Corporate Governance Responsibilities of Company Boards in China

Corporate governance in China has undergone significant changes, particularly with the recent revisions to the Company Law, which impact how boards of directors and supervisory boards operate in listed companies. China's newly revised Company Law introduces a shift from a two-tier to a one-tier corporate governance structure for listed companies. This change allows companies to choose their governance arrangements via their articles of association.

For listed companies, Article 121 of the Company Law allows for the creation of an audit committee within the board of directors. This audit committee assumes the duties of the board of supervisors, which is no longer a mandatory entity for listed companies.

Legal Responsibilities of the Board

Under the new legislation, the audit committee or board of supervisors is responsible for:

• Reviewing the company’s financial affairs.

• Overseeing the actions of directors and senior executives, with the power to propose removal for legal or regulatory violations.

• Ensuring directors rectify actions that harm the company’s interests.

• Calling interim shareholders' meetings if necessary.

• Initiating lawsuits for breaches of duty of loyalty or care by directors or senior executives.
  

Duties to the Company and Shareholders

Board members in China represent the interests of both the company and its shareholders. The law requires directors, supervisors, and senior executives to act with loyalty and diligence. This includes avoiding conflicts of interest, exercising reasonable care, and acting in the company’s best interests.

Enforcement Actions Against Directors

If a director, supervisor, or senior executive breaches their duties, shareholders with at least 1% of shares held for 180 days or more can request the board to initiate a lawsuit. If the board fails to act, the shareholders themselves can take legal action. Chinese law focuses on negligence, damage, and causation to establish liability for breaches of care, without applying the business judgment rule.

Board Committees and Composition

For listed companies, certain board committees, such as an audit committee, are mandatory. Independent directors are required, and they must comprise at least one-third of the board, including at least one accounting professional. Independent directors have special responsibilities in ensuring the company’s decisions align with shareholder interests and addressing conflicts of interest.

Board Size, Meetings, and Composition

The number of board members in companies varies based on the company’s structure, with some flexibility in appointing employees as directors in certain cases. Listed companies must hold at least two board meetings per year, with specific requirements for the composition and roles of the board depending on the company’s size and ownership.

Board Leadership and Evaluation

Chinese law does not mandate the separation of CEO and board chair roles, though separating these roles is seen as best practice in larger, listed companies. Listed companies are subject to rigorous disclosure and evaluation standards, including board performance assessments conducted by independent firms or committees, with results disclosed to shareholders. The evolving landscape of corporate governance in China reflects a shift towards greater flexibility and modernisation in board structures and responsibilities. As companies adapt to the new regulatory framework, the principles of transparency, accountability, and effective oversight will continue to shape the future of corporate governance in China, ensuring that boards are well-equipped to meet the challenges of a dynamic business environment.

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