Supervisory Committee (Mainland China)

Supervisory Committees are found in Mainland China; they do not form part of the corporate governance landscape in Hong Kong.

Improvement of internal oversight is key to improving the quality of corporate governance and reducing the risk of governance failures. In Mainland China, the key responsibility of a supervisory committee is to monitor the activities of the board and CEO, as well as to monitor financial affairs and business activities on behalf of shareholders. In the course of its monitoring, the supervisory committee may ask directors or management to rectify any breaches of company policy or procedure that harms the company’s interests. According to Chinese Company Law, a limited liability company or a joint stock company shall have a Supervisory Committee. For smaller companies or companies with only a few shareholders, supervisors may be appointed without setting up a formal committee. According to the Code of Corporate Governance for Listed Companies in China, all listed companies should establish a Supervisory Committee.

Supervisory Committee Structure

A joint stock company or a limited liability company may set up a Supervisory Committee, which should be composed of at least three people. For a limited liability company in which there is a relatively small number of shareholders or which is relatively small in scale, the company may have 1 or 2 supervisors and does not have to establish a Supervisory Committee itself. The Supervisory Committee should include both shareholder and employee representatives as defined in the articles of association. Employee representatives should be democratically elected by company employees through an assembly of employee representatives, by an assembly of all employees, or by other means. The supervisory committee should have a chairman, and may have a vice-chairman. Directors and senior officers of the company may not serve as supervisors.
The Supervisory Committee of a state-owned company, whether fully-owned or simply controlled by the state, should have no fewer than five members, and employee representatives should represent at least one-third of these. The specific percentage of employee representatives is determined by the articles of association. Supervisors in these cases are designated by the State-owned Assets Supervision and Administration Commission (SASAC), however, employee representatives on the committee are elected through staff and worker representatives assemblies. The chairman of the Supervisory Committee is appointed by SASAC from among the Committee’s members. However, the Committee of a large state-owned enterprise is designated by the State Council.

For details, please refer to:

Work of the Supervisory Committee

Supervisory Committee Responsibilities


According to China’s Company Law, the responsibilities of the Supervisory Committee include: 

Reviewing the financial affairs of the company;

Monitoring the performance of directors and senior officers; removal of directors or senior officers in the case of violation of laws, administrative regulations or  articles of association; 

Requiring rectification from directors or senior officers if they cause harm to company interests;

Proposing interim shareholder meetings; convening shareholder meetings when the board of directors does not do so as required by law;

Submitting proposals at the shareholders meeting;

Filing suit against directors or senior officers if they harm the company while performing their duties in violation of laws, administrative regulations or the articles of association; 

Exercising other authorities set out in the articles of association.

In addition, supervisors may attend board meetings and may propose issues to be determined by the board of directors. A supervisory committee or the supervisors of a company that does not have a committee may conduct investigations upon discovery of any unusual operations of the company. A supervisory committee of a wholly state-owned company may exercise the first three powers in the above list as well as other powers set out by the State Council.

Supervisory Committees of State-Owned Enterprises

According to the regulation "State-Owned Enterprises Supervisory Committee Interim Provisions", supervisory committees of key state-owned enterprises have as their core responsibility to monitor financial condition, to monitor financial activities and acts of management, and to perform the following duties: 

To review the company’s compliance with relevant laws, administrative regulations or other policies and procedures; 
To review the financial affairs of the enterprise; to review financial and accounting information and other information related to business operations and management activities in order to verify the authenticity and legitimacy of corporate financial reports; 
To review the enterprise's operational efficiency, profit distribution, state-owned assets management, asset operations and other conditions; 
To review management; evaluate its performance, and to propose rewards and penalties, as well as their appointment and removal.

For state-owned enterprises, the supervisory committee was introduced to monitor management in 2007. For these companies, the responsibilities of the supervisory committee have gradually changed, from simply monitoring last year’s activities to monitoring those of the current year and submitting the annual inspection report within the first half of the following year. This approach assumes daily supervision, where the committee conducts a focused annual inspection of the company’s activities together with the annual financial audit. With respect to monitoring of the current period, the committee strengthens the monitoring of compliance with state-owned assets supervision and administration regulations, evaluates the implementation of enterprise internal controls, and assesses compliance of major decisions and procedures. The committee may also integrate the financial inspection with the annual external audit so as to focus on key points in the course of inspection by referencing and using the audit result of its external auditor.

For details, please refer to:

Several Comments on Strengthening and Improving the Work of the Supervisory Committee of State-owned Enterprise. (In Chinese only)

CFA Institute China Corporate Governance Study

In August/September 2006, in order to gain a better understanding of governance issues in China, the CFA Institute Centre for Financial Market Integrity conducted a detailed study of Chinese governance practices. As part of the study, a survey of the Institute’s members investing in or having interest in Chinese companies was carried out to obtain opinions and views. Findings were based on 475 responses. Respondents felt that because independent directors are a requirement in China, and because independent directors are becoming more prevalent, the role of the supervisory board has become increasingly unclear. The survey observes that duplicated functions between independent directors and the supervisory committee are costly and inefficient. For details, please refer to: China Corporate Governance Survey 

Governance Report on Top 100 Listed Chinese Companies

A 2009 report from Protiviti and The Corporate Governance Centre of the Chinese Academy of Social Sciences and Centre for Research on Assessment of Leaders of the China National School of Administration highlights the increasing size of supervisory committees among the top 100 Chinese listed companies. The report, entititled "Corporate Governance Assessment Summary Report on the Top 100 Chinese Listed Companies for 2009,” shows the average number of members has increased from 4.95 last year to 5.41 this year. The report also indicates that supervisory committees are becoming more independent from company management – that is, the number of external supervisors is increasing. In times of financial crisis, the role of the supervisory committee may be essential. For the increasing numbers of external supervisors among the top 100 Chinese listed companies, monitoring management risk-taking has become a larger and more important task. However, how to obtain sufficient information to do this, and how to improve the capability of risk forecasting is becoming one of the key issues these supervisors have to face.

Shareholders (Mainland China)

Shareholders in China: An Overview

A share in the equity of any of China’s listed companies can be categorized as either a state-owned share, a corporate share, or a trading share, depending on the different type of investor involved. State-owned shares are purchased with state-owned assets by entities or institutions eligible to make investments on behalf of the state; corporate shares represent the equity invested by corporations, or state-owned institutional organizations, or social society equivalent to corporation on a legal perspective with eligible investable assets; trading shares (i.e. public shares) are open to any individual or to company's employees who can invest with their personal assets.

Controlling Shareholders

Controlling shareholders are shareholders whose equity investments exceed 50% of total contributed capital in limited liability companies or whose shareholdings exceed 50% of the total share capitals in joint stock companies; controlling shareholders also include those shareholders exercising significant influence upon the company even though their shareholdings might not exceed 50%. 

State Ownership

State-owned shares are generated by investment in companies made by the state. On behalf of the state, the State Council and local governments have investors’ rights and obligations to the invested companies in accordance with law and regulation.  

Listed companies owned by the state are the lion’s share of Mainland China's capital market, with more than 1,100 companies listed as A Shares on an exchange. As of 2008, listed companies controlled by central enterprises represent 37 percent of total market capitalization, 42 percent of revenues and 30 percent of profits of all holding companies (Source: Extract of speech of Rongrong Li, Director of State-owned Assets Supervision and Administration Commission of the State Council (SASAC), made at 8th China Corporate Governance Forum, December, 2009.) See this link for the abstract of the speech (in Chinese only).

Corporate Governance Code

The Corporate Governance Code for Listed Companies in China, released by the China Security Regulatory Commission (CSRC) in 2002, stipulates that controlling shareholders not influence the company's decision-making or its business operations; nor should they act against the interest of the company or other shareholders. The Code also stipulates segregation of duties between listed companies and controlling shareholders; that employees, assets and financial bookkeeping should be separated; that responsibilities and risks be considered separately; that controlling shareholders be independent of company management; that assets invested by controlling shareholders be independent, complete and with clear indication of ownership; that sound financial and accounting policies be established in accordance with laws and regulations; that there be independent accounting ; that the board of directors, supervisory committee and other internal functions be independent; and that the listed company's business be completely independent of the business of the controlling shareholders.
Company Law also regulates that controlling shareholders not act against the interest of the company through related-party transactions.

References

OECD Guidelines for Governance of State-Owned Enterprises

In an effort to offer international governance standards for state-owned enterprises, in 2005 the OECD released corporate governance guidelines specially tailored for state-owned enterprises. Find a link to the OECD report here.

Shanghai Stock Exchange Report on Governance of State-Owned Enterprises

How to improve the corporate governance of state-controlled companies has long been a focus for state regulators. The Shanghai Stock Exchange (SSE) has published its Report on Corporate Governance in China on an annual basis since 2003.  Its 2006 Report, which focused on state-controlled listed companies, analyzes corporate governance at these companies and makes recommendations. The report points out that the corporate governance at China's state-controlled companies is observed more in form than in substance; that progress in China's corporate governance is moving backward rather than forward; that government forces are more powerful in this respect than market forces; that insiders may have more power and control at these firms than boards of directors or shareholders; and that the hierarchy of approval is often more powerful than supervision or regulation and enforcement. In reaction to these findings, the report provides ten suggestions for state-controlled, listed companies to improve their corporate governance. The Report includes a history of the sector and recent reforms, as well as a review of related-party transactions, non-tradable shares, and comparisons with state-owned enterprises in other counties.

Find a link to the extract of SSE Report on China Corporate Governance (2006): Corporate Governance of State-controlled Listed Companies (In Chinese only)

Find a link to the prologue of SSE Report on China Corporate Governance (2006): Corporate Governance of State-controlled Listed Companies (In Chinese only)

 

Laws & Regulations for State-Owned Enterprises

Laws and regulations regarding state-owned shares and management of state-owned assets:

The National People's Congress (NPC): Laws of State-owned Assets of the People's Republic of China  (In Chinese only)

NPC: Company Law of the People's Republic of China (In Chinese only)

NPC: Security Law of the People's Republic of China  (In Chinese only)

State Council: Notice of Improving the Quality of  Listed Companies from CSRC Approved by State Council (In Chinese only)

State Council: Acting Regulations on State-owned Assets Supervision (In Chinese only)

CSRC: Code of Corporate Governance for Listed Companies in China  (In Chinese only)

SASAC: Advice on Regulating the Behavior of  State Shareholder in Listed Companies (In Chinese only)

SASAC: Notice on Trial of Establishing and Improving the Board of Directors in Central Enterprises (In Chinese only)