The importance of supervisors in corporate governance: high trust and understanding

Under Company Law of the People’s Republic of China (revised 2018), the corporate governance of a limited liability company shall include shareholders, a board of directors and senior officers. Previously, we reflected on the corporate governance structure and responsibilities. Here, we focus on the importance of the board of supervisors or supervisor in a limited liability company.

The board of supervisors or sole supervisor is an internal corporate supervision system established to protect the interest of a company’s shareholders. It is a legally required standing agency whose purpose is to safeguard and supervise the company’s business activities according to the interests of the shareholders. Supervisors are appointed by the shareholders and work on behalf of these shareholders, supporting their interests, even if their interests may be against the interests of the company. For instance, a company initiating bankruptcy may not be in the best interest of the company, however, may serve to benefit shareholders in minimising further losses.

Under China’s Company Law, a company’s directors and senior managers are required to be regulated by the supervisory system. No directors or senior executives may obstruct the board of supervisors or any supervisor in executing their powers.

Supervisors of the board may exercise the following items of primary authority:

  • Review of the company’s financial affairs through checking the company’s account books and other accounting materials, financial reports, business reports, profit distribution program and other accounting materials submitted by the board of directors to a shareholders’ meeting. Supervisors may perform a re-check in the event of that questions pertaining to the company’s financial affairs arise.
  • Supervision the company’s operation and management activities to ensure they are performed in line with the resolutions of the shareholders.
  • Where the director or senior manager violates laws, administrative regulations, articles of association, or resolutions of the shareholders’ meeting
    (i) The board of supervisors may propose the removal of any director or senior manager who commits irregularities; or
    (ii) Correct or stop any director or senior manager’s activities that injure the company’s interests
  • Propose certain topics and specific issues to the shareholders’ meeting for discussion and voting.
  • Propose to convene temporary shareholders’ meetings, as well as convening and presiding over shareholders’ general meetings under special circumstances.
  • Initiate litigation on behalf of the company where the board of directors or managers of the company neglect to protect the company’s interests.

The supervisor is held to the same liabilities as the directors and senior managers. Supervisors are obligated to carry out responsibilities with a duty of loyalty and diligence. Any negligence of the provisioned responsibilities may result in legal action initiated by the shareholders. Although supervisors may bear liability for any illegal conducts of shareholders, in court should the supervisor have the necessary understanding to doubt the actions of the shareholder and believe it could be illegal, the supervisor could be found liable.   

Normally, the shareholder appoints a person of high trust for the role of supervisor, one who holds an understanding of the company, so that they can effectively regulate its activities. The appointment by the shareholder is required by law to be registered with the government. An additional best-practise is signing a contract between the shareholders and the supervisor. In this manner, a replacement clause can be included in the contract stipulating an agreed upon timeline for replacing the supervisor upon their resignation to limit risks. Otherwise, if there is no replacement and monetary compensation clauses in effect, the current supervisor could still be liable for the actions of the directors, senior managers and shareholders.

Consequently, the role of the supervisor holds extreme importance and influence in a company. Where the supervisor is utilised in the correct and lawful manner, even the minority shareholder may hold greater influence within the company management, operations and structure. However, if the majority shareholder does not fully utilise the supervisor correctly and lawfully, the control of the company may sway unfavourably to the majority shareholder.

If you would like more information about China corporate governance or other related corporate matters, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.

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