Gang Wei (et al.) from the Henan University takes on a subject I’ve often wondered about. Do external supervisors, in the China context, actually do any good in protecting investor’s interests?
The researchers chose to concentrate their study on China’s commercial banks and analyzed data from 2005 to 2022, a period of rapid growth, stress and development for the sector and thus a great petri dish for analysis.
New readers may be unaware that Chinese SOEs are required to have a two-tier management structure with a ‘Supervisory Board’ in place to monitor the doings of the Main Board. Like Independent Non-Executive Directors (INEDs) the selection of the composition of these boards can, and is, influenced by the Party, government and the company themselves.
Putting aside the question of whether this arrangement is a good idea or not or, irrespective of the cat’s colour, does it catch mice?
Not only do the researchers demonstrate these Supervisory Boards are effective they highlight the following in the process:
- INEDs, as they delicately put it “..have not fully met their expected monitoring role”. The reason seems to be they lack the authority of the Supervisory Board.
- External supervisors “..significantly curb earnings management.”
- The effectiveness of the supervision varies with earnings cycles. In good times they’re hardly noticeable but in bad times they clearly prevent misreporting.
- Female supervisors and those with strong academic backgrounds are more effective.
The paper concludes noting Chinese Company Law since 2023 has been steering monitoring functions away from Supervisors in favour of Audit Committees. The work presented here suggests this may not be optimal and perhaps instead more emphasis should be placed on making the demonstrably effective Supervisory Committees work even better?
For practitioners there’s useful additional detail in the work and you can access the full paper here Are External Supervisors Working in China?
Happy Sunday.