Since travel restrictions to China has severely impacted the governance of Chinese subsidiaries. Namely, the absence of c-suite management within China can increase compliance and operational issues. Without an onsite management to control the company, headquarters may not be able to resolve issues and risks in a timely manner, hence Chinese entities can quickly spiral out of control.
Furthermore, company management may have abruptly departed China due to the recent epidemic measures to contain the new COVID-19 variant Omicron. Hence, Horizons' multidisciplinary team of legal and finance experts have been called to conduct investigation audits which highlight the current red flags and the best practices moving forward. In the below, we highlight five aspects that headquarters face in company governance during epidemic measures.
Companies may face the sudden departure of management during epidemic measures and subsequent consequences. Specifically, the company may establish an interim remote governance and change company policy to align with such management changes and establish new communication and reporting channels between the overseas management and local employees. However, human resources should note that any amendment to company policy should be consulted and agreed with employees and notifications of the amendments shall be formally announced such as email circulation.
In practice, the corporate governance of a Chinese entity is held within its corporate seals and company seal policies. Once the seal of a company is affixed to a document, the company is legally bound and contract is effective, whilst signatures are not enforceable under Chinese law. Robust corporate seal management should be formulated and implemented to instruct proper use and safeguard the company's corporate seals. Especially for companies remotely managed due to impact of epidemic measures, poor seal policies or misplaced seals leaves companies extremely vulnerable to mismanagement and risk.
Equally, where a new governing body is established for the company after the departure of general manager, execute director, directors or supervisors shall be amended through the administrative procedures. Failure to amend the governing body may result in certain penalties such as being listed in the unreliable list of entities.
Latest regulation compliance
Last year two main data legislation was adopted (Data Security Law and Personal Information Protection Law). Both Laws substantially affect companies in the collection, handling and storing of data, and any cross-border data transfer. As a result, companies should understand that such Laws are not a duplicate of the General Data Protection Regulation and whilst it would be simpler to replicate related GDPR policies into the Chinese entity, it is crucial for management to formulate a China specific data policy based on the data legislation in China.
Re-establishing a robust governing structure
Long term, companies may wish to replace remote management with local personnel (for example, senior executives include the general manager, deputy general manager, chief financial officer, and other personnel designated by the company's articles of association). Companies should utilise such opportunity to review their Articles of Association (‘AoA'), ensure the reporting line is clearly stated in the AoA and governing structure adheres to the AoA. Usually, the governing structure was not correctly implemented in the establishment of the company and previous senior executives may have neglected duties without facing consequences. As a result, prior to recruiting new senior executives for the Chinese entity, the scope authority of each senior executive should be defined and governed within the AoA. In this manner, the AoA can serve as a governing mechanism to clearly define the responsibilities of senior executives and hold senior executives for any abuse, negligence or violation of their responsibilities.
Investigations equip headquarters with informative intelligence to navigate their Chinese entities though the current economic and political landscape in China. Often, once the red flags highlighted in the investigation report are solved, the company can move forward and steer towards profitable revenue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.