A wholly foreign-owned enterprise (“WFOE”) incorporated in China is required to establish a Supervisory Board or have one Supervisor appointed by the shareholder(s). The Supervisory Board/Supervisor is responsible for overseeing and inspecting the WFOE, ensuring that it remains compliant with local laws and regulations. The presence of the Supervisory Board/Supervisor ensures that the WFOE can focus on revenue-generating activities without having to worry about its compliance with financial, accounting and legal matters.
At their discretion, the Supervisory Board/Supervisor may raise questions before the Board of Directors or make suggestions that improve the running of the company. If the Supervisory Board/Supervisor discovers suspicious activities in the WFOE, they may conduct investigations with the option of enlisting the help of an accounting firm. Any fees from the accounting firm are to be paid by the WFOE, not the Supervisory Board/Supervisor.
The Supervisory Board/Supervisor plays an important role in the WFOE’s system of check and balance. Corporate governance is maintained in WFOEs by three distinct branches – Shareholders Meeting, Board of Directors and Supervisory Board/Supervisor. Each branch is given certain powers over the others, ensuring that no single branch dominates and gains the ability to make decisions without being questioned.
No Director or senior manager may concurrently work as a Supervisor. A Supervisor can be appointed in three ways. He can be:
- a representative appointed in the Shareholders Meeting
- a representative who is democratically elected by the employees of the WFOE
- an independent Supervisor who is a third party
The Supervisory Board/Supervisor cannot replace the Board of Directors in the management of business operations or conduct any business activities on behalf of the WFOE. Additionally, the Supervisory Board/Supervisor should not interfere with the normal and regular activities of the Board of Directors or General Manager.
The roles and responsibilities of the Supervisory Board/Supervisor are as follows:
- Monitor the financial affairs of the WFOE
- Supervise the duties of Directors and senior managers
- Put forward proposals on the removal of any Director or senior manager who violates any law, administrative regulation, articles of association or resolutions of shareholders
- To ensure that corrective action is taken should any Director’s or senior manager’s actions injure the interests of the WFOE Put forward proposals to shareholders
- Call for disciplinary action against Directors or senior managers who have broken laws or ethical rules
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