What China Can Learn from the Organizational Structures of Investment Banks in Mature International Markets
As previously discussed, the organizational forms of investment banks in mature international markets have gradually evolved from family businesses to today's large international financial holding companies, which is an inevitable result of economic development and business expansion. Based on the current development status, we can now draw a framework chart to represent the governance structures of investment banks in mature international markets, which would look as shown in Figure 8.2.
The empirical analysis on the governance structures of investment banks in mature international markets, as previously discussed, found that most successful investment banks in mature international markets have the following six characteristics:
1. Widely distributed equity or low equity concentration
2. High equity liquidity and low percentage of internally held shares
3. A relatively independent board of directors, with the majority of directors coming from outside the company
4. Blurred boundaries between directors and managers, with most senior executives concurrently serving as directors
FIGURE 8.2 General Framework Diagram of Governance Structures of Investment Banks in Mature International Markets
5. Diminished functions and power of the board of supervisors, with auditors in the board of directors working in the place of the board of supervisors in most cases
6. A large number of functional divisions and well-defined division of responsibilities
These conclusions lead us to a number of discussion points on the topic of helping develop Chinese securities companies.
Focusing on the Cultivation of Financial Holding Companies in Keeping with the Trend Of the Time
Our earlier discussion on the evolution of the organizational forms of investment banks in the mature international market determined that with constant business expansion and intensifying competition in the industry, Chinese securities companies will inevitably go through the type of large-scale mergers and acquisitions experienced by mature international markets late last century. It is certain that the winners will be securities companies with sufficient funds, high operation efficiency, and great competitive strength. According to the Securities Law of China, securities companies can be incorporated as either a company with limited liability or a company limited by shares. However, a list of Chinese securities companies as of August 2010 released by the CSRC shows that of the 106 securities companies registered in China, only 41 are companies limited by shares, which is less than half. This shows that Chinese securities companies are still fundamentally constrained in terms of capital sources and operation and management levels. Therefore, as a first step, more securities companies in the future should adopt the form of companies limited by shares. This will gradually raise the percentage of companies limited by shares among securities companies.
We have also seen in the Chinese market the bud of financial holding companies, the prevailing form for investment banks in mature international markets. China made it clear as early as 1993 that separate administration policies will be implemented for the banking industry and the securities industry. The separate regulation system that remains will consist of the People's Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission. With recent fast economic development and the deepening of financial reform and innovation, however, the Chinese securities industry is now facing unprecedented broad space for development, which is giving rise to integrated operation. This will undoubtedly become the cradle for Chinese financial holding companies. Driven by such factors as synergistic effects, economies of scale, diversification of revenues, dispersion of risks, and integration of customer needs, a number of fledgling financial holding companies have already appeared in China, as shown in Table 8.8.
In addition to the banking-centric financial holdings companies shown in Table 8.8, Ping An Group is an insurance-centric group also involved in commercial banking and investment banking. China will likely see such phenomena in the future as financial institutions expand their business into a diversified set of sectors and large enterprises enter into the financial industry. In particular, as the deadline draws near for China to deliver on its promise to the WTO of fully opening its financial sectors, the competition in the securities industry will be increasingly internationalized. Building up a number of domestic financial holding companies will help the Chinese securities industry win fierce competition in the future.
TABLE 8.8 Overview of Chinese Financial Holding Companies