A Study On The Corporate Governance Of China’s Large Commercial Banks And Optimal Path

To study the corporate governance of China’slarge commercial banks has great theatrical value and practical sense.First of all, along with China’s economic system evolves from a planned economy to a planned Commodity economy, and then later to a socialist market economy, the role of large commercial banks changes step by step from the universal system banks, to state-owned specialized banks, then later to state-owned commercial banks, and at last to large state-holding commercial banks. During this process, according to the theory of property right, through the continuing improvement of the ownership arrangement, the allocative efficiency and productive efficiency of the large commercial banks is effectively enhanced, and a system of checks and balances between decision-making power, executive power, and supervisory power based on property right has been initially established. Secondly, how to improve the incentives and supervision of management is one of the key problems that the corporate governance of the large commercial banks needs to solve. Agency theory and Stewardship theory reflected different human nature presumptions, which provides a different analytical perspective and solution to for this problem. Besides, because of the particularity of the large commercial banks, the improvement of management incentive also needs a solution different form other commercial banks. Thirdly, the stakeholder theory advocates that the corporation should focus on and serve all stakeholders including shareholders. Under this theory, social responsibility becomes an important element of the corporate governance of the large commercial banks, which will make efforts to keep a balance between maximizing the shareholder value and the benefits and other stakeholders, for the purpose of achieve the sustainable development of the banks.In the real sense, the successful listing of the Agricultural Bank of China in2010is the sign of the final completion of the share reform of the large commercial banks, whose reform of corporate governance transforms to the "after-share reform period" thereafter. At present, although the large commercial banks has established the basic structure and elements of the corporate governance for modern banks. But similar to the dilemma of the reform of other areas in China, the dividend that comes form the reform of corporate governance based on property right will inevitably tends to decrease. But the following reform will be more complicated and difficult, new paths need to be explored and new breakthroughs needs to be made.At the same time, under the influence of the global economic integration, the profit model transformation of the multinational financial group, IT innovation and the renew of financial supervision, the philosophy, structure and rules of the corporate governance of commercial banks are all going through a sustained, in-depth change. To this end, the overall standards for the corporate governance of large commercial banks in China are: not only should comply with the basic concept and general principal of the corporate governance of international banking business, but also should reflect the specific national conditions of China including political, economic, historical, and cultural elements.In the long run, without the establishment of corporate governance in line withe the above conditions, even though the scale of operation or the stock value is in the lead over the global peers, the large commercial banks still cannot form and maintain a lasting core competitive advantage. Therefore, the optimization of the corporate governance of the large commercial banks will be an ongoing process and unfinished mission. In view of this, the author’s study was designed to rethink the developing process and status quo of the the corporate governance of the large commercial banks, and then put forward some constructive suggestions for the optimal plans.Starting from describing the the general concept such as the company, corporate governance and the basic connotation of the corporate governance of commercial banks and the particularity of China’s large commercial banks, taking the changing role of the large commercial banks from specialized banks to state-owned commercial banks and to state-holding commercial banks as the background, this paper reviews the establishment and evolution of the large commercial banks incorporate governance systematically, deconstructs the status of corporate governance and major defects comprehensively, and puts forward the main paths and basic suggestions for optimizing the corporate governance of large commercial banks.The paper is divided into six chapters, includes:Introduction; the particularity of the corporate governance of China’s large commercial banks; the historical evolution of the corporate governance of China’s large commercial banks; the deconstruction of the corporate governance of China’s large commercial banks;the analysis of the corporate governance of large commercial banks; the optimal path of the corporate governance.In the first chapter, the author introduces the research background and significance of the thesis, then reviews relevant research literature, and describes the main research method, the basic idea, logical structure and innovations of this thesis.Beginning from the company’s properties, the interpretation of corporate governance the second chapter discusses the author’s understanding of the concept of corporate governance, and reviews the mainstream model of the global corporate governance and the basic theory of corporate governance, the author then analyses the particularity of the corporate governance of commercial banks, and explores the specific performance of the corporate governance of China’s large commercial banks.In the third chapter, the author believes that:Taking a perspective of corporate governance to review and examine the growing process of the large commercial banks after the reform and opening up, from the blank state of professional banking corporate governance to a basic modern corporate governance framework and institutional system after share reform, the main line running through is the property rights reform, organizational construction and system design. Large commercial banks in this manner evolves as follows:the reform of property rights changes from the whole-people-owned to the state-holding, and the structure of organizations changes from a single structure to the power balance, and the design of the system changes from an extensive governance to the governance of law. In this chapter, in reference to the division of the developing stage of the large commercial banks, the author analyses the historical evolutions of large commercial banks after the reform and opening up from three aspects:the reform of property rights, the organization construct and system design.In the forth chapter,"China’s large commercial banking firm governance deconstruction", the author analyses the corporate governance of large commercial banks from the four dimensions:ownership structure, organizational structure, decision rules, and incentive. Firstly, in the part of ownership structure, the author analyses the large scale of large commercial banks equity, the ownership concentration and the dominant state-owned shares, and basic characteristics of some other ownership structure. The author also reviews the formation of the capital structure in this part. Secondly, in the part of organizational structure, the author does some research on the governance structure and the relationship thereof, which is about the shareholders,directors and officers and supervisors. Meanwhile the author analyses the operational model and main features of management under the head office-branches system. Thirdly, in the part of decision-making rules, the author discusses the rules of procedure, authorized operation and decision-making by hierarchy of the internal governance structure. Last, in the part of incentives and restraints, the author makes an assay of the problems existed in the status quo of the salary system, the limitation of the stock option and other internal or external mechanism.In Chapter Five,"the discussion of the board structure, management incentives and performance of the corporate governance of China’s large commercial banks", by making references of the methods of the distribution of parliamentary seats in the United States and Europe, and combining with the specific feature of the board of China’s large commercial banks,the author makes a proposal to establish the principle about how to distribute the seats of non-executive directors and other improvements to the board structure. Furthermore, from the perspective of principal-agent theory, the author discusses the deficiencies in the existing management incentives mechanism and brings up some strategies and suggestions. The author also puts forward the concept of the performance of corporate governance both in narrow and broad sense, and carries on an empirical study on the relationship between the proxy variables of theownership structure, board structure, executive salary and per capita bank assets, the cost-income ratio of the large commercial banks, and draws on Douglas production function to establish a simple model of the function of large commercial banks operating results.In chapter Sixth,"the optimal path of the corporate governance of the large commercial banks", under the specific circumstances in China and the influence of the global trends of corporate governance in banking business, the author analyses the reasonable position of the corporate governance of large commercial banks and discusses about the similarities and differences of external governance mechanism of large commercial banks and those state-owned commercial banks in the developed countries. The author explores the suggestions on how to optimize the governance mechanism from6aspects:the share structure and supervision of great shareholders, the construction of the board of directors, the allocation of the supervisory power, the organizational structure and incentives and restraining mechanism. On the basis of the division of the external governance mechanism into market-oriented mechanism and non-market-oriented mechanism, the author addresses the influence to the external governance mechanism of large commercial banks form the stock market, banker market and non-shareholder stakeholder market, financial supervision, the construction of finance legal system, the principle under which the CPC should supervise its cadres. Then the author puts forward optimizing suggestions.Compared with the existing literature about the corporate governance of large commercial banks, the innovation and improvement of this thesis are mainly as following:First, Make an analogy of the relationship of the number of shares held by stockholders and the corresponding directors(non-executive) delegated by them to the relationship of the number of voters represented by a political party and their corresponding seat in Parliament in the multiparty system of the west countries. Drawing on the allocation of parliamentary seats by the proportion and the quota, the author discusses about the rationality of the allocation of the seats of non-executive directors in large commercial banks. The study found that according to the allocation method mentioned above, the number of non-executive director seats that should be allocated in large commercial banks is obviously different form the actual situation. The most prominent example is the actual seats Huijin Corporation has is less that it should have. Under the condition of a high concentration in equity and there is one absolute largest shareholder, the result of allocation by the proportion or allocation by the quota is the same or just a little different.under the condition where the shares are decentralized, allocation by quota is more equal than allocation by proportion. The author believes that the large commercial banks should adopt a relatively equal method such as allocation by quota to allocate the non-executive director’s seat, for the purpose of enhance the transparency of the allocation of the seats.Secondly, the author discusses based on the principal-agency model under which the result is uncertain and cannot be supervised, and under some particularity of the management incentives(double-level motivation, the salary is unrelated to performance, duty consumption and rent-seeking opportunities), the expected return of the shareholders and management of the large commercial banks and incentives.The author believes that the salary of the management in large commercial banks cant be priced complying with the market rules of professional bankers’salary in Europe countries and the United States.In order to make the management diligent and accountable and avoid the risk of improper enrichment, the expected return of the management should be reasonably increased. The management salary should be tied to the career risks, integrity and performance, and the payment should be postponed. However, though high salary is necessary to assure the integrity and diligence of the management, it more important to strengthen the supervision, evaluation and accountability mechanism and keep a dynamic balance between incentive and restraints mechanism, and increase the punishment of lawbreaking behaviour.Thirdly, the author gives a broad and narrow interpretation of the performance of corporate governance, and puts forward a function expression about the performance of corporate governance. The author give a narrow explanation of the performance of corporate governance form the view of the efficiency of resource allocation. Besides, this thesis discusses influences made by the corporate governance variables on the performance. The author also make an analogy of the relationship between corporate governance and the performance to the relationship between the technological innovation and economic growth provided in the Douglas production function, and brings up a simple function expression of the bank’s performance,and make a broad explanation of the performance of corporate governance.