All you want to know about the board of supervisors
Board of supervisors is an indispensable part of large corporations. They supervise the board of directors with the effect of not only protecting the corporation from deviance of the directors, but also protecting the shareholders assets. More ambiguous is the meaning of the board of supervisors in smaller companies, especially limited companies. The different law systems are ruling their board of supervisors differently. For example, in France there is no obligation to have a board of supervisors. In Germany it gets obligatory from 500 employees on. The country with the widest rules in favor of a board of supervisors is China. Companies who want to enter the Chinese market with a WFOE must initiate a board of supervisors. What this means specifically and why this does not only mean effort, but also chances you will get to know here.
Duties of the supervisor / board of supervisors
What are the duties of the board of supervisors are to some extent self-explainable: supervising the board of directors and the management. Especially, he must ensure that these two do not defy law, administrative regulation, the articles of association and / or any resolution of the shareholders (compliance). The articles of association can impose further duties on the supervisors. If the board does not fulfill its duty of supervision, it can be liable for damages. The accountability (only intention or even commercial diligence) depends on the articles of association, otherwise it is determined by law.
Authorities of the supervisor / board of supervisors
The initiation of a board of supervisors allocates several authorities to the supervisors. It is essential for the supervising function, even if their realization can be unpleasant for the board of directors and the management. Essential authority is checking the financial affairs of the company. Furthermore, the board of supervisors can demand the directors or managers in the case of infringement on interests of the company (e.g. defy on compliance) to make corrections. If corrections are not made, the board of supervisors can take actions against the directors or managers according to the Chinese company law. The articles of association can allocate further authorities on the supervisors. Aside from the rights of the board, the supervisors themselves have a right to compensation.
Of which members is the board of supervisors made up?
The board of supervisors is made up of at least three supervisors. For smaller WFOEs one or two supervisors are sufficient (but then it is not called board of supervisors anymore). To be supervisor you must fulfill the requirements by law. Excluded are Members of board of directors, managers and other employees who are in the directorate. Furthermore, people who are sentenced due to an offence of corruption, encroachment of property, etc. (within 5 years), people who are as a former director or manager liable for bankruptcy of the company or the defy of compliance, or people who are heavily in dept can not be supervisor. Aside from the question, who can be supervisor there is the question, who is suitable for being supervisor. Being a supervisor of a company in China invested by Germans, you should know both sides of the coin. That means: It is recommendable to have knowledge of German and Chinese language, as well as of German and Chinese law. Having knowledge only on one side is normally not ideal. You would like to know more? Please have a look at this article to know, how to acquire the right supervisor.
Chances by having a supervisor / board of supervisors
Not every entrepreneur will be in favor of being directly concerned when structuring the board of supervisors while entering a new market. Finding a suitable supervisor as well as board of supervisors requires a lot of effort.
Furthermore, the supervisors have a right to compensation. In fact, you do not have the chance to choose if you would like a board of supervisors or not. Nevertheless, we briefly want to name the chances for running a board of supervisors: Not only are companies with wisely chosen board of supervisors more successful according to surveys than those without. Legal and tax knowledge of China, expertise, cultural knowledge / experience and strategic evaluations are important points to be integrated into the decision-making process.
Also, from legal perspective there is the advantage that the board of supervisors is liable for not fulfilling its duty of supervision. By that, in the case of defiance of a supervisor, the liability for damages can eventually be transferred from the directors or the managers to the board of supervisors, if the supervisors didn’t prevent the damage by fulfilling their duty of supervision. The more extended the accountability of the supervisors is, the more advantageous it is for the directors. Compared to Germany, a board of supervisors is especially important, as compliance violation will have far-reaching consequences in China. Defiance can be punished by penalties in the Social Credit System. For enterprises in China, this can have far-reaching consequences. More about this topic you can read here.
Supervising Expertise of Ecovis Heidelberg
If you have any questions regarding tax, accounting, auditing, or legal advice, please feel free to contact Ecovis Richard Hoffmann in Heidelberg or the ECOVIS Ruide China team. Ecovis Richard Hoffmann has also experience in being a supervisor in China. Through years of experience and specific knowledge of the German, international, and Chinese business environment, Richard Hoffmann has successfully supported several hundred companies to navigate through the complexity of legal, tax and compliance issues in China.