Chinese banks and insurers are failing on corporate governance

The China Banking and Insurance Regulatory Commission (CBIRC) announced on November 12 that some of the organisations involved in its annual evaluation of banks and insurance firms are failing to meet corporate governance guidelines including shareholders governance, risk control and board governance. 

This year, 1,857 companies participated in the corporate governance regulatory assessment (1,673 commercial banks and 184 insurers). The CBIRC ratings placed firms into A, B, C, D and E groups.

The breakdown by institution saw the largest number 1,100 rated as C (pass), representing 59% out of the assessed firms, followed by 366 B (fine)-rated firms (19.7%). A total of 253 institutions were rated D (weak), representing 13.6% and 138 institutions were rated E (poor) (7.4%). No institutions got an A rating, denoting 'excellent'. 

That says, fewer than 20% of firms were valued as “higher than passing level” for their corporate governance. Experts believe these firms need to do more on information disclosure and improve their corporate governance structures as the government has been strengthening every single part of the financial sector: from listing enterprises to private sector under a stricter ESG engagement.

“Improved disclosure and standardisation of ESG metrics in China would allow better comparison of Chinese corporates against local and international peers, benefiting the rising number of local and international investors with ESG mandates. Still, we think the level and quality of the disclosure in China will continue to fall short of that in the US or EU over the next few years,” Fitch Ratings told AsianInvestor.

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The CBIRC assessment uses these eight dimension to evaluates the participating institutions:

• Communist party leadership,
• Shareholder governance,
• Board governance,
• Supervisory board and management governance,
• Risk control,
• Related transaction governance,
• Market constraints, and
• Other stakeholder governance.

The assessment was conducted both onsite and offsite. The regulator did not provide breakdown numbers for banks nor insurers for each rating or a full list of all firms that were rated.

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The regulator found a number of faults with shareholder governance at different firms  such as some shareholders having illegal equity holding positions; major shareholders illegally interfering with management; and small and medium-sized shareholders failing to effectively participate in governance.

On risk internal control, the regulator found many peers had insufficient ability to manage risk and internal audit departments that lacked independence.

The regulator also found that some firms failed to implement information disclosure that is comprehensive enough and that there were even different definitions concerning disclosure of major related transaction types and amounts. For example, firms failed to disclose the situation of external intermediaries, important employee compensation information and other risk information.

Regulators are pushing companies to do more, particularly on ESG disclosure. 

In June this year, the China Securities Regulatory Commission (CSRC) published the final set of amendments to the ESG disclosure rules applicable to annual reports and half-year reports, respectively.

Also in October, Ministry of Ecology and Environment proposed mandatory environmental information disclosure requirements  that could improve investor access to data and risk assessment around ESG factors as well.

ALSO READ: China's ESG disclosure improving but regulatory risk a concern