A Study On Supervisory Board System Of Stock Corporations

Supervisor board is an important part within corporations in China. Improving supervisory board system of stock corporations is a vital measure to enhance the quality of corporate governance, which is concerned by legislators constantly. It is very important for shaping a check-and-balance system between organ of power, decision-making body, supervisors and the management team within the corporation and it also can promote the practice of socialist principles about democratic economy. But, because of some reasons, the implementation of supervisory board system in China is less than satisfactory. This paper, from the view of jurisprudence, discusses the fundamental theory of supervisory board system of stock corporations and puts forward some legislative suggestions for improving this system in China based on empirical study. After the chapter of introduction, the structure of this paper is shown as followed:The first part:where should supervisory board system go? Make a comprehensive survey on the legislation of all countries, internal supervisory system of a corporation has several patterns. In Germany, under double-layer system, the supervisory board of a corporation, as the top organ, has two important rights of decision-making and supervising. Within single-layer corporate governance system, which is mainly accepted by the countries in Continental Legal System, stock corporations set supervisory board internally, which is paralleled with the board of directors. The supervisory board, as the agent of stockholders, is responsible for supervising directors and management’s operations. Under the unified system of America and the UK, the board of director is reformed internally and independent directors are introduced into the board to supervise. In Japan, board of directors and supervisory board are coexist and selective. In China, generally, stock corporations set supervisory board paralleled with the board of directors and listed companies are required to set both supervisory board and independent directors system. Though supervisory board and independent directors both are supervisory system within a corporation and have the right to do internal supervision, they still have significant difference on the nature, responsibilities and operation method. Introduction of independent directors system mostly caters to the notion that supervisors must be independent and in some extent, reflects the competition of US corporation governance model but actually for different internal supervision systems, it is difficult to say which one is better or worse. Considering the special social background and the need for corporate governance system in China, we should insist the principles of using and improving supervisory board system. At the same time, for listed companies, supervisory board and independent directors should coexist. It is not rational to totally repudiate supervisory board or independent director system. They should complement on supervision functions and their extent of functions should be differentiated reasonably.The second part:functions of supervisory board. The paper firstly analyses the clauses of corporate law of various countries. Though in different countries of Continental Legal System and even in different times of one country, the definition of supervisory board’s functions are different. Supervisory board system implies two functions of internal supervision and democratic management involvement of employees. Thereinto, the supervision function results from the economic nature of corporation or the technological nature of it. Either based on the ideas of corporate contract or the idea of corporate organization, the theory of economics both emphasizes the necessity of internal supervision since internal supervision is endogenous need of hierarchies and separation check and balance of power of corporation and internal supvervision is the best method to make up for the flaws of incomplete contract. So, internal supervision system is one of the fundamental principles of the corporate law of various countries. Democratic management involvement of employees mostly results from the history or policies so it is just selection of several countries. In China, we need define the functions of supervisory board from these two aspects. Supervisory board’s functions are not changeless and supervising function and involvement of employees evoluted with the development of society. To keep up with the trend of strengthening internal supervision and control, China should reinforce the supervervision function of supervisory board and optimize its function of employee involvement comply with the trend of democratic economy.The third part:operation mechanism of supervisory board system. Activeness and independence showed by supervisory board when it oversees the financial issues of the corporation, supervises the behavior of directors and executives, rectifies ilegal behaviors are the essential clues for judging its operation effect. So the internal mechanism and outside environment should be optimized to ensure the independence of supervisors and who are supervised and ensure the supervisors have sufficient supervising resource and supervisors themselves are competent and motivated. When designing corporate law, supervising function and its operation mode should be considered firstly. The principles that supervisory board’s functions should have moderate extent and distinct connotation with assurance should be insisted. The right of supervisors to supervise financial issues and behaviors of the corporation, their delegacy, their right to suggest on personnel issues, their right to propose and chair the stockholders meetings, their right to attend some meetings and the right to ensure the fulfill of their functions should be designed optimally. The relationship between the supervision of supervisory board and supervisors should be properly handled to design a reasonable operation mode of supervision function. Then, the composition of supervisory board should be optimized from the aspects of the scale of supervisory board, the ratio between delegates of employees and stockholders and the qualification of supervisors. Outside independent directors should be considered to be introduced and positive qualifications of supervisors should be concerned. In addition, the regular meeting mechanism of supervisory board should be optimized from the aspects of frequency, conveners, chairing, voting, defects and remedies. Finally, the compensation, dismissal and duties of supervisors should be designed properly to optimize the incentive and constrain mechanism of the supervisory board.The fourth part:empirical study on the practice of supervisory board system in China. Firstly, the paper examines the relevant law and regulations in China. According to Corporate Law promulgated in 1993, supervisory board is a statutory machinery a company limited by shares must set. There are also relevant detailed provisions for the number of members, composition, tenure, method for conducting business, voting procedure, authorities, obligations and liabilities of supervisory board. Corporate Law amended in 2005 expands supervisory board’s functions, confirms the regular meeting mechanism and consolidates the liabilities and obligations of supervisory board. Though Corporate Law gives a framework for supervisory board system, some provisions are still not definite for some reasons. Except for Corporate Law, China has some other administrative or local regulations concerned supervisory board system. It seems that Provisional Regulations for Supervisory Board of State-owned Enterprise and Provisional Regulations for Supervisory Board of State-owned Major Financial Institutions only are applied to expatriated supervisors of state-owned enterprises, but it takes a good example for other stock corporations to improve their supervisory board system. Regulations on Limited Liabilities Companies in Shenzhen Special Economic Zone has some special provisions about the functions and operations of supervisory board and liabilities of supervisors different with Corporate Law. Some local regulations, such as Regulations on Employee Directors and Employee Supervisors of Corporation in Inner Mongolia and Regulations on Democratic Management of Corporation in Jiangshu Province, and so on have some complementary provisions for operation mechanism of employee supervisors. In addition, some regulative documents or policies issued by central government departments, provinces or other institutions are not law but they indicates the stance of the country and the society on supervisory board system. Specific rules or suggestions in there, in fact, are significant and can be regarded as routines to conduct the supervisory board system of stock corporations. Then, the paper does empirical study on operation effect of supervisory board of stock corporations. Through surveying certain kind of stock corporations in certain place and certain industry and field investigation, we find that supervisory board system contributes in some extent for internal supervising, improving corporate governance and realizing democratic economy with employee’s involvement in management of corporations. But, neither before or after Corporate Law amended in 2005 come into force, the operation effect of supervisory board system is less than satisfactory. Lack of independence during supervising, short of effective supervision resources, less competent and motivated and regular meetings not going well are the main problems. We find that there are some problems from design of supervisory board system to its operation environment. For design of the system, it lacks of necessary rules for the exercise of functions, assurance mechanism for the positions of supervisors, personal supervision and outside supervisors system. For the operation, vague property rights of state-owned enterprises, reformation of state-owned enterprises not finished, concentrated ownerships of stock corporations, political culture of management centralization, lack of legal consciousness, social culture of hoping immune from outside, and so on, essentially influence operation of supervisory board system. Corporate governance culture not concerning about supervisory board within the corporation also weakens the position of supervisory board.The fifth part:legislative suggestions for improving supervisory board system in China. We must insist the principle that orientation of policy should match with the realization approach. Through root-and-branch, step-by-step and adaptable reformation, we should rationally pursue realization approach for the target. Principle of checks and balance of power should be insisted to arrange rationally the functions of stockholders’meeting, supervisory board, board of directors and special overseer within the corporation. The position of supervisors’supervision in the internal supervision system, operation status of other supervision organs, probabilities of improvement and optimization of supervising functions and operation mechanism should be considered systematically. Legislative improvement and mechanism optimization should be implemented together, based on research on the factors influencing operation of the system, from the perspective of both legislative improvement and mechanism optimization, to find reasonable mechanism and complementary mechanism for imperfect system. Systematism between law, regulations and rules should be concerned and we also need to take full advantages of other regulative documents and unwritten conventions and optimize these documents when we amend our Corporate Law. Substantive rules and procedure rules should be balanced and we need pay more attention on the exercise procedures of the right to supervise and operation procedures of supervisory board. More detailedly, we need optimize the relationship between supervisory board and independent directors. Aiming at independence and professionalism, in the law, through introducing independent directors system and positive qualification for supervisors, constraining part-time supervisors, improving voting mechanism, confirming position assurance for independent directors and employee supervisors and expanding the scale of supervisor board, the structure of supervisory board can be improved and the independence and competence of supervisors can be promoted. Exercise rules of the right to supervise financial issues should be defined explicitly and the right to obtain information also need to be given special provisions. Exercise procedures of the right to supervise the behavior of directors and the management should be defined. The right to make decision and supervise conflict transaction between directors and the management, the right to propose supervising plan and budget should be defined in the Law. The delegacy of supervisors should be expanded and improved. The right to supervise the establishment procedure of the corporation should be added to perfect the supervision functions and exercise procedure of supervisory board. The personal delegacy of supervisor, the right to investigate, independent disposal right and personal supervision right should be introduced into the Law to make good use of supervisors. Standing institution of supervisory board should be set up and regular meetings of supervisory board should be improved to perfect the working mechanism of supervisory board. Through promulgating Regulations on Supervisory Board of Corporations by the State Council, completing relevant regulative documents for listed companies and, amending Governance Guidance for Stock Corporations and Guide for Articles of Association, issuing special regulations for financial stock corporations and promulgating special documents for employee supervisors by local government or trade unions, systematization of other documents out of the Law can be ensured. The compensation mechanism and evaluation mechanism of supervisors should be set up to improve the system of liabilities and obligations of supervisors. We need create a right environment for the operation of supervisory board system from the corporation and the society.