Ling Huawei: Corporate Governance Is No Substitute for Effective Supervision Over Banks

Ling Huawei is managing editor of Caixin Media and Caixin Weekly.

While poor corporate governance can be a driver of financial risks in China’s banking sector, in many cases insufficient oversight is also a key reason. Without taking this issue into account, it is difficult to grasp the essence of the problems caused by mysterious billionaire Xiao Jianhua’s Tomorrow Holding Co. Ltd. which illegally controlled Baoshang Bank Co. Ltd.

Regulators should play a key role in preventing ill-intentioned shareholders from taking control of lenders to chip away at bank funds, but they should not excessively supervise banks in this respect, such as requiring an overly decentralized shareholding structure.

Equity dispersion is not in itself an antidote for dominance by any single shareholder. If regulators deliberately require a highly diversified shareholding structure, lenders will find it hard to bring in truly responsible major shareholders. This is contrary to a basic principle for banks’ corporate governance and external supervision: to introduce shareholders who are willing to be, as well as capable of being, responsible.

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As equity diversification can facilitate capital replenishment, regulators have acquiesced to many industrial groups’ equity investments in banks, believing that they cannot control banks with small stakes. Meanwhile, regulators think that they can effectively govern senior bank executives by examining their qualifications.

In reality, however, shareholders can easily circumvent the requirement to decentralize shareholding structures by hiding behind shell companies, as we saw in Tomorrow Holding’s shadowy practices. Besides, even small shareholders can collude with bank insiders to get financing, like the privately owned companies that held shares in the troubled Bank of Jinzhou Co. Ltd.

On one hand, if their shareholding structures are dispersed and no one takes compliance seriously, banks would be largely controlled by insiders who operate them. This would lead to shareholder meetings becoming unable to supervise senior executives and the failure of corporate governance.

On the other hand, if regulators simply appoint senior executives, or even the chairman who is usually selected by shareholders, it would be difficult to ensure regulatory fairness and independence. For example, how can we ensure accountability if executives selected by regulators fail to operate well?

Regulators should think twice about how far their reach and power can be extended and consciously keep an appropriate distance from those they regulate. This is necessary to ensure independent and effective supervision.

A benign cycle of banks’ corporate governance can start from the rationalization of the regulatory system, enabling banks to introduce qualified and responsible shareholders, and allowing shareholders to choose professionals who are able to comply with regulations and manage risks well.

This commentary has been edited for length and clarity.

Translated by Luo Meihan

Contact editor Joshua Dummer (joshuadummer@caixin.com)

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