The China Banking and Insurance Regulatory Commission (CBIRC) has introduced formal requirements for Chinese banks and insurance providers to integrate Communist Party leadership into their corporate governance systems under new draft guidelines.
The guidelines were issued after a sector-wide government audit revealed numerous gaps in institutional corporate governance practices. This included instances where major shareholders were found to have used banks as personal “cash machines”, through the issuance of a large number of non-performing loans to themselves.
Separately, the regulator found that the reported capital at a number of institutions was “false” as a result of some lenders bankrolling shareholder equity capital through their own credit business. Investors were also revealed to be holding controlling stakes in several banks at the same time – a banned practice – and illegally manipulating their operations.
In addition, the CBIRC queried the independence and oversight of bank boards, saying that some directors “blindly succumb to the personal will of the nominating shareholder or chairman” and do not meet regularly to carry out their duties.
Other issues highlighted by the review include “incomplete and untrue” statutory disclosures, poor remuneration practices, insufficient attention to “social responsibility indicators” and non-implementation of regulatory requirements for green credit.
However, the CBIRC also flagged the weakening institutional influence of the Chinese Communist Party (CCP) as a key governance issue – in contravention with global democratic norms. According to the regulator, the CCP had “insufficient participation in major management issues'' as a result of being left out of discussions between senior management and boards.
The findings were based on an assessment of 1,605 commercial banks and 187 insurance institutions conducted in January. Only one institution received an ‘A’ grade, while the majority – 1,026 institutions representing 57% of respondents – were given a C for Pass.
A more recent audit on the country's largest 10 insurance groups found that many respondents had not yet established comprehensive risk compliance management processes and had insufficient firewalls separating their business units. Regulators also encountered similar instances of “excessive intervention by major shareholders” among top insurers.
While six of the assessed insurers were rated B or Good – including Ping An, which is considered the world’s second largest insurance provider, and is a signatory to the Principles for Responsible Investment; none received the top rating of A.
The guidelines being proposed by the CBIRC would introduce caps on the number of board positions which can be held by individuals, as well as additional regulatory safeguards to protect the rights and interests of small and medium shareholders.
They also lay down the first regulatory requirements for “the organic integration of party [CCP] leadership” into institutional corporate governance.
CBIRC has described the guidelines as bringing together the global best practices under the G20/OECD Corporate Governance Principles and domestic considerations based on China’s “national conditions”. The comment period for the draft guidelines is open until the end of February.