Abstract: Starting from the pilot project of holding reform to the introduction of foreign strategic investors and then accomplishing the leaping enhancement of listing in Hong Kong, China Construction Bank became the first case of Chinese state owned bank to achieve restructuring of shareholding system. But before, the governance and organization structure of China’s SOBs has severely impacted their international competitiveness. So a question about how to establish effective governance and organization structure among SOBs has been highly concerned. Outline: 1.
History of CCB 2. The Stock Reform of CCB 3. CCB’s governance and organizational structure 4. Top management President Guo 5. Further Reflections History of CCB China Construction Bank is one of the largest banks in China and actually it is the second largest bank . China Construction Bank’s (CCB) history dates back to 1954 when the People’s Construction Bank of China founded as a state-owned entity. In 1979, People’s Construction Bank of China became a financial institution under the direction of the State Council and assumes more commercial banking functions.
Headquartered in Beijing, CCB employed more than 300000 personnel in a network of 13977 branches and sub-branches in Mainland China, and representative offices in London and New York. CCB had established banking relationships with many of the largest business groups and leading the companies in industries that were strategically important to China’s economy. According to The Banker magazine in industries in July 2005, CCB ranked 25th among the world’s top 1000 banks based on tier-one capital. CCB began trading on the HK Stock Exchange in October 2005.
CCB had undergone substantial reforms since 1994 and tried to change itself from a policy bank to a commercial bank. In 2004, CCB Corporation is formed as a joint-stock commercial bank as a result of a separation procedure undertaken by its predecessor, China Construction Bank, under the PRC Company Law. In 2005, Bank of America acquires a 9% stake in China Construction Bank for $3 billion. It represents BAC’s largest foray into China’s growing banking sector. The Stock Reform of CCB The background: With China joining in the WTO, a lot of competitive foreign banks intruded into the dynamic Chinese market.
These foreign banks have put a lot of pressure on Chinese banks, especially the state-owned commercial banks. At the annual conference of Asian development bank board in 2001, four bank presidents form BC, CBC, ABC, ICBC all came up with the idea that only by picking up the company governance framework can they solve their problems and thus lifting their competitiveness. The motivation: 1. Subjectively: motivation: There existed some fatal shortcomings in the governance framework at that time, and those would hamper the progress of going forward.
These may be the fundamental reasons. 2. Objectively: motivation: Just like what I mentioned above in the background. The most direct reasons are caused by the foreign banks which put unprecedented pressure and striking on the state-owned commercial banks. SOME detailed and specific information Although the state-owned commercial banks had been reforming for many years, they were still kept at the surface level. This phenomenon may derive from the fact that reformation always had something to do with the complicated upper-class governance and human-resource management.
According to the 4 standards announced by OCED: Fairness, Transparency, Accountability and Responsibility. We can conclude into six reasons of SUBJECTIVE ones. 1. To begin with,“internal control”cannot guarantee the legitimate rights and interests of all the stockholders. The government has held too many shares nearly 100% and the ownership belongs to country in theory. However, in practice, no stockholders is willing to be responsible for the state-owned assets, the owner vacancy problem is very salient.
Under this circumstance, the profits of country owner cannot be promised and on the other hand, the ubiquitous ownership of the bank engenders the unclear boundaries between government and companies, leading to a heavier burden on the country finance. The state-owned commercial banks don’t take the limited responsibility, if the government over supervises or over interferes, it may cause the financial repression, and with the increase of bank debts, the government has to loosen the requirement and invest revenues to bank again and again .
As a result, the country must hold the burden. 2. Lacking a balanced corporation construction structure just like “Shareholders meeting—board, Supervisors board—operators”. This may lead to the bureaucratization. Therefore, no one will show any care for financial risk and profits. 3. Without an efficient information announcing system. Because there is no perfect system, the ways of information announcing are diverse, thus the information is fragmented. As a result, the information integrity, reliability, and authority can not get guarantee.
Some foreign bank professions often suspect our transparency. 4. The managers hardly use the incentives to motivate their subordinates. For the budgets of banks are determined by the Ministry of Finance, and the banks themselves do not have the decision-making power. And if there is no incentives and no emphasis on talents, banks will suffer a great loss, and proceed in opposite directions with the initial goal. 5. Lacking the accountability mechanisms in management level.
At that time, some senior managers are appointed by central government, and these people transform among central bank, four banks, policy banks and other government department . These transformation picks up the accountability risk and is more easy to cause the senior management level to shirk their responsibility and shift the blame onto others. 6. Lacking attention to stakeholders. This mainly attributes to the poor-quality of service and the monotone of products. The Specific Procedures • 1.
In 2003, China Construction Bank set up the leading group and its office of stockholding system reforms in early April, in order to coordinate and arrange the reforming work systematically and consistently. • 2. From 2003 July to August, CCB determined the intermediary organizations such as the auditor, appraiser, lawyers, management consulting company in the course of stockholding system reforms. • 3. On December 30, 2003, the Central limited liability company invested 22. 5 billion to CCB • 4.
From January to September,2004,the CCB started introducing sponsor shareholders preparatory work, confirmed the first group of candidate sponsors, and formally launched the related work to contact and negotiate with candidate sponsors shareholders. The central Huijin company, CCB investment company, the national power company, Shanghai baosteel, Yangtze river power these five sponsors formally signed the “promoter agreement”. CBRC approved that the CCB is divided into CCB Co. , LTD. And CCB investment limited liability company. • The effects of the reformation:
Although the procedures of bond issuance have increased in amount, the efficiency did not reduce, the critical point is that the reformation has satisfied the basic requirements through authority division, proper restriction, efficient supervision and so on. CCB’s governance and organizational structure After China’s accession to the WTO, more and more foreign banks enter into the domestic market, which brings in investment and also competition. Meanwhile, all know that China’s economy is in the transition stage and that means great impact from the system contradiction as well as some adjustments of relative policies.
Different from common companies, commercial banks have many specific characteristics, which lead to the differentiation of their governance structure. Commercial banks have special operation objectives—maximize profits while allocating financial resources as well as pursuing the minimum of financial risks. In addition, the complexity of consignation-agency relationship, the negative incentives of deposit insurance system, the influence from government regulation and the speciality of the capital structure all bring about its special characteristics.
According to what has been stressed in the files issued from the Basle Committee, a firm governance structure of a bank should include following contents: clearly defined and implemented responsibilities of each position in the bank, the guarantee of effective supervision to subordinates from senior executives and to senior executives from the board of directors and high transparency of corporate governance. But let first view three main weaknesses of CCB now.
A) After the share reform of China Construction Banks, joint-stock companies were established in line with the requirements of corporate governance framework. However, the establishment of the framework of corporate governance structure and its effective operation are two different propositions. At this stage, senior managers of these state-owned banks is the party’s organization department of the former state-owned banks after the council management staff recommendation is the use of cadres principle, basically retained the original managers of state-owned banks and old-fashioned ” soft culture “atmosphere.
This makes the role of bank managers and operators of cadres role mixed with political overtones. As a result, the bank restructuring process and the formation of a more serious “internal control” issue, the banks are not really change the operating mechanism. (B) Joint-stock banks, banking supervisors within the statutory functions of oversight bodies, is to improve the governance structure of joint-stock banks an important part.
But our current board of supervisors of state-owned commercial banks is difficult to play its supervisory role effectively, and even be assimilated within the trend. Reflected in two aspects: first, to see from the composition of the board of supervisors, board of supervisors by the representatives of shareholders and an appropriate proportion of staff representatives, external supervisors less than normal, while the addition of non-professionals, internal supervisors, supervising a mere formality.
Second, the lack of legal procedural requirements for the board of supervisors supervise the banking system currently used such as the annual Board of Supervisors, Supervisor of the company’s right to know, check and oversight powers are extremely limited, there is no clear procedures for the board of supervisors and more opportunity to exercise their proper supervision. (C) The new institutional economics thinks that the reason lead to “internal control” is the root of the effective mechanisms of institutional arrangements and lack of restraint.
In the absence of appropriate restraint mechanism case, “internal control” for the overall performance of the failure of corporate governance, banking supervision within the mutual positions to become a display, the operating rules in name only. ?? ???????????? ?? On August 13, 2008, issued to the public. Focusing on the layer of upper management, it gave us a very clear presentation of CCB’s modern corporate governance structure which they called “three boards and one layer”.
According to the claim of the Company Law and some related laws and regulations, CCB established modern corporate governance structure with the board of shareholders, directors, supervisors and the executive management. They formed four organs of separated powers, checks and balances including the organ of authority, decision-making, supervision and executing. As for the board of directors, it has five subordinate boards consisting of committees of strategic development, auditing, risk management, nomination and remuneration and related transaction risk control.
There are also two subordinate committees called supervisions on performance and commitment of duty committee and financial supervision and internal control committee. More precisely, 4 executive directors, 7 non-executive directors and 6 independent directors comprise the board of directors while the board of supervisors is comprised of 3 shareholder representatives, 3 staff representatives and 3 outside supervisors.
As for the Senior Management, there are seven subordinates called the committee of asset and liability, risk management and internal control, corporate and institutional banking , personal banking, investment and wealth management, information technology and human resources and cost control. This is the chart of CCB’s structure. [pic] If we look at the whole picture of organizational structure, over the 30 years in the reform and opening up, the organizational structure of Chinese commercial banks has experienced a series of process of evolution.
A firm’s structure can determine the success or failure of its strategy and its overall performance. The centralization or decentralization of a firm’s structure affects the implementation of its overall strategy and the strategy of its divisions. But for Chinese commercial banks, the revolution of organization structures should at first specify the principles of structure design and then choose appropriate target mode. On the basis of that, create conditions and environment for the reform and formulate logical measures without desire for quick returns and profits.
Alfred D. Chandler, Jr. has pointed four principles for the modern organization structure construction— integrate the centralization and decentralization of power, maximize efficiency, connect and coordinate with others and control effectively. This is the organizational chart. [pic] Theoretically, the evolution follows a dynamic logic which can be described that environment determines the strategy, strategy determines the management system and management system determines the organization structure.
Chronologically, the four stages are highly centralized functional structure, fully decentralized holding company structure, area business division structure and business line division structure. The common choice of advanced international banks is the matrix structure focusing on the customers based on the specialization of business, flattening of branches and vertical management. At present, most of the large international commercial banks have formed matrix structure mode. Meanwhile, the organization structure reform of domestic commercial banks features operation principle of “customer oriented”.
CCB build strategic business unit system and start three lines of vertical reform involving auditing, venture and preservation, implementing independent vertical management system within the whole bank. Although we know that the matrix structure often slows some response activities because of the need to make joint decisions and coordinate actions prior to implementing them, it can facilitate the coordinated response because managers have already established relationships and coordinated their efforts on a regular basis. The Pyramid of the Structure:
Top Management President Guo Shuqing: Guo Shuqing’s leadership In restructuring progress of CCB, there was a man who played a significant role and he is Guo Shuqing. Guo Shuqing was the deputy governor of Bank of China, a head of the State Administration of Foreign Exchange and the chairman of Huijin Investment Ltd until he took the helm at China Construction Bank in March, 2005. During that time, public had widespread commented on the resignation of former chairman of CCB, Zhang Enzhao who had been involved in bribery in America.
However, instead of worrying about the public voice, Guo was quite optimistic about the current situation of CCB. He said that thanks to restructuring, operation management, business development, the process of reformation had not been strongly hampered. Later on the first Party committee meetings, he made a decision that human resource department which had been managed by Board chairman and Secretary of the Party Committee belonged to the president’s govern. He also separated the power between party committee and bank president congress according to modern enterprise system and party constitution.
After researching Guo’s work experience, it is eye-catching that apart from being a policy researcher such as director of Comprehensive Department in commission for economic restructuring for twenty years, he has also been vice governor of Guizhou province to gain more practical experience. His experience is quite in accordance with his principle of unity of knowing-doing. He had owned appreciation of honest and sincerity from employees through internal meeting.
But he admitted that he still lacked experience of working in financial firm because management and operation was vastly different from that in government and it required more technical skills and social skills. Now let’s have a look at Guo’s performance in terms of leadership. • what Guo has done as a leader :He faced the bottleneck of management directly and accelerate the reform of corporate structure, analyze current situation, and make necessary changes • Two types of power: ? position power: as chairman of CCB, Guo has enough legitimate power to influence his employees.
?Personal power: Guo once was vice president of People’s Bank of China so he owns both expert power and referent power. • Leaders’ traits ? Drive: tenacity: Guo always sticks to company law and Constitution of the Party ? Motivation to lead: Guo used to being a leader so is comfortable using power. ?Emotional maturity: Guo was optimistic about the current situation of CCB. He said that thanks to restructuring, operation management, business development, reform and restructuring had not been strongly influenced and was calm under stress from public.
He is unself-centered because he can think from the perspective of the people is no defense by showing mercy to his predecessor when talking about Zhang’s bribery. ?Self-confidence: Guo has said: we should firmly believe that the reformation will succeed with lots of advantages including understanding and support of society and efforts from everyone in the bank • Skills ? Technical: Guo came from different industries so lacks relative skills and experience. ?Conceptual: Guo analyzed the SWOT of CCB and then drew his own conclusion.
? Social: working in CCB is a challenge for Guo because cases of dealing with relationship problems increase. • Behaviors ? Task behavior: Guo held a meeting immediately after he took office so his work is of high efficiency. ? People behavior: Guo is friendly and shows trust in subordinates. • Path-goal theory: Guo’s leadership style is supportive as he once said, “board of directors does not have to keep an eye on manage layer everyday. ” • Substitutes:? ability &experience: employees are all highly qualified. ?direct feedback ?
staff support:Guo looks forward to the recognition, understanding and support from employees. Further Reflections: As is known to everyone, commercial bank is an important part in a country’s financial system. So its operating efficiency not only has relation to the allocation of resources in society, but also affects the transmission and implement of finance and economy policies. Through reorganization of demutualization, structural reform of CCB has achieved great success as below. 1. Better financial situation and more profit 2.
More mature internal control system CBC has preliminary formed comparatively independent internal control system and risk prevention mechanism. 3. Preliminary standard framework of corporate governance and supervise and constraints system Despite the positive results, there are still several weaknesses lying in the present structure of CCB. 1. Supervisory mechanism is not efficient enough. Supervisory boards are supposed to be the internal supervisory organ of the bank and an important part in improving organization structure according to the law.
However, in CCB, supervisory boards consist of shareholder representatives and employees’ representatives who are not very professional and lack external supervisors. Besides, laws related to the procedure are limited which obstruct the right to know, right of access and authority to supervise. Hence, it turns out to be more like a mere formality. 2. The issue of internal control (execute decision making all-in-one) is serious. At the present stage, superior managers of CCB are recommended by Communist Party of China (CPC) from managers who were working in nationalized bank.
So they have almost same previous experience and the cultural environment is outmoded to some extend. In consequence, the role of cadre members at the manager level is mixed with the role of proprietor. During the reformation of structure, the issue of internal control becomes an obstacle in the way of real change of managing mechanism, which reflects a lack of commitment mechanism. 3. CCB lacks incentive and restraint mechanism that are clear and suit for market. What is more, accountability system and assessment system towards managers and employees are not effective and transparent.
These problems have brought CCB a series of disadvantages such as vague operational objectives, a lack of motivation, low efficiency and high operating risks. Targeting at these problems, there are four policy proposals. 1. Perfect procedures and rules of Supervisory mechanism at law. Once authorized, Supervisory boards should use power without being intervened by other departments. The ratio of external professional supervisors to internals should increase and internal supervisors have to pass restrict qualification examination to participate.
What’s more, encourage employees to take part in juridification of rules and make them be a force to balance the Corporate Governance Structure. 2. Set up and complete business manager market and break the tradition that all top managers are appointed by party organization. CCB should strengthen the function of the board of directors because the board of directors is the center of internal governance system arrangement. Improving the independence and authority of the board of directors could obviously perfect the governance structure.
Recruit independent directors in order to separate board of directors and managers. Furthermore, managers’ promotions or demotions are depending more on the operating performance of the bank, which can motivate managers to do their best to run the company and gain reputation. In this way, the constraint to insiders is enlarged. 3. Build effective inquire-and-punish system to motivate all the workers and staff members. Take America for example. In the USA, the incentive mechanism combine long-run and short-run incentives together such as introducing pension plan and stock option to encourage workers.
CCB can also use performance appraisal and compensation to maximize performance. In this way, motivation can reinforced for self regulation and hard work. Major tasks in the future: CCB has set up some strategies, now the task is to implement it. 1. The external macro environment management of the state-owned commercial banks needs to be improved, economic and financial market needs to be further standardized and developed. 2. Law enforcement should be strengthened. 3. The functions, responsibilities and behaviors of the government are supposed to be standardized.
4. One more complement social credit system need to be established. 5. Financial regulation and supervision level need to be improved. 6. Managers are supposed to change the ideas, improve the management style and apply modern financial method. 6. To cultivate employee’s competition awareness and improve overall quality. 7. Enterprise culture and team spirit also need to be set up. Compared with the international first-class banks, the state-owned commercial banks still have a long way to go.
Besides the methods mentioned above, it will surely be of great help if CCB develop and shape organization culture. Enterprise culture, if positive, can enhance cohesion, cultivate an atmosphere of teamwork, drum up business and also improve company image. The fundamental way to promote the reformation of governance framework construction: Establishing a comparatively perfect system of ownership. 1. For one thing, we should propel the diversity, decentralization, corporatization of the ownership of stocks. 2.
Secondly, we should separate the government and companies and clarify the ownership. As a conclusion, corporate governance structure and organizational structure are the essential part of the strategy of CCB’s development because it is the foundation and support of a series of development strategic objective and measures. CCB still has a long way to go in structure reform. Involved Key Terms in the Book: Centralization and decentralization Organization structure Integration and differentiation Organizational design Matrix structure Leadership