——The Reform and Development Report of China Construction Bank

On March 5 Premier Wen Jiabao in his government work report raised six points of requirement on the reform of financial system this year and the first one is to deepen the reform of state-owned banks and consolidate and develop the achievements of shareholding transformation of state-owned commercial banks. The reform of state-owned banks has been a hot topic in the Chinese financial industry for several years. How is the reform going today? The reporter recently visited China Construction Bank (CCB), the first among the four state-owned banks conducting the reform, to personally experience the energy and dynamism demonstrated by the state-owned commercial bank in the process of marching into the international capital market.

New services bring new experience

“On behalf of Mrs. Nancy, Business Representative of Philadelphia in China, I would like to extend the deepest gratitude to you. I appreciate so much that your excellent employees explain to Mrs. Nancy the financial services she needs in warm and eloquent American English. She is deeply impressed by the charm of your employees.” At the very beginning of the New Year, Zhang Jianguo, President of CCB, received a letter from a foreign customer. The counter service offered by CCB staffs which the letter speaks highly of is a vivid epitome of the “customer-oriented” business philosophy practiced by CCB over the years.

To provide customers with fast, convenient and quality services has become the soul of business process reengineering of CCB.
   

For CCB which just transferred from a state-owned commercial bank into a public company, there are so many complicated issues to be addressed. Why should it start with process reengineering to push ahead its overall strategic transition? “For many corporate and private customers, whether they can get better financial products and services from CCB is the way of judging the performance of our bank after the IPO. Therefore, we must meet the demands of the market and customers,” said Guo Shuqing, Chairman and CPC Secretary of CCB.

The reporter is told that CCB puts its focus of business process reengineering on the corporate, private and wealth management services. With the help of experts from the Bank of America, CCB last year introduced the Six Sigma management method and started building the VOC, VOA and VOPA systems to collect data of quality and continuously improve products and service. Meanwhile, the bank shifted the accounting function from the front desk to the back office to leave greater room for product marketing and customer service over the counter and raise counter service efficiency. It continues optimizing the information technology development for core business systems and initiated 127 new projects last year alone. Its strategic cooperation projects with the Bank of America, including the retail outlets transition, private credit center transition and call center improvement, also start one after another to enhance the retail outlet service.

In the past CCB’s organizational structure was composed of departments operating separately, but today it sets up departments based on business process, making a good beginning of transition from a “department-based bank” to “process-based bank”. All its business lines from the headquarters to the 14,000 business outlets nationwide run efficiently around customers and products:

Taking their demand or time deposit books issued by CCB, customers can make direct deposit, withdrawal, transfer and account inquiry at any CCB business outlet nationwide.

Counter staffs are only responsible for simple transactions. The time of opening a corporate account is reduced from 20 minutes to 10 minutes and a private account from 140 seconds to 80 seconds.

The bank establishes and improves such professional teams as the big corporate marketing team, small business credit center, finance center, wealth management center, credit card team and e-bank team. With the business outlets offering general wealth management services to the public, the wealth management center serving the medium and high-end customers and the finance center serving high-end customers, CCB provides customer-tailored services to meet diversified needs.

The online bank, 18,000 ATMs and nearly 1,500 self-service banks of CCB initially shape the self-service network nationwide and make CCB the “most caring bank” for more and more customers.

During the campaign of selecting the best bank network in 2006 launched by Sohu.com financial channel, with votes of netizens CCB won such awards as “The Most Satisfactory Banking Services to the Public”, “The Most Recognized Bank by the Public” and “The Most Innovative Bank”.

Writing a glorious story of business transition

“We simplify the borrowing procedure and cut the borrowing process by 2 to 3 working days, which is highly appreciated by our developer clients.” “Customers actively ask about the newly launched ‘Flexible Repayment’ service.” The reporter sees such news in a recent in-house report of CCB. The ten housing loan services launched by CCB include such innovative products as the “Joint Borrowing”, “Grace Period” and “Flexible Repayment” which meet the diversified needs of customers from the perspective of borrowing and repayment. Such measures consolidate the position of CCB as the largest housing mortgage bank in the highly competitive market and make the popular words “Wanna buy a house? Go to CCB” the natural choice of an increasing number of house buyers.

In the campaign of selecting the best financial news in 2006 held by Hexun.com, CCB won the award of “2006 Outstanding Service of Personal Housing Loan – China Construction Bank Fixed Interest Rate Housing Loan”. Voted by experts and netizens, the award is another proof of CCB’s competitiveness in the domestic personal housing loan market.

New business keeps cropping up in today’s financial market, but there remain huge demands for financial services to be met. While consolidating the traditional business, the CCB decision-making executives actively push forward strategic transition and seize market opportunities to speed up development. According to Zhang Jianguo, President of CCB, the financial situation and market changes, increasingly diversified demands of customers for financial services, and more importantly the need of coping with intensifying market competition all require the bank to implement strategic transition.

As the fund market boomed in 2006, “Wanna buy fund? Go to CCB” became the most popular words in the wealth management market. Since 2006 CCB has jointed hands with 20 fund companies in selling 74 funds. In a financial center of CCB located in Xujiahui Business District, Shanghai, the reporter noticed that several wealth managers were too busy with answering questions of customers to drink any water. Wang Hai, one of those managers, told the reporter their team which is composed of 39 AFP financial wealth managers and 6 certified financial planners enjoys the well-known brand of “professional qualification and expert team” in Shanghai.

In the overseas market CCB acquired the Hong Kong-based Bank of America (Asia) to consolidate Hong Kong business. In the mainland market CCB pushes ahead the retail, intermediary and small and medium-sized business credit services and takes comprehensive operation as the future direction of business development to explore new profit growth points. At the “Marching amid Competition and Cooperation - 2006 Forum on the Development of Small and Medium-sized Businesses in the Pearl River Delta, Yangtze River Delta and Baohai Rim” held in late November 2006, CCB, as the joint host of the meeting, introduced its two major service brands of “Swift Loan” and “Growth Road” for small and medium-sized businesses and drew active responses from the participants.

Continuous product innovation of CCB such as the QDII, mobile phone stock exchange service, issuance of the first innovative domestic online shopping bank card creates sound performance. The increment of deposit and the increment, issuance and balance of individual credit of CCB both rank No.1 among domestic banks. The increment of its general foreign exchange deposit ranks the first among the four state-owned commercial banks, so does the increment of fund under its custody. It is the first Chinese bank issuing more than 10 million pieces of credit card (including quasi-credit card) and its dual currency credit card has a market share of 22.5%. CCB’s debit card, the first of its kind among the four state-owned commercial banks integrating transaction and value-adding services, offers customers ten major services and is named by VISA as “the relatively leading comprehensive debit card product globally”.

Improving Risk Control Framework

At the beginning of 2006 when the celebrations on the IPO of CCB just ended the bank has started the building of a comprehensive risk management system. After careful analysis, decision makers of CCB concluded that despite being a commercial bank with certain influence on the international financial market CCB still lags behind leading international commercial banks in terms of risk management and internal control capabilities. Therefore they put raising the risk management capacity on the top agenda and started reforming the risk management system step by step.

First, establishing a concentrated and vertical risk management structure. In July 2007 CCB headquarters dispatched risk directors to 37 primary branches and kicked off the recruitment of risk executives. Up to now the bank has altogether 538 risk executives and 16 branches have sent risk managers to their county-level sub-branches.

Second, implementing parallel operation. The detailed process of parallel operation and the responsibilities of risk managers and customer managers at all levels are defined clearly. By the end of 2006 30 primary branches of CCB have appointed risk managers of parallel operation, 23 branches started pro-credit parallel operation, 17 branches began parallel operation in the process of issuing credit and 17 branches kicked off post-credit parallel operation. CCB deepens the reform of auditing system and consolidates the auditing departments and general auditing offices in line with the vertical management system. It sets up 8 auditing departments and 30 general auditing offices and exchanges part of the chiefs of auditing departments and general auditing offices. The improvement of auditing system and the exchanges of auditors help tap the advantages of the auditing units at all levels, raise auditing quality and find many hidden problems, including the major criminal case of acceptance bill of Huanghe Road Branch, Luohe, Henan province.

To standardize the collection, dissemination and effective use of risk information and get real-time information about the risk management and international control of the bank, CCB also establishes the risk report system, raising requirements on the content and priority of the monthly, quarterly, semi-annual and annual risk reports and major risk event report of branches. CCB branches are also required to set up the reporting system of risk executives. By the end of 2006 the headquarters has received 123 risk reports which serve as an important reference for the senior management in making decisions. The bank is also improving the market risk monitoring and reporting system and standardizing the information collection channels.

Whether the risk directors and executives can play their due role within a short period of time depends on the positioning of their functions. Appropriately handling their relations with the bank presidents and business units is the first task faced by risk executives. According to Lv Yunsong, risk manager of CCB Anhui branch, the most important method is “communication”. Those risk managers not only practice parallel operation on the large and medium-sized credit services but also work in the small business credit centers and private credit centers. At present they are trying to establish the post-credit management system involving the customer managers, risk managers and credit managers at the same time. 

After more than one year of exploration, CCB has initially shaped the risk system featuring vertical management and parallel operation. Vertical management means that the risk managers should report to risk directors who then report to the chief risk officer, and parallel operation means that risk managers and customer managers jointly meet with customers and raise opinions on the examination of credit application so as to manage risks before issuing credit. In this way within CCB from the board of directors to each employee all have clearly-defined risk management responsibilities. Risks are controlled on three levels: the first level is the board of directors which sets up a special risk management committee responsible for risk management throughout the bank; the second is the senior management. The headquarters appoints a chief risk officer and dispatches risk directors to primary branches. The primary branches send risk management chiefs to secondary branches which then dispatch risk managers to county-level sub-branches. Such a system ensures the independence, specialization and effectiveness of the risk management system. Risk managers become really independent and the unified risk policies and system of the headquarters are implemented in a timely and efficient manner. A new risk culture is being built in CCB.

Building a Strong Team of 330,000 Employees

The news that CCB gave high reward to grassroots employees in November last year draws wide attention from the public. 12 employees of grassroots branches received the Outstanding Contribution Award – the highest award of CCB and got rewards ranging from RMB300,000 to 200,000. It is the highest ever reward given by CCB as well as a major measure of the bank to improve the reward system and raise comprehensive competitiveness after the IPO.

Guo Shuqing has stressed on many occasions that to realize the strategic goal of growing into a leading international commercial bank CCB must raise the overall quality of its 330,000 employees. In recent years CCB actively learns the advanced human recourses management experience of modern international companies and explores actively the design of growth strategies, building of a study-oriented organization, professional training and employee career development. In particular, it intensifies training after the IPO with diversified training programs and channels. Meanwhile it has recruited a group of managerial and technological talents.

Learning the successful experience of the Bank of America in human resources planning and leadership development, CCB offers trainings to its employees and at the same time encourages them to learn by themselves to raise skills. It is said that since last year the bank has spent RMB265 million on training and held 7071 off-job trainings for 402,200 person times of employees. It also cooperated with the School of Economic Management of Tsinghua University and the City University of New York in holding 7 training programs for young managers. With more than 260 trainees, the programs cover such areas as the operation of the US financial market, management theories and practices of modern commercial banks and investment banks, research on the hot issues of e global financial market, corporate strategy and human resources management. It also strengthens training cooperation with its strategic partner the Bank of America as well as Temasek in forms of sharing experience, carrying out assistance projects and holding post training.

With improving quality the employees enjoy a greater arena to contribute to the bank’s growth. Through expanding the promotion channels and providing a plain play field for all the employees a large group of outstanding business staffs of CCB have been promoted to important posts, which serves as an important guarantee for the sustainable and healthy development of the bank and increases employees’ sense of recognition and sense of belonging.

CCB continues improving the organizational structure and raising the quality and efficiency of human resources allocation. Following market demands, it gives priority to key customers, products, business and posts when deploying human resources. In line with the regional and business strategies the bank optimizes the staff structure, reducing the proportion of in-house employees of primary and secondary branches and increasing that of employees of grassroots business outlets, cutting the number of administrative and logistical staffs and raising that of customer managers, risk managers and lobby managers. Redundant employees are shifted to help expand the retail business of the bank.

Lifting Corporate Governance to a New Level

We still remember the questions about corporate governance structure of state-owned commercial banks after their IPO. As the first state-owned commercial bank completing the overseas listing more than one year ago, CCB has given us a satisfactory answer of corporate governance reform.

2006 is the first year after the overseas listing of CCB. In line with the Guidance on Corporate Governance of State-owned Commercial Banks and the Relevant Supervision of China Banking Regulatory Commission and the rules and regulations of Hong Kong Monetary Authority, Hong Kong Securities and Futures Commission and Hong Kong Exchanges and Clearing Limited, CCB follows the best practices of international corporate governance to build an efficient and balanced governance structure and gradually shapes an effective decision-making, execution and monitoring mechanism.

Practices over the years show that the most difficult problem of state-owned commercial bank reform is the establishment of entrepreneurship and business civilization. The board of directors, the management and the board of supervisions enjoy absolute independence, but problems remain whether their decision-making, execution and supervision comply with market practice and whether they can seize strategic business opportunities and properly coordinate the requirements of stakeholders including the shareholders, customers, employees and government.

Given the uneven levels of customer services, internal control of risk, implementation of strategies, rules and policies and check of balance system at different branches, the decision makers of CCB, as one legal person, are committed to improving corporate governance and building a modern banking system from an integrated point of view.

The sense that CCB is a unified legal person is enhanced throughout the bank and all of its branches further clarify their responsibilities. The slogan that “each cent of assets of the bank belongs to the customers and shareholders and loss of a single cent will undermine the value of CCB” spreads throughout the bank. It has become the common sense and action of CCB’s more than 10,000 branches and 330,000 employees to follow the requirements of corporate governance in their daily operation.

To well seize market opportunities and raise decision-making efficiency, CCB’s meeting of shareholders authorized new power to its board of directors last year, including power of issuing bonds, assets disposal and securities investment. New independent directors were added to the board to strengthen the protection of small and medium-sized shareholders.

The board of supervisors independently supervises the compliance with laws and regulations of the bank, the execution of resolutions of the meeting of shareholders by the board of directors and those of the board of directors by the senior management, the fulfillment of responsibilities of members of the board of directors and the senior management as well as the financial and risk management and international control of the bank. Two representatives of employee were added to the board of supervisors. A fairly sophisticated supervision system and procedure are established. New supervision methods including off-site monitoring and analysis are developed. Special investigations on major risk management, internal control and financial events are carried out and the internal documents and information are consulted frequently. The board of supervisors raises suggestions and opinions in various forms including written letters, meetings, special researches and reports. According to Xie Duyang, chairman of CCB board of supervisors, the board of supervisors is important not just because it can find some detailed problems but it looks at questions from an overall point of view and nips them in the bud. In this way the board will surely receive understanding and support in their daily work.

The bank optimizes the structure of senior management and implements the vertical management of business lines. In 2006, according to the resolution of the board of directors and with the approval of the China Banking Regulatory Commission, CCB appointed such senior executives as the Chief Financial Officer, Chief Risk Officer, Director of Wholesale Business, Director of Retail Business and Director of Investment and Wealth Management to better implement the strategic plan of the board of directors and push ahead the vertical management of business lines.

The bank also issues the Accountability Rules of the Management with the purpose of strengthening the accountability of senior executives. In 2006 alone 8 senior executives of primary branches and 543 executives of secondary branches were held accountable for various problems.

Centripetal Effects Based upon a Sound Corporate Culture

An annual salary of RMB350,000 is fairly attractive to Xiao Song, a CCB employee who has an ordinary family. A foreign bank has offered such an annual salary to Xiao Song for several times, but he refused. Many people do not understand why. Xiao Song said “it is CCB that offers me the arena where I can display my ability, which in no way can be measured by money.”

Facing with the fierce competition for human resources raised by foreign banks, many people worry state-owned commercial banks like CCB will “work as dowry” for other rivals. The fact is that state-owned commercial banks after IPO are growing big and strong and with sound corporate culture developed over dozens of or even a hundred years and promising prospects attracting more and more talents.

When interviewed by the reporter many CCB employees said the bank attaches great importance to their career development and building their sense of honor and belonging. Salary and other benefits are of course very important to them, but employees should not always talk about salary, bonus, welfare, etc but value the sense of achievements and responsibility.

As a large commercial bank with a glorious history of more than 5 decades, CCB in the process of reform and development has built a unique corporate culture which plays an important role of developing the centripetal force, standardizing operation and management and promoting business growth. Facing with fierce competition after the complete opening of the Chinese financial market, CCB insists to following the excellent corporate culture to educate the employees and stimulate their enthusiasm and innovative capacity.

Today CCB has set the minimum salary line for employees and improved the performance evaluation system based on key performance indicators. The role of senior managerial personnel in creating value and achieving the strategic goals of the bank is strengthened. In terms of employee welfare, the bank has made efforts to improve the annuity system, reform the house distribution system, urge branches to pay the “five insurances and public house accumulation fund” in full amount on time, draft the flexible welfare plan and EAP scheme and guide the branches to explore the commercial operation of supplementary health insurance. Meanwhile, it is building the long-term incentive plan covering not only the senior and middle-level managerial staffs but also ordinary employees. With the approval of the board of directors and the workers’ congress, CCB has implemented the first phase of stock option incentive throughout the bank, marking a substantive progress of its efforts of implementing the stock option plan.

The stock option plan of CCB has unique features. First, wide participation of both ordinary employees and the senior management. It is stressed to take into full consideration the interest of employees, encourage their enthusiasm and design and implement the plans for ordinary employees and the management at the same time. Second, fair incentive opportunities to all employees without equalitarianism. Incentives and disincentives are combined without disguised increase of income. The plan contains requirements on the working years of employees in CCB, dismissal of those who undermine the interest of the bank and rewarding those with outstanding contributions. Third, the plan is composed of voluntary subscription and conditional rewarding. Individual contribution should make up the majority of the plan. Reward can only be given on the condition of meeting the requirements of the board of directors on performance. The amount of reward should be affordable to the bank without undermining the interest of the bank and shareholders. At the early stage of the stock option plan the amount of stocks and yield might not be as high as outsiders expect, but it is important to underline that CCB is trying to build a new incentive mechanism in line with modern corporate management system. 

Today, the concept of “official orientation” has dimmed and the promotional system in line with the needs of modern commercial banks been built in CCB. The promotional system composed of open selection, market recruitment, recommendation by the public and employment through competition from Chairman, the President to the grassroots employees. It is under such a system that in the process of flattening reform many managerial staffs move from the administrative departments to lobbies and counters. Wang Xing, who originally was the president of a county-level sub-branch and later became a customer manager. Due to outstanding performance he was named as one of the 100 best customer managers of CCB at the end of last year and his income was raised considerably. Similar stories happen frequently in today’s CCB.

While seeking business expansion CCB is paying greater attention to social responsibilities. Through the CCB “Care Fund” and the Chinese Foundation for Justice and Courage, the bank makes donations to help the poverty-stricken regions, poor university students, build Hope primary schools and disaster-hit areas. In 2006, CCB received the highest award from China Foundation for Poverty Alleviation – “2006 Poverty Alleviation Contribution Award” and was the only bank named as “The Most Responsible Enterprise”.

From a state-owned commercial bank to a large listed bank with the state as the controlling shareholder, CCB has always been a forerunner of Chinese financial reform since its establishment more than 50 years ago. In particular after the shareholding transformation and successful overseas listing the bank grows stronger and enjoys rising business performance, creating huge wealth for the country. Today, CCB’s assets rank the second largest among domestic banks and the market value of its stocks stay within the top ten around the globe. It has become one of the Chinese banks with the strongest competitiveness, marketing, risk control and customer service capacities and profitability. Its outstanding performance well demonstrates the promising prospects of state-owned bank reform.