By Didier Cossin & Abraham Lu
Since its dual IPOs in 2007, the Industrial and Commercial Bank of China Limited (ICBC), one of the largest commercial banks in China, has received a multitude of best governance awards adding to its global reputation. As recently as June 1999, however, international institutions and analysts broadly considered ICBC as “technically bankrupt” with the nonperforming loan (NPL) ratio reaching 47.59 percent. ICBC drastically improved through a governance transformation with the united effort of the government, the management team, and its employees. The transformation path had four steps: internal restructure, ownership reform, governance overhaul, and public IPOs. With each step, corporate governance became more sophisticated and comprehensive.
The ICBC’s governance system has four tiers: shareholders’ general meeting, board of directors, board of supervisors and senior management. The board of directors itself is composed of three distinct groups, the executive directors, the full-time non-executive directors, and the part-time independent directors. This structure is designed to provide effective checks and balances within the board. The board of supervisors monitors the performance of the directors and senior management members who are not on board. There are two additional components of the governance system: the party committee which plays an important role in the system and the party disciplinary commission which provides thorough monitoring from the top to the bottom. ICBC’s unique, sophisticated and rich governance system provides potential lessons and perhaps some inspiration for western and emerging markets. In what follows, we trace those lessons.
Chinese banks as country strategic and the political will to transform them
The banking reform of the past 30 years is a snapshot of China’s reform, a process filled with trial and error while exploring new paths for development. In 1979, Deng Xiaoping forged ahead with plans for a banking reform; the objective was to transform “banks into real banks.” After that, China’s banking sector has experienced many institutional changes, but the transformation has been largely unsuccessful.
In 1997, the average of the capital adequacy ratio (CAR) of the Big Four1 was only 3.5 percent and they were burdened by the NPLs and large losses. The banking sector had experienced tremendous difficulties and was described as “a ticking time bomb,” which would eventually lead to an implosion of the country’s economic system. The WTO entry added further urgency. When China joined the WTO in 2001, the country promised that the geographic and customer restrictions on foreign banks would be gradually removed. Full access was to be granted after December 11, 2006. However, the ailing banking system could not cope with the intensified domestic competition.