D. Bat-Ochir: XacBank’s strength is an understanding of the financial sector corporate governance standards ahead and their implementation
We discuss about Good Corporate Governance concept a lot lately, which is a fairly new concept in Mongolia. Below is an interview held with Mr. D. Bat-Ochir, CEO of XacBank, who made this concept to be not only one of the values of his bank but also promotes this concept to others.
First of all, please allow me to extend my congratulations to you and your bank team! We’ve heard that your bank has been selected as the Best Bank with Good Corporate Governance. What organization gives such recognition and who nominated your bank for this award?
Thank you. Capital Finance International headquartered in London, a print journal and online resource reporting on business, economics and finance, selects banks leading in implementing corporate social responsibility. The nominees are reviewed by the world’s most reputable organizations such as the World Trade Organization, the World Bank, European Union, etc. and the final selection is made through individual interviews. Our bank’s nomination was the first from Mongolia and we are very proud that XacBank has been selected as the Best Bank for good governance in Asia.
Has Capital Finance International contacted you? Is this award certain once you are nominated by one of those reputable international organizations?
The organizations that nominate candidates are highly reputable international organizations. Thus the probability of making a poor nomination, which will jeopardize their reputation, is highly unlikely. I understand that CFI makes other selections among the nominees then conducts 30 minute interviews with the CEOs regarding their bank’s governance issues. After that the nominees are reviewed by the panel and only then the final selection is made.
We are interested in learning about XacBank’s view on Corporate Governance rather than the official definition of it.
Corporate governance is one of the indicators demonstrating the level of the country’s economy. During the emerging private sector economy, we do not have any concept of corporate governance. However, with the economy’s development this concept has expanded. I would like to note that this issue rises despite whether we want or not. As for our bank, we have pursued corporate governance since our establishment. Because the seeds of good corporate governance are planted at the beginning and now the seeds have sprouted, grown and blossomed, so the internationally recognized organization has awarded us with such a prestigious award. Also, this award evidences that XacBank has developed its business in microfinance and now has reached higher international levels.
We are confident that companies can operate sustainably and successfully in the long term here by ensuring equal and balanced protection of all parties’ interests in conducting business and finance activities. We’ve been putting all of our efforts into the pursuit of such principles. As for our bank, besides clients, lenders, shareholders and employees, we have close working ties with our partner organizations such as tax, social insurance, regulatory agencies, etc. If we negatively influence the interests of any of these parties then there will be a risk of some negative impact on our business.
This principle has been respected by every all shareholders by ensuring balanced rights and interests not conflicting with those of the other party. As a result of pursuing strict governance principles, XacBank has been able to transform and evolve from a small project to a systemically important bank with hundreds of thousands of clients.
In order to properly represent all of these different rights and interests, it is essential that the rights and responsibilities of shareholders, the Board of Directors and the management team to be distributed appropriately to ensure professional independence. Recognizing all of these principles from the start of our operation is one of our strengths.
As I recall, since 2001 around 10 banks have gone bankrupt. But we have managed to grow to be the fourth largest bank on a systemic level from one of the smallest banks. The reason is very clear. It is due to keeping a proper balance of many different parties’ rights and interests. Because of this, shareholders invest, clients deposit and borrow and employees work for us.
What other strengths can you tell us that distinguish you from others in corporate governance?
I think that the other are of strength that distinguishes us from others is that we have recognized the specifics of the financial sector governance ahead of the time and implemented it. Financial sector governance is very unique. With regard to companies with limited liabilities (LLC) most of the capital comes from the owners. Therefore the owners’ rights and interests are of primary concern. But with financial institutions, the capital of depositors, lenders and shareholders are mixed together. In other words, 10 percent of total capital comes from the owners, 90 percent is based on the trust of others. So the more protection we have on the rights and interests of the parties that form that 90 percent of the total capital, the more expansion of the bank will likely see in its business.
No protection leads to bankruptcy. Therefore, our bank’s shareholders participation is not excessive at the policy formulation and implementation levels. This is still the case today. With regard to some organizations, there are tendencies toward excessive dominance by the shareholder, which leads to a dependent Board of Directors (BOD) and management team. XacBank has developed professional governance standards from the start of the business. A shareholder will not have the right to appoint or remove someone to/from the BOD. This is the case with the management team as well. No shareholder has the right to appoint or dismiss anyone to/from the management team. But of course, independence does not mean you may act as you like. This means that in order to maintain sustainability and the right balance of all the different rights and interests, professionalism should be at the top priority in conducting business. Briefly, our professional independence is our difference from others.
Does this mean that the Board of Directors or management team can exercise major decision making free from shareholder involvement?
It is not that decision making is exercised free of shareholder involvement. Instead it can be looked as independent decision making within the limited responsibilities of each party. There is one big lesson to be learned in the banking sector. You can name many examples of it that either loans are overly centralized or they are mainly issued to affiliated companies. Also minimal investment to the infrastructure has a negative impact as well. One of the main responsibilities of banks is to provide reliable and efficient use of capital for both individuals and organizations in the economy. For this, information technology infrastructure must be strong. The less investment you make in IT infrastructure, the less secure your payments and settlement system will be causing risks to clients and the institution. For example, the required size of such investment is to be decided by the management team and the BOD but not the shareholders.
One of the requirements set forth by Capital Finance International on companies with good corporate governance is to have an independent management team. I understand that XacBank has met this requirement. What is the reason behind having an independent BOD and an independent management?
This is inevitable requirement and condition that comes along with the social and economic development of the country. This can be interpreted as one of the criteria that the business has matured. In Mongolia, during the emergence of the private sector there have been many businesses comprised of one or two persons or a family, but today there are many businesses comprised of multiple parties with many different and often complex rights and interests. In such circumstances, the issue of appointing a competent management team becomes very important. In other words, the highly educated professional team that meets all the requirements is needed. Our bank formed our management team from the right people and is managed by these people. This principle has never changed. Highly trained banking and finance professionals are working in the management team. The issue of succession, of who would be the next leader has always been the center of attention by the BOD. The BOD’s advice the management team is “we expect you to execute and achieve this goal with this empowerment and resources at this level”, but does not get involved in day-to-day operations. The management team also works in line with such principles and its performance is evaluated. Generally, we work in pursuant of such principles. Once again, an independent BOD and independent management is an essential structure at the present time when large businesses with many stakeholders are emerging.
One of the important governance issues is corporate social responsibility. I think that some companies understand this concept to be limited to handing out presents on Children’s Day. For XacBank, what is corporate social responsibility?
Certainly, we cannot provide sponsorship for every person or cause. I understand the concept of corporate social responsibility is to influence people’s perception through changing the mindset. The more socially responsible the bank is the more developed the banking business will be because we provide services to all levels of the community. We gain their trust only through recognition of our actions. All the profits should not be only for the benefit of the shareholders but a sharing of the profit with others for the sake of social benefits for the community is also one of our duties. If we provide services in the community and earn our profits there, then we need to give something back by contributing to the welfare of the community as much as we can. In this way we’ve been providing continuous support to non-governmental organizations (NGOs) and any activities that are for the welfare of the community. Golden Fund for Development NGO was formed to support talented children from disadvantaged families. We have built XacTugul parks in every aimag. These are still ongoing activities. In order to support team sports, we initiated the “Boom 2020” indoor soccer match for the first time and we actively sponsor it every year. We can name many activities where we provide continuous support, including Khasyn Khuleguud soccer, basketball and hockey teams, implementation of the Alfatoun program to provide social and financial education to children and youth, etc.
When the economy is not performing well, certainly a risk management strategy should be the top priority. On the other hand, this is also one of the criteria of good corporation governance, isn’t it?
Banks are the institutions that intermediate people’s many years of hard work and rewards channeling those savings into the economy. Banks are particularly cautious in dealing with loan operations. Therefore, we require some form of collateral or guarantee in order to provide a loan.
With the slow-down in the economy, the money stream of the people also slows down and their creditworthiness decreases. Accordingly, we take measures when needed to re-evaluate and change loan repayment conditions to the appropriate level. Because we run our loan operations cautiously based on the projection of future economic trends, we do not suffer much from such economic downturns. For example, our loan portfolio in the mining sector is very small. Centralization of loans among a few large borrowers is very small, too. Our loan operations are mostly focused on small and medium businesses. Risk management units, including a special unit in charge of credit risk management, is in charge of loan operations. In the loan decision making there is a principle that 4 officers participate in the loan approval process. No single officer is able to make a decision solely.
What is your future plan to improve your corporate governance?
In the executive management level, the authorities need to be diversified and defined. Previously, the CEO was the only person to make a decision. Now there are business directors under the CEO. In other words, the CEO delegates some authorities among the directors, providing them with the goals, empowering them and supervising their performance while providing opportunities for them to grow in their areas of specialization. The CEO is not to be involved in all decision making, but instead will have more opportunity to focus on supervision of the business development process, strategic direction and optimal formulation of short and long term business goals.
Thank you for your interview. I wish you and your team every success in your business!
Thank you.
