The American Idea that is Guiding China’s Governance Model for the AIIB

June 8, 2015
A bicycle rides at sunset in Xian, China. (Shutterstock)

In the first year he was treasury secretary, Henry Paulson went to China at least four times. He was on a mission to take relations to another level. (His mission changed abruptly in the autumn of 2008.)

Paulson said he had a special relationship with Chinese officials borne out by the 70-something visits he had made while at Goldman Sachs.

I covered Paulson’s campaign to engage China and, to be honest, I observed little evidence that he got anything more out of Beijing than a similarly motivated US official of his stature could have achieved.

But perhaps China was listening more intently than I thought? I say this upon discovery that the Chinese architects of of the Asian Infrastructure Investment Bank (AIIB) have borrowed a Paulson-era idea about how modern multilateral institutions should be governed.

More than 50 countries have signed up to be founding members of the AIIB. Chief negotiators concluded the institution's proposed Articles of Agreement on May 22 in Singapore. No details were released. The AIIB said the articles would be ready for signing by the end of June. Reuters said China would be the biggest stakeholder with about a quarter of total shares, which would represent a concession, as Beijing had wanted a 50 percent stake. India reportedly would be the second-biggest shareholder. And — significantly — there apparently will be no meddlesome board of directors on sight to get in the way of the bank’s staff.

Bloomberg News reported ahead of the Singapore meeting that Beijing was insisting on a non-residential board of directors, which would separate the AIIB from the cluster of existing multilateral lending institutions. At a minimum, the head of the institution will be spared hours of painful meetings with minders dispatched from the capitals of the biggest shareholders.

The US is one of only a few economic powers that has chosen to shun the AIIB. But the idea of doing away with resident boards gained currency in Washington during Bush’s second term. In November 2008, Paulson said in a speech:

… the IMF, the World Bank, as well as the regional development banks should consider how to reform their executive boards to make them more accountable, streamlined, and effective. We should also consider whether these institutions could benefit from non-resident boards. This proposal could free-up resources and enable management to focus on issues of more strategic importance.

I’m going to credit Paulson’s advisers with this idea, as I never got the sense he gave much thought to global governance beyond the G2. The think tanks in Washington had been discussing the possibility for a while. Todd Moss at the Center for Global Development has been pushing for a non-residential board since 2006. Still, Paulson has been the most significant figure to endorse the concept to date. I have no idea if his speech had anything to do with China’s decision to build an international bank with a non-residential board; chances are it did not. But his backing more than six years ago shows that Beijing’s insistence on freeing the AIIB’s staff from the shadow of an in-house board of directors isn’t necessarily a scheme to undermine oversight. There is — and should be still — support outside of China.

Does that make it a good idea? Well, according to Dennis de Tray and Moss, John Maynard Keynes originally conceived of the World Bank and the IMF with non-resident boards. He was overruled because of the logistics of international travel in the 1940s. That is no longer an issue. Moss and de Tray submit that scrapping resident boards at the institutions would save millions in salaries and expenses, while stoking important gains in efficiency. Boards of directors would meet six or so times a year, and would be forced to focus on the broader strategy of the institution. The temptation to interfere with day-to-day operations would be removed. Fewer board meetings would allow finance ministers to attend, rather than proxies. “Non-residency would eliminate much of the political guesswork and backchannel maneuvering to divine what the shareholder governments are really thinking,” de Tray and Moss wrote in their 2006 policy note.

The example of China’s multilateral bank operating without an on-site board could force change at the IMF, World Bank and other institutions. The US could lead the charge, as Paulson once tried to do. The AIIB has the potential to bring Beijing and Washington together. Who would have thought? 

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Author

Kevin Carmichael is a senior fellow at CIGI and the national business columnist at the Financial Post.