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Original Wang Haifeng Audit Observation

In 2021, in order to implement the Party Central Committee’s decision-making and deployment requirements on deepening the reform of state-owned enterprises, optimizing the business environment, strengthening the protection of property rights and promoting the healthy development of the capital market, the company law ushered in the sixth revision in the past 30 years. During the initial review of this revised draft, about 70 articles were actually added and revised, involving upholding the Party’s leadership over state-owned enterprises, improving the special provisions of state-funded companies, improving the system of company establishment and withdrawal, optimizing the company’s organizational structure, improving the company’s capital system, strengthening the responsibilities of controlling shareholders and managers, and strengthening corporate social responsibility. Among them, in terms of the company’s organizational structure, the provision that the audit Committee under the board of directors and the board of supervisors have complementary functions is an important part of this revision of the company law. Under the background of the revision of the company law, this paper aims to clarify the boundaries and scope of the complementary functions of the audit committee and the board of supervisors, and clarify the specific paths for the implementation of their rights and responsibilities, and then provide feasible ideas for improving the corporate governance of state-owned enterprises and implementing the major decision-making arrangements of the CPC Central Committee to deepen the reform of state-owned enterprises.

Under the previous single-layer or double-layer board governance model, it is necessary to adjust the current board governance structure, whether based on the need to strengthen the supervision of the board of directors and managers or to release the decision-making efficiency of the board of directors. The problems of "independence" and "weak specialization" of independent directors and the absence of supervision by supervisors (associations) are also important reasons for the improvement of board governance. The establishment of the professional committee of the board of directors, represented by the audit committee, can help improve the governance structure, promote the implementation of the powers and responsibilities of the board of directors and improve its efficiency. To improve and implement the audit committee system, we need a good human resource foundation and substantial rights and responsibilities, so that it can coordinate the power operation of the board of directors internally and realize the function of supervision and restriction externally. State-owned enterprises should gradually improve the division of powers and responsibilities among multiple governance bodies, including audit committees, in order to achieve the same frequency resonance in governance efficiency.

The corporate governance structure of single-layer system and double-layer system and its practical dilemma

From the perspective of company law, corporate governance mainly refers to how to make company directors represent shareholders’ interests, not their own interests, and the core is to handle the interest relationship between directors and shareholders. In order to deal with the relationship between the two and achieve the ultimate goal, there are two governance structures: "single-layer system" and "double-layer system" Among them, the single-layer corporate governance structure is mainly reflected by the introduction of the independent director system, and the double-layer corporate governance structure is mainly reflected by the establishment of the board of supervisors.

(A) the function of the board of directors under the single-tier structure

In the single-layer governance structure, there is a board of directors and no board of supervisors, and the supervision of the company is mainly external (government, intermediary, market mechanism, etc.), which is characterized by "weak shareholders and strong management". This governance structure originates from the traditional free market economy, and the typical representative is American companies. In addition to the shareholders’ meeting, the board of directors is a mandatory institution, and there is no special supervision institution. Independent directors perform supervision functions. The shareholders’ meeting elects members of the board of directors, but due to the scattered shareholders, the ability to control the elected board of directors is not strong. The board of directors and managers may submit business answers that make shareholders "satisfied" in order to realize short-term interests, ignoring the long-term interests of the company.

(B) the function of the board of directors under the two-tier structure

In the two-tier governance structure, the board of directors and the board of supervisors participate in corporate governance at the same time and play their governance functions respectively. German and Japanese companies are the representatives of this model. In the governance structure of German companies, the board of directors is divided into two levels: supervisory board and management board. The supervisory board has the right to supervise the management board, and to appoint and remove members of the management board. Its members are composed of shareholders’ representatives elected by the shareholders’ meeting and workers’ representatives elected by the trade union. The management board of directors, as a subordinate organization to supervise the board of directors, is responsible for the company’s business activities. However, the board of directors and the board of supervisors of Japanese companies are not established vertically, but in parallel. Whether it is a vertical structure or a parallel structure, the management function of the management board is greatly influenced by the supervision board. On the one hand, the vertically set supervisory board excessively interferes with the management board’s business decisions, resulting in low efficiency; On the other hand, the existence of parallel supervisory boards is meaningless if they cannot actively play their supervisory functions.

From the historical process of the development of corporate governance model, it is a transition from shareholders’ meeting doctrine to board doctrine as a whole. In the 19th century, the company was small in scale and relatively concentrated in equity, with shareholders’ interests as the leading role. After the 20th century, with the expansion of the company’s scale and the decentralization of equity, the demand for the board of directors and professional managers became more obvious. The shareholders’ meeting as the owner of the company and the board of directors as the decision-maker of the company’s operation are more obvious. However, with the important role of professional managers in the company’s operation and management and the actual influence of controlling shareholders on the company’s operation, the board of directors doctrine has a tendency to be replaced by manager-level doctrine and controlling shareholder doctrine.

(D) China’s company law in the way of governance structure.

China’s company law adopts both "single-layer system" and "double-layer system" in its governance structure. The independent director system is the concrete embodiment of the single-layer system, and the establishment of the board of supervisors is the concrete embodiment of the double-layer system. However, as a result of corporate governance practice, scholars and practitioners have different views on the choice of corporate governance structure in China. If the board of supervisors is cancelled; Improve the system of board of supervisors and independent directors; Improve the professional committees of the board of directors, and the professional committees will play a supervisory role; The company can choose "single-layer system" or "double-layer system" and so on. No matter what choice is made in the revision of the company law, the ultimate goal is to give full play to the institutional value of corporate governance and promote the improvement of governance efficiency. The system design of professional committees based on past practical experience will be more favored in achieving this governance goal.

The Development of Professional Committee System

As the shareholders’ meeting is weakened, how to strengthen the supervision of the board of directors and managers has become a problem that companies with single-tier governance structure need to consider. Strengthening the independence and supervision function of the board of directors is the general idea to solve the above problems. The establishment of professional committees of the board of directors plays a role in supervising the board of directors and managers. Professional committees of the board of directors generally include committees on strategy, nomination, audit, remuneration and assessment, and the committees are generally composed of independent directors. Companies that adopt a two-tier structure to set up a board of supervisors will either interfere too much in management and affect decision-making efficiency; Either the supervisory function is difficult to play, it is a mere formality, and it is difficult to properly play the supervisory role of the board of supervisors. China’s corporate governance structure is also facing problems such as the independence of independent directors and the inadequate supervision function of the board of supervisors. It is urgent to clarify the future direction of corporate governance through top-level design.

(A) the function of independent directors is not in place.

In 1992, american law institute proposed in his Principles of Corporate Governance: Analysis and Suggestions that the board of directors should introduce independent external directors; The independence of external directors shall be determined according to whether they have important relations with operating directors and management, and the important relations shall be enumerated. In 1992, the British Cadbury Committee suggested in its Financial Aspects of Corporate Governance that there should be at least three non-executive directors on the board of directors, and two of them must be independent. These are the embryonic forms of the early British and American independent director system. Returning to China, from the Guidelines for the Articles of Association of Listed Companies issued by the CSRC in 1997 to the Guiding Opinions on Establishing the Independent Director System in Listed Companies in 2001 (repealed), the listed companies should employ appropriate personnel as independent directors before June 30, 2002, and then to the Rules for Independent Directors of Listed Companies in 2022, which stated that at least one third of the board members of listed companies should include independent directors. However, some scholars pointed out that independent directors did not play a big role and could not analyze the company’s operating conditions like economic experts and financial experts. Some scholars also point out that the independent director system is too simple, and it fails to be placed in a professional committee, nor does it coordinate its division of labor with the board of supervisors, which increases the risk of overlapping supervisory functions.

(B) the supervisory function of supervisors is not perfect

The supervisor system, which faces the same embarrassing situation as the independent director system in China, has not played its supervisory role since its implementation. It is normal that the board of supervisors is subject to the board of directors instead of supervising the board of directors, and the provisions of the company law on the authority of the board of supervisors are obviously insufficient. On the one hand, due to the general system design of "capital majority decision", non-employee supervisors represent the interests of major shareholders, and the emergence of directors also has the same problems, which in turn leads to the fact that major shareholders, directors and supervisors belong to the same interest circle, and it is difficult for supervisors (associations) to really play their independent supervision functions. Because of the labor contract relationship between employee supervisors and the company, it is difficult to avoid the influence of directors and other senior executives’ behavior, so it is difficult to hope for the independent supervision function to play. On the other hand, although the current company law gives supervisors (associations) the authority of financial inspection, the authority of supervising directors and senior executives to perform their duties and making proposals, it is difficult to give full play to the effectiveness of supervision in view of the weakening of supervisors’ own professional experience and the actual implementation of supervision methods. For example, whether the supervisor’s criticism of directors and senior executives can be recognized or implemented ultimately depends on the decision-making level; When exercising the power of financial inspection, it needs to have sufficient financial expertise. Even if an external accounting firm can issue audit opinions, if the accounting firm hired by shareholders issues different audit opinions, the effectiveness of the audit opinions obtained by the board of supervisors will be weakened. This contradiction is obviously not conducive to the improvement of corporate governance efficiency. Furthermore, the sources of information for the Board of Supervisors to exercise supervision may be hindered. If directors and senior executives do not actively provide business information,It is entirely up to the supervisors to find out, and this passivity in supervision will hinder the supervision function.

It is the shortcomings of the independent director system and the board of supervisors system that lead to more attention to the construction and improvement of the professional Committee system. The "Guidelines for the Governance of Listed Companies of Shanghai Stock Exchange" issued in 2000 has required the establishment of professional committees of the board of directors such as the audit committee. In 2018, China Securities Regulatory Commission required that an audit committee must be set up in the revised Corporate Governance Standards for Listed Companies. Obviously, the importance of the audit committee is self-evident. This is also a reference to the corporate governance experience of foreign listed companies. For example, since the late 1980s, German companies have generally set up audit committees. The German Corporate Governance Standards suggest that the audit committee should be responsible for assigning tasks to auditors, determining audit priorities, signing business agreements, and handling compliance affairs including systematic review of compliance organizations. All listed companies in new york Stock Exchange have audit committees. The reason why we attach so much importance to the establishment of professional committees of the board of directors is that professional committees can exert the governance efficiency of the board of directors to a greater extent. On the one hand, the requirements for directors’ professional qualifications in professional committees enable professional committees to truly achieve professionalism. For example, the stipulation that the audit committee must be an accounting professional can, to a certain extent, promote the professional committee to play a supervisory role in the professional direction and help the board of directors to implement it with high quality. On the other hand, for the composition of professional committees, the requirement that most of them are independent directors can integrate the independent director system and the professional Committee system.Make up for the deficiencies in their independent operation scenarios, so that they can really help the implementation of corporate governance rights and responsibilities and improve their efficiency within their respective strengths. In this way, professional committees can better coordinate the power and responsibility operation within the board of directors and between the board of directors and the board of supervisors.

Improvement and implementation of audit committee system under the background of company law revision.

One of the highlights of this revision of the company law is the establishment of the audit Committee and the board of supervisors of the board of directors. Articles 64, 125 and 153 of the draft respectively provide options and adjustment schemes for the setting of the governance structure with regard to the selective setting of the audit committee and the board of supervisors of the board of directors in three forms of companies: limited liability companies, joint-stock companies and wholly state-owned companies.

(1) Options for limited liability companies and joint stock limited companies

The core content of articles 64 and 125 of the draft is to stipulate the self-establishment of "audit committee" and "supervisor (meeting)" of limited liability companies and joint stock limited companies respectively. If this draft amendment is confirmed, supervisors (associations) will not be necessary institutions in limited liability companies and joint stock limited companies in the future, that is, after the audit committee that meets the requirements is set up, supervisors (associations) can be retained or their functions can be integrated and absorbed, and the audit committee or other professional committees under the board of directors will undertake relevant functions. Looking at the practice of corporate governance at home and abroad, it is an overall trend to set up an audit committee of the board of directors regardless of whether the supervisory organization exists or not. The organizational design, power and responsibility operation and rules of procedure of the audit Committee need to be planned in advance.

It is the first step to establish an audit committee that conforms to the law in form. Compared with a limited liability company, the audit committee of a joint stock limited company has additional requirements for its members, which means that it needs to have sufficient human resources. It is obviously unwise to cobble together members for the purpose of setting up an audit committee. Therefore, the premise of establishing and using the audit committee system design is to have a good human resource foundation. At the same time, in the case that the board of directors system and the board of supervisors system are localized and mature, we need to guard against the backlog of contradictions in the implementation of the audit Committee system in the process of building it. On the one hand, this contradiction comes from the "undigested" of the previous system, on the other hand, it comes from the "copy mechanically" of the new system.

It is the core of practicing the system to construct an audit committee whose content conforms to the original intention of the system design. How to supervise the company’s finance and accounting is a difficult problem to realize the value of this system, otherwise, the audit Committee is just another "board of supervisors". Improve the institutional orientation, power and responsibility boundaries and rules of procedure of the audit committee, strengthen the construction of its own independence, so that it can truly play its professional advantages independently, coordinate the power operation of the board of directors internally, and realize the function of supervision and restriction externally.

(B) the establishment of the audit committee of a wholly state-owned company

The core content of article 153 of the draft is to stipulate that a wholly state-owned company "has no board of supervisors or supervisors and an audit committee". Another key point of this draft is that on the basis of the section of "Special Provisions for Wholly State-owned Companies in the Current Company Law", a special chapter on special provisions for state-funded companies has been set up, and there are many provisions on state-owned companies. Compared with the general provisions of the above-mentioned limited liability companies and joint stock limited companies, the audit committee in a wholly state-owned company is compulsory, and the supervisors (associations) are compulsory. Under the background of the reform that the party’s leadership is gradually embedded in corporate governance, the original functions of supervisors (associations) are naturally undertaken by discipline inspection and supervision, audit committees, etc., and there is really no need to continue to exist. In view of the mandatory establishment of the audit committee of a wholly state-owned company, it is more important to clarify its membership and the operation mode of power and responsibility. According to the Guiding Opinions of the General Office of the State Council on Further Improving the Corporate Governance Structure of State-owned Enterprises (hereinafter referred to as the Guiding Opinions), "the Board of Directors shall set up special committees such as the Nomination Committee, the Remuneration and Appraisal Committee and the Audit Committee to provide advice for the decision-making of the Board of Directors, among which the Remuneration and Appraisal Committee and the Audit Committee shall be composed of external directors". In this draft, the stipulation that "more than half of them are external directors" is slightly different from the statement that "they should be composed of external directors" in the Guiding Opinions. From the perspective of governance practice of state-owned enterprises, it is required that all members of the audit Committee are external directors, which has achieved complete independence in form on the surface, but it has also hindered the flow of information.It is difficult to ensure that external directors resonate with the company’s business decisions. In this regard, maintaining the expression of "more than half" is more in line with the actual governance of state-owned enterprises. Of course, a system needs a lot of institutional assistance to truly realize its value. No matter what kind of personnel composition, it is an important content to further improve the audit Committee system to clarify the functions and powers of the audit Committee of a wholly state-owned company, what should be audited and how to achieve the audit supervision goal.

The establishment of the audit committee of the board of directors is helpful to coordinate the internal power operation of the board of directors and promote the efficiency of corporate governance. However, as a professional committee under the board of directors, how to separate the audit committee’s own supervisory attributes from the board’s own attributes is also a problem that needs special attention in future governance practice. At the same time, while advocating the improvement of the audit Committee system, we should also strengthen the improvement of the functions of the board of supervisors. Article 81 of the draft adds the provision that "the board of supervisors may require directors and senior managers to submit reports on the performance of their duties", which also shows the trend of further improving the board of supervisors system. No system is natural and self-consistent, and it needs the coordinated operation of multiple systems to play their due value. State-owned enterprises should further combine the framework path of state-owned enterprise reform, make up the historical debt of corporate governance in time, take advantage of the east wind of reform, gradually improve the embedded integration of existing governance subjects such as party organizations and boards of directors, give full play to the institutional advantages of Socialism with Chinese characteristics, and set up a model of corporate governance of state-owned enterprises. (The author’s Wang Haifeng unit is Jiangsu Coastal Development Group Co., Ltd.)

Original title: Audit Observation | Perfection and Implementation of Audit Committee System under the Background of Revision of Company Law