Corporate Governance of Chinese Banks Posts Improvement in 2021, Party Leadership Still Insufficient: CBIRC Survey

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A new survey from Chinese regulators of the quality of corporate governance at domestic banks and insurers points to steady improvements across the board in both sectors.

The China Banking and Insurance Regulatory Commission’s (CBIRC) latest regulatory assessment results for 2021 highlighted “steady improvement in the corporate governance of banking and insurance sector companies,” while also warning of “the presence of risk in certain areas that continues to warrant attention.”

The 2021 assessment looked at a total of 1857 banking and insurance sector institutions, giving them an average score of 73.93 points, for an increase of 0.14 points compared to 2020.

In 2021 no financial sector institutions in China received an A grade (outstanding), as compared to just 1 in 2020. 1466 Chinese financial institutions received grades of B (excellent) or C (compliant) however, accounting for 78.95% of the total, for an increase of 0.77 percentage points compared to 2020.

Fewer financial institutions received D (weak) or E (poor) grades in 2021. Only 138 received E grades, for a decline of 44 compared to 2020. They accounted for 7.43% of the total, for a slide of 2.73 percentage points compared to 2020.

CBIRC’s survey found that key areas of improvement included shareholder governance, affiliate transaction management and board governance.

Municipal commercial banks and rural commercial banks saw improvements in shareholder governance of 2.28 and 5.48 percentage points respectively compared to 2020, while the number of commercial banks with “share entrustment issues” fell by 23% compared to 2020.

Commercial banks and insurance institutions also saw improvements of 10.44 and 8.93 percentage points respectively when it came to management of affiliate transactions.

The CBIRC assessment highlighted improvements in areas including:

  1. Active innovation in effective paths for the organic integration of party leadership and corporate governance. Large-scale state-owned commercial banks and insurance groups took the lead in incorporating party work requirements into corporate charters.
  2. Continuing to explore new methods for the optimisation of corporate governance. ICBC, China Construction Bank and other big state-owned banks continually improved board structure, generally increasing their numbers from 11 to 15, with executive directors, share directors and independent directors accounting for around one third each.
  3. Continual strengthening of performance assessment and remuneration management in guiding business operations.
  4. Fully making use of IT as an adjunct to strengthening risk management.
  5. Continuing to diversify effective implementation of ESG duties.

The survey highlighted ongoing areas of weakness and concern which included:

  1. “Empty” or weak leadership by the Chinese Communist Party. “In some state-owned banks and insurance companies the leadership role of the party is lacking, and related system arrangements are vague or operability is weak.”
  2. Shareholder conduct is non-compliant and imprudent. This includes problems such as failure to pay in capital, “fake” capital contributions by shareholders, and removal of capital contributions. “Some shareholders have engaged in entrusted or proxy holding of equity in breach of regulations, and some shareholders have invested in multiple commercial banks, breaching the regulatory provisions for ‘Two Participations and One Control.’ At some institutions shareholders have used shares as collateral in breach of regulations.”
  3. Inadequacies in the regulation of affiliate transactions. “Identification of affiliate parties is inadequate, and some directors, senior management executives and shareholders have proved unable to report on affiliate conditions in accordance with regulations.”
  4. Effectiveness of the operations of boards of directors is inadequate. “The structure of boards of directors fails to satisfy regulatory requirements, with one shareholder and its affiliates nominating a share of directors in excess of regulatory requirements…the number of independent directors is inadequate, while the leaders of specialist committees for auditing, affiliate transactions and other areas are not independent directors.”