The Supervisory Board in Chinese Listed Companies: Problems, Causes, Consequences and Remedies

This study investigates the effect of two-tier board characteristics, audit committee, and external auditors on earnings management in China. This study contributes to the empirical literature of corporate governance in China that remarkably differs from the Anglo-Saxon structure in terms of boards’ features and auditing. Using a sample of 622 listed Chinese company-years, this study finds that independent directors on the board of directors are negatively related to earnings management while employee supervisors on the supervisory board are not related to earnings management. The results of empirical analysis also show that the presence of audit committees and the brand auditors are negatively associated with earnings management. Finally, the relationship between qualified audit opinions and the level of earnings management are examined. The results show that qualified audit opinion is associated with a higher level of earnings management. Implications of these findings are discussed with regard to the characteristics of corporate governance and auditing settings in Chinese listed companies. In particular, higher proportion of independent directors on the board can improve the quality of reported earnings. However, it indicates that the role of supervisory board to restrain earnings management is limited with the increase of employee members. In addition, the existence of an audit committee improves the quality of reported earnings. Moreover, external audit play a monitoring role in mitigating earnings management in Chinese listed companies.

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Empirical Insights into Supervisory Boards of Listed Companies in China

Asian Journal of Economics Business and Accounting ◽

10.9734/ajeba/2020/v19i430310 ◽

2020 ◽

pp. 19-37

Author(s):

Julia A. Smith ◽

Yuqi Tian

Keyword(s):

Corporate Governance ◽

Supervisory Board ◽

Regulatory System ◽

Primary Source ◽

Listed Companies ◽

Legal Cases ◽

Legal Decisions ◽

Chinese Listed Companies ◽

Supervisory Boards ◽

Limited Power

This paper addresses a gap in the literature by presenting novel empirical insight, accorded by privileged access to prejudications and legal decisions, into corporate governance in China. A main aim of our work was to assess whether calls for reform of the regulatory system are warranted. We present an inductive piece of research into two-tier boards in Chinese listed companies, incorporating a board of directors and a supervisory board, appointed by and reporting to the shareholders’ meeting. Through unique primary-source evidence, and additional evidence from recent legal cases, we illustrate the problems faced by organizations that have had to contend with the inherent difficulties of corporate governance in China. Our findings suggest that the supervisory board, in practice, has limited power, given the conflicting roles of the various members, and that corporate governance might be better maintained by a greater transfer of power to independent directors.

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