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Firstly, In 1997, “Shangshi Gongsi Zhangcheng Zhiyin ”for the first time pointed out that, listed companies may retain independent directors when it is in companies’ demand. [FN4] Secondly,the CSRC issued 2001“Establishment of Independent Director Systems by Listed Companies Guiding Opinion”(the Guiding Opinion), stipulating all listed companies in China should establish independent director system. In addition, “Notice on Issuing the Guideline on the Management of Listed Companies”(2002) also has relevant stipulation about independent director system in Chinese listed companies. Most importantly, the newly amended “Company Law of People’s Republic of China”(2006), for the first time, expressly addresses “A listed company shall have independent directors. The concrete measures shall be formulated by the State Council”. Therefore, up till now, a formal dual supervisory mechanism has been formed, for the sake of curbing abuse of right in the management board of Chinese listed companies.
However, in respect of the practical implication of the two coexisting systems in recent years, the outcome seems to be not optimistic. The double safeguard is too weak to inhibit the board’s illegal behavior. Some high profile cases hinted that the alarm bell of ongoing supervisory situation of listed companies in China is ringing. In the writer’s view, the key questions refer to how to effectively bring the two systems’ supervisory functions into full play; how to coordinate the two systems if there are discrepancies between them. Therefore, the following content will focus on analysis of perfection and coordination of the coexisting supervisory systems, based on addressing major issues arisen from current listed companies.
Main Issues Under Current Dual Supervisory Mechanism
Weaknesses of the Supervisory Board
The board of supervisors is a self-supervision agency, which makes accountability to supervise the behaviors of the board of directors and managers of a company, and to ensure the company’s operation on the right track. Under the 2006 Company Law of PRC, the supervisory board is statutory agency in a joint stock limited company. [FN5] However, unlike Germany, the supervisory board in Chinese companies is not the highest authority, in contrast, it is highly under control of the shareholders’ assembly. As mentioned above, there is an unusual concentration of power in the hands of big shareholders (usually the state) in Chinese listed companies. Under the 2006 Company Law, the board of supervisors usually come from two parts: one part is from representatives of employees democratically elected through the assembly of representatives of the company’s employees, shareholders’ assembly or by other means. This part accounts for no less than 1/3 of all the supervisors. It is prima facie that these supervisors are independently functioning. In fact, these representatives’ remuneration, nomination, appointment etc, heavily rely on the board of directors. This connection obviously inclines to smother these supervisors’ incentive to exercise their supervisory rights, because they naturally put their personal interests first. The other part is representatives from shareholders (usually controlling shareholders). Undoubtedly, they work on behalf of their partners’ interests. As the proverb says, “One can’t be the judge of his own case.” Self-supervising, more often than not, is the least efficient and effective.
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