Corporate Governance in China
Shareholders, directors, supervisors, audit committees and senior management under the current Company Law
Shareholders, directors, supervisors, audit committees and senior management under the current Company Law
Key takeaways
- Governance should be designed in the articles of association and shareholder arrangements rather than copied from a generic template.
- The current Company Law offers different director and supervisory configurations, including audit-committee alternatives in qualifying structures.
- Directors, supervisors, senior managers, controlling shareholders and actual controllers can face duties and liability based on their conduct and influence.
1. Choose the appropriate company form
Most foreign-invested operating companies are limited liability companies. A joint stock company may be appropriate for a wider shareholder base, employee equity arrangements or capital-market planning, but it brings a different governance and disclosure structure. The chosen form should match the ownership, financing and exit plan.
2. Shareholders and reserved matters
Shareholders decide matters allocated to them by law and the articles, including major changes to capital and organisational documents. In a joint venture, reserved matters should be precisely drafted. Requiring unanimous approval for routine issues can create paralysis, while vague veto rights may not protect the intended commercial interest.
3. Directors and management
The board, or a director where the law and company structure permit, is responsible for company decision-making within its authority. Senior management handles day-to-day operations under the articles, board decisions and employment arrangements. Delegations should specify approval limits, reporting lines, signatures and controls over bank accounts, chops and digital credentials.
4. Supervisory arrangements and audit committees
Depending on the company type and size, the company may use a board of supervisors, one supervisor, an audit committee within the board or another legally permitted simplified arrangement. The choice should be checked against the current Company Law and the company’s circumstances rather than automatically retaining the former ‘three governance bodies plus management’ model.
5. Duties and connected-party risks
Directors, supervisors and senior managers owe duties of loyalty and diligence. Related-party transactions, business opportunities, competing activities and the use of company assets require particular care. A controlling shareholder or actual controller that instructs a director or manager to harm the company may also face liability.
6. Governance that works in practice
A sound governance package aligns the articles, shareholder agreement, board rules, authority matrix, finance policy, chop policy and employment contracts. It also establishes regular reporting, conflict declarations, minutes, document retention and escalation procedures. Formal organs are ineffective if the foreign shareholder cannot access reliable financial and operational information.
Before you act
- Select a governance configuration permitted for the company type and size.
- Align the articles and shareholder agreement on voting and reserved matters.
- Adopt an authority matrix for contracts, payments, chops and digital accounts.
- Create conflict-of-interest and related-party transaction procedures.
- Ensure the shareholder receives regular financial and compliance reporting.
How we can help
BizLawyerChina can review articles of association, shareholder arrangements, authority matrices, director and legal-representative appointments, and practical controls over chops, banking and company records.