01
The current situation of the operation of the board of supervisors system of state-owned enterprises
As of April 2024, there are 791,000 state-owned enterprises in the mainland, and the high-quality development of state-owned enterprises is of great significance to achieving sustainable economic development and building a modern socialist country in an all-round way. The original intention of the establishment of the board of supervisors system of state-owned enterprises is to maintain the security of state-owned assets, prevent the loss of state-owned assets, promote the preservation and appreciation of state-owned assets, and realize the sustainable and healthy development of state-owned enterprises. However, in the long-term practice of corporate governance in mainland China, the position of the board of supervisors of state-owned enterprises has been weak, and the board of supervisors, as an internal supervisory body, not only does not play the role it needs to play when it is established, but increases the cost of corporate governance, mainly because:
1. Personnel are not independent. In most state-owned enterprises, the rank of chairman of the board of supervisors or the rank of intra-party position is lower than that of the chairman and general manager, and it is difficult for the lower level to supervise and the higher level to play a supervisory role.
2. No decision-making power. The main responsibility of the board of supervisors is to supervise the company's financial status and the diligence of its personnel, and the supervisors (boards) usually do not actually participate in the company's business decisions, and have limited understanding and access to the company's information, and are more likely to supervise after the fact.
3. The funds are not independent. According to the current Company Law, the expenses necessary for the board of supervisors to exercise their powers shall be borne by the company. However, supervisors cannot directly control the company's assets, and if they exercise their rights at their own expense and then claim reimbursement from the company afterwards, the supervisors will lack sufficient motivation to perform their duties.
02
The new Companies Act has a negative impact on "audit committees"
and the new provisions on the "Board of Supervisors".
Article 176 of the new Company Law stipulates that if a wholly state-owned company appoints an audit committee composed of directors to its board of directors to exercise the functions and powers of the board of supervisors as provided for in this Law, it shall not have a board of supervisors or supervisors. This means that SOEs have greater autonomy in the organizational set-up, allowing companies to choose a single-tier governance model, and if a company chooses to have only a board of directors, an audit committee composed of directors should be set up in the board of directors to be responsible for supervision, and more than half of the members of the audit committee of a company limited by shares should be non-executive directors. According to the new Company Law, the supervisory authority of a wholly state-owned company can choose the following three ways: the board of supervisors, the supervisors, and the audit committee under the board of directors.
Although judging from the legislative process of the new Company Law, legislators are more inclined to weaken the supervisory board and strengthen the board of directors. At the same time, however, the new Company Law expands the functions and powers of the board of supervisors of wholly state-owned companies, and Article 80 of the new Company Law adds the function that the board of supervisors may require directors and senior managers to submit reports on the performance of their duties. Article 215 adds the functions of the board of supervisors to decide whether to hire or dismiss an accounting firm that undertakes the company's auditing business. This shows that the reform has not abandoned the improvement of the original system while introducing the single and double parallel system, aiming at the coordinated development of multiple mechanisms, and the company can seek its own governance model.
03
Application of the "single and dual" layer governance model
1. The single-tier governance model does not set up a special supervisory body, and the board of directors exercises the functions of operation management and supervision at the same time, and the common law companies are more likely to choose the single-tier governance model; it is suitable for companies with smaller scale or fewer shareholders, and its ownership and management rights are highly concentrated, which can reduce the staffing of management institutions and supervisory agencies, and reduce agency costs.
2. The two-tier governance model is governed by the separation of the board of directors and the board of supervisors on operation and supervision, the boundaries of power and responsibility are relatively clear, and the common practice is parallel governance, and the civil law companies mostly choose the two-tier governance model; it is suitable for companies with large scale, relatively scattered equity and a large number of shareholders, which pay more attention to the checks and balances of shareholders' powers, the protection of the interests of creditors and employees, and can clearly define the management and supervision responsibilities.
The addition of the "Audit Committee" under the Board of Directors and the independent choice of the Board of Supervisors in the new Company Law is undoubtedly an innovation and attempt of the corporate governance model with Chinese characteristics. To this end, in the process of selecting single and double tiers, SOEs should consider the particularity of state-owned assets supervision, the protection of the interests and will of private shareholders participating in the shares, and the willingness and ability of (audit) directors and supervisors, so as to determine the single/double tier governance model.
04
Recommendations for SOEs to choose a single-tier governance model
The following aspects should be considered in the selection of the governance model of state-owned enterprises:
1. To adapt to the country's economic development strategy, the selection and construction of the governance model of state-owned enterprises must be based on the reform and deepening of the financial system, fiscal and taxation policies, legal environment, government functions and other relevant levels, and gradually reflect and adapt to the market-oriented orientation;
2. Match the original management system within the state-owned enterprises, and choose a governance structure that is consistent with the overall promotion of the marketization of the national economy on the basis of not departing from the original governance soil;
3. The leadership team of state-owned enterprises should have the courage to reform and innovate, and on the basis of rigorous and objective feasibility demonstration, give full play to the subjective initiative of the supervision agency, and adapt to the deepening and upgrading of the reform of state-owned enterprises based on results;
4. The state-owned assets supervision department should fully learn and grasp the legislative intent of the revision of the new "Company Law", smooth the transformation of single-tier and two-tier governance structures, and promote the high-quality development of state-owned assets and state-owned enterprises.
In addition, if a state-owned enterprise chooses a single-tier governance model, it should also rationally allocate the rights between the shareholders' meeting, the board of directors and the managerial level. We will make full use of the company's autonomy to further clarify the functions and powers of each institution in the articles of association, increase the proportion of independent directors, and strengthen the supervisory function of the audit committee.
At the same time, at the level of system construction, improve the mechanism for the formation of the audit committee of the board of directors, the rules of procedure, and the qualifications of members, and further improve the supervision and management mechanism and precise accountability of (audit) directors and executives, which is more conducive to the implementation and application of the single-layer governance model of state-owned enterprises.
Source: Yuzhi Investment