A leading financial expert believes the new governance structures developed by Chinese banks could prove to be a globally significant innovation

Chinese banks are championing a unique corporate governance structure that could provide lessons for both Western and emerging markets, says Didier Cossin, professor of finance and governance at Switzerland's IMD Business School.

The 48-year-old academic, who has advised many banks around the world, says that Chinese banks have devised a structure which ensures checks and balances between different directors but also ensures the views of the state, a key shareholder, are heard.

Cossin says such a structure is unfamiliar to Western banks because traditionally they do not have governments as key shareholders. Cossin believes this structure can provide an alternative model for banks in other emerging markets that have large state ownership.

"I was in Qatar, and I know they are very interested in the Chinese model," Cossin says. "For Qatar, the tradition has been to draw lessons from the West, but many Qatari corporations have large state ownership, and in the West we don't have a great tradition of state management of private-style assets.

"Countries like Qatar have tried to copy the Western system but it didn't work so well. So in some ways, the Chinese system can be inspirational."

With the assistance of a Chinese colleague, Cossin studied Chinese banks' corporate governance structures during an 18-month research project at the Industrial and Commercial Bank of China.

The result of this research has since been turned into case study material distributed by IMD and used by business schools globally for teaching purposes.

One innovative feature at ICBC he identified is the creation of full-time non-executive directors, who are seconded to ICBC from the Ministry of Finance and Central Huijin Investment Ltd, an investment vehicle that China's State Council set up to represent the state's interests in the country's financial sector.

At ICBC, there are six such full-time non-executive directors, who participate in board discussions to make sure that whatever decisions are made will take into account the interests of the state, a key shareholder in ICBC.

Also on the ICBC board are four executive directors, and three part-time independent directors, who are experts in their fields and contribute independent views to discussions.

Cossin says the structure implemented at ICBC is common to China's biggest state-owned banks. It was created during the rapid banking reforms of recent years, changing banks from being completely state-controlled to being market-driven and revenue-generating enterprises.

In comparison, Western banks typically have only executive directors and independent part-time non-executive directors, Cossin says.

"In the West, government intervention is exercised in the form of regulation. But in Qatar, Brazil and many other emerging markets, the state is an owner of many assets, and as an owner it has to participate in decision-making processes," Cossin says.

He says such a structure builds on the concept of responsible shareholding. According to Cossin, this concept is demonstrated in the West by a recent law in Switzerland, which requires all institutional shareholders to vote in general assembly meetings.

Cossin says a second group of organizations that can draw lessons from Chinese banks' corporate governance is sovereign wealth funds, in both developed and emerging markets, because, again, the state is a major shareholder.

A third group that can draw similar lessons is Western banks, although here the lesson is not one of structure but of part-time non-executive directors' dedication to their roles, he says.

"Western boards are evolving," says Cossin. "In the past, the culture of the West was a culture of leadership, meaning that the CEO was most important, and the board of directors was secondary. We are now moving from a culture of leadership to a culture of governance."

Cossin says traditionally non-executive directors on the boards of Western banks tend to be influential figures, but may not have enough time to commit to the companies they advise.

He says one example is the Swiss bank UBS, which a few years ago had on its board of directors people such as Peter Voser, CEO of Shell, and Sergio Marchionne, CEO of Fiat.

"These people's No 1 dedication is to their own company. They are dedicated to UBS, but it's not the same type of dedication as the non-executive directors of Chinese banks," Cossin says.

However, increasing scrutiny of the work of boards of directors in the Western media in recent years is putting more pressure on those banks' non-executive directors, Cossin says.

"Social pressure on directors is increasing. If you look at financial publications around the world, what the boards do is key. Only five or six years ago, most people didn't know who were on the boards of large corporations, and they were not talking about board members.

"In the past, the CEO was considered responsible if something went wrong, and now the board is."

Cossin says that compared to Western non-executive directors, ICBC's part-time non-executive directors demonstrate much more personal dedication to their roles.

"They are very committed, they are very engaged, they have a true heartfelt intention to make the bank successful," Cossin says. "I'd call it personal dedication. They feel they are contributing to something greater than themselves."

As an expert on the banking industry, Cossin has advised many banks around the world, including the European Central Bank, HSBC, Bank of America and Goldman Sachs. In China, Cossin has also advised the Agricultural Bank of China and the Bank of Communications.

Such experience enabled him to observe Chinese banks' rapid transformations, which mainly started in the early 2000s, when China's admission to the World Trade Organization promised a gradual removal of barriers for foreign banks, and added urgency to China's traditionally government-controlled and protected banks to become increasingly market driven.

As Cossin observes, China's biggest banks have since improved their operation efficiency through measures such as debt restructuring and improving capital adequacy, implemented robust corporate governance systems to ensure checks and balances, and sought listings on stock exchanges to encourage more market discipline.

"The rate of transformation of Chinese banks has been extraordinary. I've not seen any banks in emerging markets transforming as fast as Chinese banks," Cossin says.

To put this transformation in context, in 1999 ICBC was considered by international institutions and analysts broadly as "technically bankrupt" with a non-performing loan rate reaching 47.59 percent, says Cossin, adding that such pressure could have been one motivation for transformation.

Cossin recalls a conversation with Jiang Jianqing, chairman of ICBC, in which he asked Jiang what made ICBC so successful. "He said it's so successful because it had been technically bankrupt a few years before. So when you have had a near-death experience, you have to transform," Cossin says.

Cossin believes Chinese banks today have the ambition to become truly global institutions, and to be on par with leading banks internationally, although challenges still exist. He says he hopes these challenges will turn into pressure to urge Chinese banks to pursue further change.

"Chinese banks can still improve their IT systems, in terms of credit approval, information management, risk control and risk supervision," he says. "In terms of these processes, they can still learn lessons from the West.

"At the same time, there is pressure in China from the government in the form of changing policies for liquidity provision and capital ratios, so these pressures force banks to rethink and fine-tune their systems. Hopefully these pressures will create a good chance for further transformations."

Alexander Bloom contributed to this story.

cecily.liu@chinadaily.com.cn

(China Daily European Weekly 08/30/2013 page32)