When the new Asian Infrastructure Investment Bank (AIIB) opened its doors in January 2016, those of us on the Asian Development Bank Board of Directors and Management watched with interest.
Rather than seeing the AIIB’s establishment as driven by geopolitics, my view was that China had been dissatisfied with a lack of, what it felt was, a level of influence commensurate with its economic strength within the traditional Multilateral Development Banks (MDBs), and wished to expand its clout.
The need for greater attention to infrastructure in the region cannot be denied, though the need for a new bank was debatable; especially since the AIIB thus far has co-financed its projects with the World Bank and Asian Development Bank, which have followed recognised and effective existing procedures and process in ways that the AIIB seems to find acceptable.
AIIB’s acceptance of these procedures and of good governance standards is a hopeful sign. However, this also highlights the one significant difference with the existing major MDBs: the lack of a resident board of directors – a forum for the shareholders to have day-to-day oversight of the actions of the bank.
This is so far a major flaw in the AIIB governance structure, and it is an issue, in part, because the AIIB aspires to become a mega-bank. With 57 member countries already, and on a path to add more, it is clearly not an issue to be taken lightly.
The ADB board’s role
Here is why a resident board is critical to the 24 member states of the ADB. The board represents 67 country shareholders and is permanently based in Manila, the capital of the Philippines. Its principal role is oversight, so that the shareholders’ interests are ensured. A large part of that interest is the integrity of the bank.
As a resident body, the board has day-to-day contact with management and can effect changes on everything from policy to projects. The board tries to improve the transparency of the bank for all stakeholders, including civil society, with varying degrees of success. On several occasions ADB president Takehiko Nakao has said he values the resident board, because it helps him keep in closer touch with what the shareholders’ actual views and concerns are.
AIIB president Jin Liqun, a former ADB vice president, has publicly stated that he opposes the establishment of a resident board because he sees it as a cost centre. However, that is certainly not the case with the ADB board. In 2015 the ADB operating budget was US$660.5 million (4.4 billion yuan); the ADB board represented only 2.7% of these overall costs.
I spent almost 15 years as a senior executive at Motorola and then Boeing: and that percentage figure does not look like any automatic corporate cost centre that I am familiar with, assuming you feel it adds value. So it strikes me that cost is a weak argument; and, if so, there must be another rationale for not having a resident board.
Corporate boards are rarely in residence. But the AIIB is not a corporation, rather an institution that represents nation-states. The shareholders in the new bank therefore represent taxpayers, whose interests must be guaranteed. Without a permanent board that has day-to-day oversight, the bank's ability to ensure these interests are greatly diminished. There are a number of immediate consequences that come to mind.
First, it reinforces a perception by some that the AIIB will be much more centrally controlled by the Chinese government than is the case with the largest shareholder in other MDBs.
Second, the absence of a resident board inhibits transparency and accountability. A resident board would provide civil society with easier access and a voice within management, giving them a better sense of inclusiveness. Most development projects require the support and assistance on the ground from non-governmental organisations and they need to be plugged in from the start. This requires that they are heard at headquarters.
Third, the AIIB’s adoption of its Public Information Interim Policy (PIIP) generated significant concern among civil society groups, including those engaging on environmental issues. This was because of their sense of not having adequate input into this policy. A resident board could help alleviate that.
Finally, this has led civil society groups to express more general concern about less than adequate communication, which could be mitigated with a resident board that would open more access to management, as many ADB board members do for civil society.
Zhou Qiangwu, chief executive of Asia Pacific Finance, a think-tank in the Chinese Finance Ministry, told the Chinese state-owned newspaper Global Times that the AIIB will have a special unit to keep the non-resident board “informed” of the AIIB’s activity.
But how can a legitimate board just be informed? Being informed does not suggest dialogue or much of an opportunity for back and forth, not to mention the ability of board members to bond and to consult easily with fellow members who represent their governments. Would China be satisfied if it were simply informed about decisions made by an MDB in which it was a major shareholder?
Because of the perceived costs of a resident board, there has been a suggestion that if a shareholder country wants a board member resident in Beijing that country’s government can pay for it themselves. But this would be a grossly unequal solution, as only the richer shareholders could afford to do so, which would no doubt cause rumblings among the other shareholders the bank is mandated to serve. Shareholders with lower capital share in a multilateral bank could form into multinational constituencies to make this more affordable.
The AIIB has recently established an international advisory panel with distinguished appointees for many countries, including the United States and Japan, both non-AIIB members. It’s a laudable undertaking, although no substitute for a resident board, as it is unclear how much influence they will have. And it is hard to envision either the United States or Japan seeking membership in the AIIB without the presence of a resident board.
If a resident board were established I believe it would remove one of the major concerns of Washington and Tokyo, and may counter the belief in some quarters that the AIIB reflects geopolitical objectives, thus easing future membership into the institution.
The AIIB has taken many of the right steps in articulating what they plan to do relative to governance and safeguards. Of course, the proof is in the pudding, as we watch how these initial cooperative projects with other MDBs are implemented. The establishment of a resident board would be the crowning indicator that the management of the AIIB will welcome transparency and shared governance with all stakeholders.