A Grounded Theory Exposition of the Role of the Supervisory Board in China*
| DOI | http://doi.org/10.1111/j.1467-8551.2004.t01-1-00399.x |
| Published date | 01 March 2004 |
| Date | 01 March 2004 |
A Grounded Theory Exposition of the Role
of the Supervisory Board in China
*
Jason Zezhong Xiao, Jay Dahyawand Zhijun Linz
Cardiff Business School, Cardiff University, Colum Drive, Cardiff CF10 3EU, UK, wBaruch College,
City University of New York, USA and zDepartment of Accountancy and Law,
Hong Kong Baptist University, Hong Kong
Corresponding author email: xiao@cardiff.ac.uk
This paper reports the findings of an investigation, through a series of interviews, into
the role of the supervisory board (SB) in Chinese listed companies. The interviews were
conducted and analysed using the grounded theory methodology. It is found that the SB
performs one of four roles under the Chinese corporate environment: an honoured guest,
a friendly advisor, a censored watchdog or an independent watchdog. The role of the SB
is dependent on a variety of factors: SB characteristics, power relations between the
Board of Directors and the SB, shareholding structure, the influence of the Communist
Party of China and government, the role of independent directors and the requirements
of the corporate law.
Introduction
By law, Chinese listed companies operate a two-
tier board structure consisting of a Board of
Directors (BoD) and a Supervisory Board (SB).
This study investigates the role of the SB in
Chinese listed companies and the factors that
shape this role. Such an investigation is impor-
tant for several reasons. First, an enhanced
understanding of the role of the SB in the
governance of Chinese companies is crucial to
investors, especially international investors, in
their investment decision-making. China is one of
the largest recipients of foreign investments and
one of the largest and fastest growing transition
economies in the world. However, China is
apparently different not only from developed eco-
nomies, but also from other transition economies
as it has adopted a gradual and experimental
approach to political and economic reform rather
than the ‘Big Bang’ or ‘Shock Therapy’ approach
that is adopted in most other transition econo-
mies. The existence of the SB andthe way in which
it operates reflect China’s unique and complex
dynamics, issues andproblems in constructing and
enforcing corporate governance systems.
Second, an investigation into the role of the SB
in China’s two-tier board structure is likely to
enrich the current debate on whether to adopt the
Anglo-Saxon style unitary board (i.e. the BoD)
or the Germanic type two-tier board that includes
both a BoD and a SB (see, for example, Aste,
1999; Ogger, 1993; Schneider-Lenne, 1992; Shleifer
*
We are indebted to the invaluable assistance provided
by the interviewees and appreciate the cooperation of
their respective institutions. We are particularly grateful
to Xin Cai, Yaping Gan, Guowei Gong, Jane Gu, Luan
Li, Guliang Tang, Bin Wang, Harrison Wang, Liyan
Wang, Wenbo Wang, Sean Xie and Youhong Yang for
arranging the interviews. Jay Dahya and Jason Xiao
acknowledge a generous Young Researcher Competition
Prize awarded by Cardiff University which financially
supported this research. Jason Xiao acknowledges addi-
tional financial support from the Chinese Accounting,
Finance and Business Research Unit (CAFBRU) at
Cardiff University. We thank the participants at the
Symposium on Organisational and Corporate Govern-
ance in China organized by the CAFBRU held at Cardiff
in 2000. John Child,Mahmoud Ezzamel, Jon Morris, two
anonymous reviewers, an associate editor andthe Editor-
in-Chief of this journal for their helpful comments on
earlier versions of the paper. We also thank Rachel
Ashworth for her editorial help on an earlier version of
the paper and He Yang for his research assistance.
British Journal of Management, Vol. 15, 39–55 (2004)
r2004 British Academy of Management
and Vishny, 1997; Turnbull, 1994). Clearly neither
board model is fault free. Recent scandals such as
Enron and WorldCom and earlier ones like
Maxwell (Clarke, 1993) and Barings Bank (Hogan,
1997) cast doubt on the effectiveness of the unitary
board while failures such as Metallgesellschaft’s
massive loss on oil-price speculation discredit the
two-tier board model (Tricker, 1994). To date the
corporate governance literature has been preoccu-
pied with the examination of the unitary board (see
John and Senbet, 1998; Shleifer and Vishny, 1997
for reviews). In contrast, it is only possible to
identify a few academic studies that examine the
two-tier board. For example, Van Hamel et al.
(1998), through interviews with 25 Dutch top
executives and directors, find general support for
the two-tier system but different views on the value
of the SB ranging from being a nuisance to making
a real contribution. In addition, Massen and van
Den Bosch (1999), by comparing the formal
structure and actual functioning of two-tier boards
in the top 50 Dutch firms, conclude that the
supposed independence between the two boards is
compromised in reality. While these recent studies
are informative to the debate over the unitary
versus the two-tier board structures, they are based
on developed economies. Thus a study of the SB in
a developing country like China clearly fills a void
in the literature.
Third, the SB in China has attracted little
academic attention so far since it is regarded as
being ineffective (Tam, 1999). As a result, the
corporate board structure in China is often seen
as close to the Anglo-Saxon type one-tier board
(Tam, 1999; Tian, 2001). However, the perceived
ineffectiveness of the SB highlights the need to
subject the SB to systematic empirical examina-
tion contextual to the Chinese corporate environ-
ment as such research could reveal its deficiencies
in practice and pinpoint ways to improve its
functioning and corporate governance in general
in China. In several recent cases, the SB has
reportedly played a crucial role in monitoring the
BoD and senior managers in Chinese listed
companies (e.g. Shi Sha Ltd., 2001). This suggests
that the performance of the SB can be substan-
tially improved. Therefore, the task should be to
find ways to improve the SB, rather than ignore
it. This study results in several policy recommen-
dations to this end as discussed later.
Methodologically, we broadly adopted a
grounded theory approach (Glaser and Strauss,
1967, 1971; Strauss and Corbin, 1998). An
inductive theory is described as ‘grounded’, when
it is developed on the basis of field research that
has been designed to capture sample variability in
a phenomenon. Rather than applying a pre-
determined theoretical framework, the grounded
theory approach allows a theory to emerge from
field work. This approach is adopted because
research on the role of the SB is generally under-
developed and thus the literature offers little
direct theoretical or empirical guidance. Within
the framework of grounded theory, we undertook
face-to-face semi-structured interviews with board
directors, supervisors, and senior executives in 21
Chinese listed companies. In general, access to
such prominent individuals is the main bar-
rier to examining two-tier boards. However, the
authors had successfully approached these people
in a sample of the Chinese listed companies.
An analytical framework has been developed
from the data collected during the interviews and
it demonstrates that the SB in Chinese listed firms
plays one of four roles: (1) an honoured guest; (2)
a friendly advisor; (3) a censored watchdog; or (4)
an independent watchdog, in response to both
internal and/or external stimuli. The adoption of
a particular role by the SB is a function of several
factors, including SB characteristics, power rela-
tions between the BoD and the SB, the type of
shares being issued, shareholding structure, the
influence of the Communist Party of China (here-
after the Party) and government, the nature of
independent directors and the legal prescriptions.
The remainder of the paper is structured as
follows. The next section documents the institu-
tional background on the Chinese economy and
the characteristics of listed companies. The
application of the grounded theory methodology
and data-collection procedure are described in
the third section. The theoretical framework
describing the role of the SB in China derived
from the interview data is presented in the fourth
section. The final section summarizes the findings
and suggests avenues for future research.
Institutional background
Chinese corporate economy and the characteristics
of listed companies
Over the last two decades, China has strived to
transform its traditionally-planned corporate
40 J. Z. Xiao, J. Dahya and Z. Lin
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