China’s Banking Regulator Unveils Three Year Plan to Improve Corporate Governance, CCP to Play Greater Role

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The China Banking and Insurance Regulatory Commission (CBIRC) has just released a multi-year plan for improving corporate governance in the banking and insurance sectors, placing an especial emphasis on strengthening the role of the Chinese Communist Party (CCP).

CBIRC recently circulated the “Three Year Action Plan for Improving Banking Sector and Insurance Sector Corporate Governance (2020 – 2022)” (健全银行业保险业公司治理三年行动方案(2020-2022年)) internally to its own regulatory offices.

The Plan places an especial stress on the “organic integration of party leadership with corporate governance” in the banking and insurance sectors.

CBIRC said that the purpose of the Plan was to “propose a series of targeted improvement measures and specify an implementation timetable for places of disparity or inadequacy in banking sector and insurance sector corporate governance.”

The move comes following multiple calls from China’s banking sector regulators for improvements to corporate governance.

Zhou Xue­dong (周学东), chair of the PBOC of­fice and PBOC spokesman, recently said that “the back­ground root cause of the risk of many small and medium banks lies in neg­li­gent cor­po­rate man­age­ment, as well as as­so­ci­ated fi­nan­cial cor­rup­tion and crime.”

The Three Year Action Plan outlines a range of targets and schedules for different areas of corporate governance in the Chinese financial sector, including:

Driving Organic integration of Party Leadership and Corporate Governance

2020Further clarify and strictly implement specific requirements for incorporation of party leadership into corporate governance. During comprehensive assessments of the corporate governance of state-owned and state share-controlled banks and insurance organisations, focus on the situation for integration of party leadership and corporate governance.
2021, 2022Continue to explore improvements to methods and paths for the organic integration of party leadership and corporate governance. Research improvements to mechanisms for communication between the boards of directors and supervisory boards of state-owned and state-share controlled entities. Explore the organic integration of party leadership and corporate governance. Further improve relevant assessment indices for the integration of party leadership and corporate governance and appropriate increases in weightings.

Undertaking Comprehensive Assessments of Corporate Governance

2020Ensure that initial comprehensive assessments of the corporate governance of insurers and banks is effectively performed. Firm up assessment duties, strictly implement assessment standards, strengthen accountability and penalisation, undertake appropriate disclosures, and drive problem rectification. Integrate corporate governance assessments with the risk disposal work for small and medium-sized banks and insurance companies currently undergoing restructuring.
2021Focus on effectively seizing application of assessment results and rectification of difficult issues. Link corporate governance assessment results with innovation trials, business permissions, fund usage and establishment of branch entities, to ensure that assessment results are effectively utilised, and pragmatically raise the emphasis placed on healthy corporate governance. Supervise and drive organisations to strictly draft and implement rectification plans, and drive substantive progress in rectification of problems.
2022Stress improvements to the assessment system, improve assessment work mechanisms. Promptly summarise the experiences and lessons of the past two years of corporate governance assessment work, and further amend the corporate governance assessment system and improve the corporate governance assessment indices. Strengthen the dovetailing of the assessment of corporate governance with regulatory ranking of commercial banks and regulation of the solvency of insurers. Pragmatically raise regulatory capability.

Standardisation of Shareholder Conduct

2020Deeply rectify the problem of equity and affiliate transactions, while endeavouring to improve mechanisms for restraining the conduct of major shareholders. In accordance with the principle of thorough consistency, further inspect and rectify deep-seated high risk issues, including false capital registration, circular capital injections, hidden shareholders, illicit proxy shareholding, illicit unanimity of action, improper interference by shareholders, and channeling of interests to shareholders; strictly implement rectification of problems. Strengthen standardisation of the conduct of major shareholders, and controlling shareholders in particular, and clarify that major shareholders cannot interfere beyond the bounds of their authority with the board of directors and senior management in the exercise of their professional duties. Pragmatically prevent major shareholders from manipulating or usurping companies. Drive the centralised depository management of commercial bank equity, raise the transparency of equity structures.
2021Stress improvements to mechanisms for protecting the rights and interests of small and medium-sized shareholders. Drive rectification of outstanding shareholder and equity problems. Establish communication and negotiation mechanisms for small and medium shareholders, support shareholders exercising their basic right to engage in appropriate negotiation and communication with each other. Establish and improve communication and dialogue mechanisms for shareholders, and in particular for small and medium shareholders and institutions. Support shareholders in inquiring about their major concerns with institutions. Explore and improve specific measures for shareholders bearing losses, and continue to effectively perform specialist rectification work for equity and affiliate transactions. Accelerate the driving of rectification of major problems, and improve weak links as soon as possible. Drive the dissolution of outstanding risk.
2022Further explore and improve shareholder governance mechanisms for insurance organisations. On the basis of work including specialist rectification of equity and affiliate transactions in recent years, consolidate those methods that have proved effective into systems. Actively pay attention to the participation of institutional investors in corporate governance, and drive institutional investors to actively disclose corporate governance and voting measures in relation to investment. Research and improve transaction regulations for banking and insurance sector equity acquisitions and takeovers, and mechanisms for the controlling interest market.

Raise the Quality and Effectiveness of the Performance of Professional Duties by Governance Bodies Such as Boards of Directors

2020Focus on standardisation of the professional conduct of directors, supervisors and senior executives.
2021Place emphasis on improving operating plans for boards of directors, supervisory boards and senior executives. Improve mechanisms for the nomination and appointment of directors, and promote the cumulative voting system. Expand the selection scope for equity directors and independent directors, and pragmatically change the current situation with some shareholders being controlled by major shareholders or internal staff. Fully employ the role of banking industry associations, insurance industry associations and other self-disciplinary associations. Drive the establishment of complete independent director database, and expand channels for sourcing independent directors. Further clarify the authorisation principles and management mechanisms for boards of directors, and drive senior executive staff to independently undertake work and bear their duties within the scope of authorisation of the company charter and the board.
2022Further drive organisations in establishing and strictly implementing high-standard professional ethical benchmarks, and continuing to tommies various work mechanisms for governance bodies. Enable the strategies and decision making of the board of directors and the supervisory role of he supervisory board to be fully embodied, and supervise and drive the operational conduct of senior executives to be pragmatic and consistent with the organisational development strategy and risk preferences. Drive the establishment of systems for the market-based recruitment of professional managers.

Improve Incentive and Restraint Mechanisms

2020Focus on driving the strict implementation of performance assessments by banking and insurance organisations, and the relevant regulations for remuneration management.
2021Focus on improving remuneration mechanisms and internal auditing work mechanisms. Supervise and expedite banking and insurance organisations in strictly protecting the reasonable remuneration of staff involved with party affairs work, risk management and internal controls and internal auditing. Pragmatically improve the situation at certain organisations of excessive incentives for operations departments, and irrational allocation of remuneration to front, medium and back-end staff. Research and formulate medium and long-term incentive standards and guidance, and drive improvements to the remuneration structure for senior executives. Strengthen investigation and research into issues with employee shareholders, and engage in standardised trials of employee shareholding. Further improve internal audit work mechanisms, and promote best practices such as internal audits and reports to supervisory chiefs.
2022Further explore pluralised incentive and restraint methods.

Strengthen Protections of the Rights and Interests of Interested Parties

2020Focus on deepening an awareness of the need to protect the rights and interests of interested parties amongst banking and insurance organisations.
2021Further improve mechanisms for the protection of the rights and interests of interested parties. Supervise and expedite organisations to incorporate respect and protection of the lawful rights and interests of interested parties – and consumers in particular, into their corporate culture and development strategies. Support and protect complaints and reporting made by consumers, staff, small and medium-sized shareholders and other interested parties to boards and authorities of conduct which breaches the laws or infringes professional ethics. Research and improve organisational professional supervisory work mechanisms.
2022Explore and improve professional director systems, research and apply bankruptcy systems and creditor’s rights protection systems for banking and insurance institutions.

Strengthen External Market Constraints

2020Focus on strengthening standardisation of external auditing work.
2021Focus on improvements to the information disclosure regulatory requirements for the banking and insurance sectors.
2022Focus on strengthening daily supervision of the quality of information disclosures.

Raise Regulatory Capability

2020Focus on driving the establishment of a corporate governance regulatory system and information system. Research and formulate corporate governance regulatory system development plans, and set about establishing a unified and coordinated corporate governance regulatory system for both the banking and insurance sectors. Research and formulate unified banking and insurance organisation corporate governance regulatory guidance, integrate and improve banking and insurance sector corporate governance regulatory requirements. Amend the “Commercial Bank and Internal Staff and Shareholder Affiliate Transaction Administrative Measures” (商业银行与内部人和股东关联交易管理办法), the “Insurance Company Director, Supervisor and Senior Manager Qualification Administrative Regulations” (保险公司董事、监事和高级管理人员任职资格管理规定) and other systems, and strengthen the effectiveness of related regulations. Focus on driving the establishment of three corporate governance regulatory information systems covering corporate governance assessment, equity supervision and affiliate transaction supervision, and pragmatically raise the digitisation level of the regulation of corporate governance.
2021Focus on improving corporate governance regulatory work mechanisms, and explore differentiated regulation. Research and improve corporate governance horizontal and vertical coordination mechanisms, to further drive clarity in terms of corporate governance regulation and authorities and duties, coordination and efficiency and standardised operation. Strengthen the establishment of corporate governance supervisory teams for local small and medium-sized legal person institutions such as municipal commercial banks and rural village commercial banks, and raise the level of professionalisation for the regulation of the corporate governance of small and medium-sized organisations. Based on regulatory work requirements, within the basic rules framework for the corporate regulation of banking and insurance institutions, when appropriate research and formulate or improve the application of regulatory rules for the corporate governance of different types of institutions, and strengthen differentiated regulation. Include the corporate governance of policy financial institutions within the framework of overall rectification of policy financial institutions. With reference to best international practices, further raise the corporate governance requirements for insurance groups.
2022Focus on strengthening domestic and overseas exchanges and cooperation, and continue to raise the capability and level of regulatory work.

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