A resolution being passed with no votes in opposition is the result of thorough communication and democratic consultations before the vote is held, and is not in conflict with the effectiveness of corporate governance. Through the corporate governance of the Industrial Bank in practice, we can see that the Bank has established advanced corporate governance concepts and an innovative BOD system.
On June 28, 2008, the board of directors of the Industrial Bank voted on 15 motions by a show of hands at the Jinci Hotel in Taiyuan , Shanxi Province. All 15 directors raised their hands (one of them exercised his voting right through a delegate). As recorded, there were no votes in opposition and no abstentions for any of the 15 motions.
Browsing through the BOD resolution announcements made by the Industrial Bank since it went public, we were surprised to find that there is no record of a single opposition vote having been cast. This uncanny level of consensus may make investors somewhat uneasy: are the five independent directors just there for show? Have the three directors representing foreign capital suddenly lost the ability to say no after coming to China ?
Does zero opposition to resolutions mean that certain directors have neglected their duties? Is there something wrong with the check-and-balance system in the BOD?
As a matter of fact, the Industrial Bank, as a listed corporation which has been included as a sample stock for corporate governance in the Shanghai Stock Exchange, is known for its sound system and innovative management. Owing to this, the Bank's growth prospects are considered among the best in the industry.
Puzzled at this lack of opposition, we paid a visit to the Bank's BOD. Our investigation revealed that Bank indeed has a sound mode for corporate governance. It has probed and innovated to develop a sound BOD system and operational mechanisms. In the past, the corporate governance of the Bank was subject to a modal of ‘passive' improvement. Today, corporate governance has become an area of pro-active innovation.
This being the case, why are there no opposing votes? We all know that opposing votes represent individual opinions. In fact, there most certainly are opposing views before a motion is put to the vote. Take the purchase of a new office building for the Guangzhou Branch for example. The proposal to buy a new office building for the Bank's Guangzhou Branch was opposed by a number of directors who questioned the necessity of spending RMB 300 million to purchase a property in high priced Guangzhou . As there were differences, the BOD had no choice but to approach this with "old rules”: a group of directors including those that opposed the motion paid a field visit to the site in question. After the investigation, a consensus was reached among the directors. The directors agreed that the current office of the Guangzhou Branch was dilapidated and detrimental to the company's image. The proposed new location was conveniently located and high in quality, and thus should be bought. Thus the motion eventually being passed at Taiyuan with no opposition suddenly doesn't seem so surprising.
The case may shed some light on the zero opposition vote phenomenon. Although consisting of a series of institutional arrangements, corporate governance has no fixed model to follow. A resolution being passed with no votes in opposition is the result of thorough communication and democratic consultations before the vote is held, and is not in conflict with the effectiveness of corporate governance. Through the corporate governance of the Industrial Bank in practice, we can see that the Bank has established advanced corporate governance concepts and an innovative BOD system.
Advanced Corporate Governance Concepts
In war, supplies should be well prepared before a military move is made. Similarly, in a company, there must be advanced concepts before a BOD can make effective moves. In an autonomous system, the directors would be but counselors. Gao Jianping, the BOD chairman of the Industrial Bank, positions himself as “a coordinator”, and it is this that gives us our first hint of the sound governance concepts in the Bank. Looking back on the twenty years of the Bank, what we see is a constant and tireless pursuit of sound corporate governance.
Stage One: The period from the establishment of the Bank in 1988 to the late 1990s, in which the interests of shareholders was maximized The Bank maintained high returns for its shareholders.
Stage Two: Starting from 2000. The interests of all interested parties began to be considered and guaranteed. The Bank realized that the interests of all interested parties, such as clients, staff and the public, must be considered in order to achieve long-term development. The measures taken included the concept of “invigorating Bank through service", taking out property insurance for the Bank and liability insurance for directors and senior executives and the exploration and establishment of career planning for personnel.
Stage Three: In recent years, the Industrial Bank has further probed into the relationship between the social responsibilities assumed by a bank and the bank's sustainable development. It became the first bank in China to offer loans for projects aimed at conserving energy and cutting emissions. It also actively became involved in charity and public welfare undertakings, such as making donations for education, supporting those in poverty and disaster relief. It founded the “Industrial Bank Charitable Fund” which had an initial sum of RMB 10 million Yuan. The Bank's total donation to earthquake stricken areas in Sichuan amounted to over RMB 20 million Yuan and over 25% of the personnel in the Bank gave blood for disaster relief. On the business cards of Bank employees, including the BOD chairman, are the words “recycled paper”. This is a detail that reflects the Bank's environmental consciousness.
Understanding that corporate governance structure is decided by shareholder structure and that the quality of corporate governance, to a large extent, is determined by the quality of shareholders, the Industrial Bank made bold and decisive moves to transform its shareholder structure and improve the quality of its shareholders.
In the early years of the Bank, state-owned shareholders occupied a dominating position and there was little checking and balancing between the shareholders. Tang Bin, the BOD secretary, was frank, saying that the main thing that shareholders cared about at that time was their annual dividends. Later they were most concerned about when the Bank would be listed. When Gao Jianping assumed the role of BOD chairman in 2000, he consciously pushed forward the optimization of the Bank's shareholder structure. In 2000, the capital and shares of the Bank was increased to RMB 3 billion Yuan with a number of domestically renowned enterprises such as CEC, Guohua Energy, the Baosteel Group and Hunan Electric Power entering the Bank. In 2003, three foreign shareholders were strategically introduced, which significantly improved the structure of the shareholders. At the end of June this year, Fujian Provincial Finance, the largest shareholder, held a 20.40% stake in the Bank. Hang Seng Bank (a member of the HSBC Group and the second largest listed bank in Hong Kong), Tetrad Ventures Pte Ltd (an investment corporation directly under Singapore Government) and the International Finance Corporation (a private sector institution in the World Bank Group, hereafter referred to as IFC) held stakes of 12.78%, 4.00%, 2.73% stake respectively, being the second, third and sixth largest shareholders. Thus a shareholder structure plural in constitution, rational in stakeholder ratio, complementarily in strengths and harmonious in cooperation had come into being. Gao indicated that efforts will be made to maintain the overall stability of this structure over the next few years.
Liu Mingkang, the chairman of the China Banking Regulatory Commission, stressed the importance of shareholder quality in establishing sound corporate governance in commercial banks. With the continual optimization of the shareholder structure, the quality of shareholders was improved steadily. After the foreign strategic investors were introduced, the Industrial Bank began in-depth cooperation with HSB in the fields of retail business, risk control, financial management and personnel exchanges. The consideration behind introducing the IFC was the international opportunities that it would bring. The energy efficiency projects subsequently launched by the Bank had an enormous amount to do with the efforts of Luo Qiang, the director recommended by the IFC.
On this basis, the efficient operation of the BOD primarily depends on the performance of these rationally-matched, highly qualified directors. There are 15 directors in the Bank. According to an employee in the office of the BOD, the scale underwent repeated argumentation and overall consideration was given to numerous factors including optimal performance of the BOD's function, supervision policies and shareholder structure. In the BOD, there are 7 directors of equity, 3 executive directors and 5 independent directors. Among them, there are highly experienced financial experts as well as scholars that exert huge influence in academic circles. The constitution of the directors in the BOD fully demonstrates the Bank's strategy of “running a bank with experts”. It is especially worth mentioning that the introduction of foreign capital directors has not only strengthened the checks and balances in the board but has also improved concepts of decision-making. IFC, as a non-profit international institution, required that the directors it dispatched represent the interests of all shareholders, especially the interests of small shareholders, and not the exclusive interests of the party that recommended them. Luo Qiang, IFC's principal banking expert for the global financial market and director at the Industrial Bank arrived at the board with these concepts. He cited an example of this: when IFC launched cooperation in energy conservation and emission reduction finance with the Bank, he withdrew from the vote to avoid a possible conflict of interests, for IFC had commercial interests in the program.
As to the positioning of the BOD, the Bank maintains that the BOD, as the senior decision maker, should play its role as the core decision maker, rational decisions and fairness in procedure should be ensured and institutional mechanisms to ensure that the BOD functions soundly should be guaranteed. The scope of BOD deliberation, which was limited to profit distribution in the Bank's early years, now covers a comprehensive range of areas including development planning, capital supplementation, corporate governance, risk management, internal control, financial auditing, motivations & constraints, key investment, project cooperation, verification and cancellation of bad debts and the establishment of basic systems.
Building an Innovative BOD System
Excluding advanced concepts on governance, the key behind the normative, scientific and efficient operation of the BOD in the Industrial Bank lies in innovations in five respects, namely, organizational structure, meeting system, democratic decision mechanism, independent director system and risk control. Among them, some are totally original whereas some are outstanding when compared with other domestic banks.
1. Organizational Structure of the BOD: establishing executive council
In 2004, the Industrial Bank became the first domestic bank to set up an executive council under its BOD (the council holds at least four meetings every year. At present a meeting is usually held every two months). The council consists of five members, including one of the recommended directors from each of the two largest stakeholders respectively and three directors from management. The chairman of the board of supervisors and the BOD secretary attend the meetings as non-voting delegates. The duties exercised by the executive council of the BOD include: to conduct research for and formulate medium-and long-term development strategies of the Bank, to scrutinize schemes for major acquisitions, investments and financings put forward by senior management and to raise suggestions and solutions regarding major issues that the BOD will make decisions on through discussions. We can see that this is indeed and “executive" BOD.
Of the 15 motions passed by the BOD on June 28, the executive council had previously deliberated on and submitted opinions to the board for the 2007 Work Report of the Executive Council, Management Measures on External Private Equity, the purchase of an office for the Guangzhou Branch, the entry into the equator principles and the Rectification Report on Industrial Bank 2007 Notification of Supervision by the CBRC.
Will the BOD be replaced by the executive council? The Bank has its own consideration: unlike other types of company, banks need to hold frequent meetings to discuss major issues. There are three advantages in establishing the council: firstly, it solves the problem of day-to-day decision-making for the Bank; secondly, it allows for in-depth discussion on issues and thirdly, it allows for collective leadership during the periods when the BOD in not in session. Of course, there are principles that the council has to abide by. It should perform its duties within the scope of authority authorized by the BOD. Except being authorized, it can not, in principle, produce resolutions. When the issue has been discussed, the council, whether it is in agreement or not, has to submit it to the BOD for final decision. Judging from practice, the establishment of the council has achieved good results, and in Luo's words, “there is nothing unsatisfactory at all”.
There is another thing worth mentioning in regard to the organizational structure of the BOD at the Industrial Bank. The audit and related transactions control committee and the pay and examination committee consist of outside directors, and do not include a single director from senior management. Among them, there are three independent directors, and these committees enjoy a notable degree of independence.
2. Meeting system set-up of the BOD: preparatory meetings and feedback mechanism after the implementation of a resolution.
As the BOD discusses issues by means of meetings, the system for discussions is clearly something that is extremely very important. The Industrial Bank established a preparatory meeting system in 2005 in a somewhat rare move for the domestic banking industry. The Bank also established a feedback mechanism for the implementation of resolutions in 2005. The initiative allows the BOD to combat any reluctance to implement decisions that might exist in management.
Preparatory meetings are usually convened by the BOD secretary. The directors, supervisors and the chiefs of related departments at Bank headquarters are entitled to attend. Before the official meeting of the BOD is held, the chiefs of the related departments introduce the issues in question to the directors and supervisors and answer their questions. This is aimed at improving the efficiency of the decision-making process at official meetings of the BOD. Naturally, preparatory meetings are convened only if there is a need to do so, and are not regular in a formalistic fashion. Given that the majority of the motions were not especially complicated and that they had undergone deliberations and verifications in various special committees, the BOD meeting on June 28 was not preceded by a preparatory one.
The feedback mechanism for implementation of the BOD's resolutions: before each meeting of the BOD begins, the management shall present a brief report on the resolutions from the previous board meeting or further in the past as well as unresolved matters. At the BOD meeting on June 28, the management presented progress reports on eight resolutions, including the construction progress of the Zhangjiang operational center in Shanghai, the progress in the issuance of financial bonds, the progress in the acquisition of the Jiujiang City Commercial Bank and the progress in the foundation of a fund company.
Furthermore, other sound systems in respect to board meetings at the Industrial Bank include the following. Ever since 2004, the Bank, at the end of each year, formulates a year-round meeting plan for the board meetings for the next year. Periodic meetings are distinguished from provisional meetings and the number of meetings, meeting times and main topics are reasonably planned. In strict accordance with the provisions stipulated by the charter and rules of procedure, meeting notices and documents are sent to all the directors and supervisors within a specific time period to improve the efficiency of decision-making at board meetings.
Now, at the Bank's board meetings, instead of reading a document aloud, the speaker introduces the background to the introduction of the document, its main points and the different considerations that emerged during the process of its formulation. Luo Qiang thinks highly of this kind of pragmatism.
3. Mechanism of Democratic Decision-Making: The view of each director is fully respected.
The BOD needs “the spirit of a round table', namely democratic decision-making and equal participation. This spirit is often lacking in many Chinese people, who are still influenced by feudal notions.
According to Wang Guogang, an independent director of the Bank and the deputy director of the Financial Research Institute of the Chinese Academy of Social Sciences, the “Industrial Bank has carried out the practice of democratic decision-making pretty well.” Of course, there has been a process involved in establishing the democratic decision-making mechanisms in the Bank. The takeover of the Foshan Commercial Bank in 2004 was a landmark event. This was not only because of the sensation that it caused in the market but also due to the stimulating effect that it had on the process of perfecting the BOD in the Bank. The meeting in which this scheme was deliberated in was the first one following the introduction of foreign capital directors. When the management reported the preliminary plan of the acquisition to the BOD, the foreign capital directors were baffled: why have we been informed of this only when the deal is nearly complete? The management was puzzled, and replied that the acquisition was a good thing. The directors answered, “that is something to be decided by the BOD". The management was stirred up by this. It made them realize that the role of the BOD must be respected and put into full play, and that they had to improve their work on the basis of this notion. During the deliberation process there were some differences among the directors themselves, and as a result the issue was not put to the vote immediately. The Bank subsequently organized a field trip to Foshan for the directors and supervisors, following which a final consensus was reached. The democratic decision-making process seen in the purchase of the office building for the Guangzhou Branch previously mentioned originated from this.
When there are significant differences regarding a motion, a vote is not sought in a hurried or mandatory manner, instead, the vote will be held when a consensus has been reached. This is a basic concept developed by Gao Jianping, the “watchman" of the Industrial Bank, on the operation of the BOD. In this mode, the views of each director are fully respected. Everyone is able to express their opinions freely. Moreover, the negative effects on major decisions which may be caused by one impulsive individual can be avoided.
4. Exploration in independent director system: extensive collection, differential nomination
It is a universal practice in domestic listed companies that candidates for independent directors are nominated by major shareholders and the company itself and a single-candidate election is held. In order to improve the selection mechanism of independent directors and to make them function better, the Industrial Bank tried the differential nomination of independent directors for the first time in 2007. Those who meet the conditions for the nomination as independent directors can be recommended to act as candidates. When submitted to the BOD, it will carry out a differential nomination.
During the 6 th BOD elections in the Industrial Bank, the parties concerned recommended seven candidates for independent directors. The number of candidates to be nominated was five. In order to be sound and pragmatic, the executive committee of the BOD suggested an anonymous vote in the nomination stage. Five were to be elected as the official candidates and submitted for election at the general meeting of shareholders. The suggestion was adopted by the BOD and was proved in practice to be highly effective.
At present, there are five independent directors in the Industrial Bank. Except a few who were recommended by the authorities, the rest were employed through channels such as the Internet. Mr. Ba Shusong is one of them.
5. Risk control: strict controls on risks with a number of measures
It is well known that banks, by nature, belong to an industry that operates in risks. Risk control is a test on the wisdom and abilities of the BOD. The sub-prime mortgage crisis that some international bank giants like UBS experienced, in a sense, was caused by mistakes in risk control.
Considering the importance of risk control, the Industrial Bank began to prepare financial statements in line with international accounting standards in 2001 and employed Ernst & Young, one of the four largest accounting firms in the world, for audit work. In 2004, the risk management committee of the BOD was set up and the Bank put forward a program of risk tolerance indexes for the first time in the domestic banking industry in 2007 to guide the allocation of bank resources and capital. The establishment of risk management of capital and assets (RMCA) has been positively promoted and alignment with the New Basel Capital Accord actively sought. In addition, the Industrial Bank has developed its own systems of credit management. For example, regional approval centers were set up; the right of credit approval was taken away from branches and offices; and the management system of separating approval from loan was conducted. In the actual process of credit approval, many projects are carried out through IT systems. “The projects which exceed risk standards are discarded through computer judgment”. By the end of 2007, the ratio of non-performing loans in the Industrial Bank was 1.15%, which was the best among domestic listed banks. Its provision coverage also reached 155.21%.
Gao Jianping exclaimed, “after the Bank went public, there has been much more concern from institutional investors and the public. Naturally there has also been more evaluations and comments. Some often curiously ask, “Why have so many good things happened to the Industrial Bank?” In fact, it has been our sharp market insight and strong sense of risk that has allowed us to seize great development opportunities and avoid big business risks.”
The Road to Improving Governance Is Still Long
In terms of corporate governance and BOD development, the Industrial Bank is advancing along the road of internationalization. However, confronted with fierce competition in the banking industry, the members of the Bank's BOD have to make a serious examination of the problems they have in the aim of establishing a stronger and more efficient BOD. Just as Gao said, there is still a long way for the Bank to go if it wants to achieve totally sound corporate governance.
As the foreign-capital director Luo Qiang sees it, the next three to five years will be the “warring-state” period for Chinese banking, and the BOD should play a greater role in the development of the Bank. For instance, the BOD should further improve its ability in the discussion of major issues and setting the strategic direction for the Bank. The transmission mechanisms of clear, efficient, complete and normative corporate governance should be established and improved and the overall convergence of operational mechanisms and systems at all levels, including the BOD, the board of supervisors, and senior management, shall be promoted so as to guarantee that the concepts, ideas and principles on corporate governance can be transmitted to all sectors soundly and effectively.
On equities incentive, the risks that a commercial bank faces, at the end of the day, are man-made risks. Therefore, it is of great importance for the Bank to improve its long-term personnel incentive system. In countries with mature market economies, equities incentive systems have been proved to be effective. The State makes rather cautious policy orientation and institutional arrangements concerning equality incentive by financial institutions, owning to the fact that the development level of the domestic market economy is limited, professional managerial system is deficient, the evaluation system of operational performance is incomplete and especially considering that fact that compared to general enterprises, financial enterprises have strong public characteristics. Thus, the Industrial Bank is still in the process of exploration and will promote and implement its strategy after related laws and regulations are perfected.
As a listed company that has made fruitful achievements in the establishment of its BOD, it is important that we acknowledge that the innovations made in corporate governance by the Industrial Bank are a valuable source of reference, although they may not have universal significance. The “zero opposing vote” phenomenon should not be misunderstood, for we hope to see more opposing votes from independent directors in companies whose corporate governance is chaotic
After 30 years of reform and opening up, China is still in the process of transformation and in many respects we are still in unfamiliar territory, the road ahead not always being known. A great BOD makes a great company. However, under a backdrop in which the market economy has not yet been fully established, the question of how to establish a normative, effective and even great BOD is still somewhat of a puzzle. The answer requires constant exploration and probing by all social circles. When interviewed, Luo Qiang spoke highly of the wisdom and enterprising spirit of the Chinese people, and was “very optimistic" about the future of BOD establishment in Chinese companies.
Like him, we hold a similarly optimistic view, and are in anticipation of unremitting efforts to sustain this optimism.
(Yan Xuefeng, Board of Directors, Board of Directors July 29, 2008）