMB 900.884 billion, growing by over 40%; the balance of various loans reached RMB 701.597 billion, increasing by over 40%; while the return on assets was reduced by a great margin, IB’s net profit in 2009 reached RMB 13.282 billion, up by nearly 17% as compared with that of the previous year; IB’s earnings per share reached RMB 2.66 and the return on total assets reached 1.13%; the weighted average return on net profits reached 24.54%, which enabled IB to stay at a domestically leading level; for four consecutive years, IB has managed to realized “double reductions” in non-performing loans. The rate of non-performing loans at the end of year was only 0.54%; the provision coverage reached 254.93%, an internationally advanced level.
From the perspective of the capital market, IB’s share price has maintained a leading position among listed banks. IB has successively received numerous awards conferred by authoritative organizations, including “No. 1 of the Top 10 Listed Companies Most Worthy of Sustainable Investment”, “No. 1 of the Top 10 Listed Companies with the Best Growth Prospect”, “Best Return on Equity in Mainland China” and “Golden Bull Award for Top 100 Listed Companies in China”. IB’s Board of Directors was also honored with “Golden Round-table Special Award for the Construction of Board of Directors” and “Nomination Award for Excellent Board of Directors of Listed Companies” by Shanghai Stock Exchange.