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The control committee’s role in a joint stock company

The article with title: “The control committee’s role in a joint stock company” written by Lawyer Tran Thanh Tung – Partner of Phuoc & Partners is published on Saigon Economic Times dated 23/4/2009.

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This time of year is generally considered the peak time for annual Shareholders’ Meeting in the joint stock companies (JSC). However, in attending some of these  meetings, one can see that   the Control Committee (CC) does not always seek to the best interests of its investors nor does it always appropriately supervise the operations of the Boards of Management (BOM) and the Boards of Directors (BOD). This article will provide you with some aspects of the CC’s operation in the JSC as allowed by the 2005

Law on Enterprises.

Legal role

Suppose that a JSC is a “state” and the General Assembly of Shareholders (GAS) takes the role of a legislative body which decides the developmental orientations and other important matters of a company while the BOM and the BOD are the executive bodies which manages daily business activities, and CC is a judiciary body which inspects and controls the operations of the BOM and the BOD. Using this metaphor helps us to more clearly understand what the CC’s role is in relationship with the other departments in a JSC, particularly, its role in “restraining counterparts” against the BOM and the BOD. Amongst other reasons, the two main reasons for the existence of CCs are: (i) the complicated process of managing a company and the relationship among its shareholders as well as (ii) the sheer isolation between the owners and direct managers of the JSC.

People often find no distinction between owners and direct managers in a small-scale JSC where shareholders are also managers. In this situation, the General Council of Shareholders (GCS) is also a member of the BOM. However, when a company grows in scale and number of shareholders,   the corporate operations and management become increasingly complicated and therefore, a professional management team is needed. As such, a company owner simultaneously  acting  as  its  manager  is  no longer appropriate. It is reasonable when the shareholders, the company’s owners, express more concerns on the company’s management conducted by the BOM and BOD. This is one of the reasons why the CC is required to exist. According to Article 95 of the Law on Enterprises, the CC may be established when a company has either more than 11 individual shareholders  or  organization  shareholders owning more than 50% of the company’s total shares.

With various functions regulated in the Law on Enterprises and the company Charter, the CC shall exercise supervision over the BOM and the BOD (Director or General Director) in terms of corporate management and operations as well as to ensure the reasonableness, lawfulness, trustworthiness and diligence, preparing accounting,   statistical   and   annual   and   six- months financial reports as well as appraisal of the BOM’s management activities.

As aforesaid, acting as a “judiciary body” in a “miniaturized  State”,  CCs  must  be independent  enough  to  supervise  the  BOM and the BOD.   This independence must be established through its establishment and funcional operations.

As regulated in the Law on Enterprises3, CCs should be elected and dismissed by the GCS and take responsibity for exercising assigned tasks before the GCS. The CC’s members cannot be a spouse, biological or adoptive father/mother, biological or adoptive child, biological sister/brother of the BOD/BOM’s members or other managers of the company. Simultaneously, CC’s members shall not take charge  of  corporate  management  positions, and be not necessarily shareholders or employees of the company. For the purposes of checking corporate accounting books, financial reports, at least one accountant or audit must serve as the CC member.

Through implementing its functions, CCs ensure  all  decisions  that  are  made  by  the BOM and   the BOD are in accordance with the laws and the resolutions of GCS and seek the maximum corporate benefits and behind- the-scenes actual owners – the corporate shareholders. It is the very role of protecting shareholders and investors that results in a CC coming into being and remaining in existence and operating.

The current status

Recent history has shown that CC has not played out its role of protecting shareholders and  investors.  Therefore,  CC’s  “inferiority” has put them at risk of bearing huge damages.

In reading CCs’ reports in general shareholders’ meetings, shareholders feel that these reports are merely duplicated from the BOMs’ and BODs’ ones. The main content primarily “applauds” the BOM and the BOD and is often characterized by a lack of useful

information for shareholders to seek hidden aspects from the reports of the BOM and the BOD.  In  some  cases,  the  matters,  that  are being included in CCs’ reports were “signed off on” by the BOM and BOD in advance during the preparatory meeting. Therefore, at the shareholders’ meeting, the CCs’ role is essentially to fill all remaining seats.

Taking that into account, the   choices of a number of BOMs and BODs has recently resulted in     serious damages for its shareholders with almost no warning by the CC until discovered.  Needless to say, as the owners  and  CC  electors,  the  shareholders have room for complaint as to the CC’s role and performance  of supervision and checking over the company’s activities.

Although the CC is authorized to exercise the right to call Shareholders in the event that the BOM does not do so or in case of a breach related to managament duties4.  But in reality, how often does the CC carry out such right?!

These are just some of the issues that are plaguing the institution of CCs in Vietnam today.

Conclusion

Baron Acton (1834-1902), an English historian, got famed with one saying that “Power tends to corrupt, absolute power corrupts absolutely”. If all power in JSC is focused on BOD and BOM, no one can assure no power abuse from them and at that point, shareholders – real owners of such company will get out of protection. CC is an appropriate mechanism for shareholders to protect themselves. To do so, CC needs to work in a clearly-adjusted legal framework in conjunction with the fact that shareholders must grasp and use CC’s role in a proper and smart manner. Besides, once relied and empowered, CC shall have enough capacity and grit to accomplish its duties, having reports characterized by independence and accuracy. That is the best way for shareholders to protect their own benefits and for the society to avoid losses from the fall of colossal JSCs as has ever occurred in the US.

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