The new Company Law introduces groundbreaking provisions for the employee director system. Most notably, a requirement to include employee directors on the board of directors was previously limited to wholly state-owned and fully state-funded limited liability companies, but now extends to all enterprises with more than 300 employees.
This new regulation, effective since 1 July 2024, is considered a milestone in promoting democratic decision-making in companies. Not surprisingly, it is also attracting significant attention from enterprises, especially those with foreign investors.
As a member of the board, an employee director holds the right to be informed, participate and vote on major company decisions, particularly those affecting employee interests such as salary reduction, layoffs, supply chain shift and corporate restructuring.
This article outlines the position of employee director within the new legal framework and its likely impact, suggesting how companies respond to the new rule.
Workforce obligation
Chief Partner
Lanbai Law Firm
Tel: +86 21 3251 1296 119
E-mail: george.lu@lanbailawfirm.com
In China, there is an old saying: “Where you stand depends on where you sit.” The status of employee director within the legal framework naturally influences their inclination in voting on significant HR matters.
Based on its legislative origins and objectives, the core role of the employee director is to represent employee interests and promote democratic management within companies.
In particular, they should be accountable to the workers’ congress, executing its resolutions and subject to its supervision, according to the Opinion on Strengthening the Worker Director and Employee Supervisor System in Corporate Enterprises (Document No. 33) of the All-China Federation of Trade Unions (ACFTU).
Among key legislative rules are:
- Employee directors should be elected by the workers’ congress or general employee meeting;
- Employee directors should report to the workers’ congress on how they reflect opinions and demands of the workers on significant labour relations issues and matters of vital interest to employees, as well as their communication with the board of directors and company management;
- When board decisions adversely affect employee interests or contradict workers’ congress resolutions, an employee director should, if necessary, request the chairman to defer these decisions and report back to the workers’ congress; and
- The workers’ congress has the right to dismiss an employee director who fails to accurately represent resolutions of congress, does not act in workers’ interests during company decision-making, harms the legal rights of workers, or refuses to report to the workers’ congress.
Partner
Lanbai Law Firm
Tel: +86 21 3251 1296 119
E-mail: tara.tang@lanbailawfirm.com
Board obligation
On the other hand, as a member of the board, employee directors also bear the statutory duties of a company director, accountable to the shareholders’ meeting for considering and respecting the interests of investors and the company as a whole.
If board resolutions violate laws and cause significant losses to the company, employee directors shall share the same liability as other directors.
Additionally, the Company Law does not entirely exclude the shareholders’ meeting from having the power to appoint or remove employee directors. During the revision process of the new law, article 59 of its second review draft removed wording that explicitly limited the right of the shareholders’ meeting to elect and replace directors “not serving as representatives of the workers”.
As such, the co-ordination of appointment and removal powers between the shareholders’ meeting and workers’ congress over employee directors remains disputed.
The legislative intent behind the employee director system is to achieve a uniquely Chinese form of democratic centralism. The employee director is supposed to act as a bridge between the board and the workers’ congress.
However, in practice, an employee director may face challenges especially when company interests conflict with employee interests. In joint ventures, where Chinese and foreign shareholders hold nearly equal board seats, the employee director’s vote can also be decisive.
Selection advice
Selecting a suitable employee director who can effectively serve as a mediator between management and employees, in line with legislative intent, is both challenging and crucial.
One important factor to bear in mind is that two categories of individuals are ineligible to serve as employee directors: senior executives and supervisors of the company; and close relatives of senior executives.
Beyond this legal requirement, it is important to ensure the candidate has the necessary, important soft skills to perform the role properly and effectively.
Companies are advised to focus on two core capabilities:
- Given that employee directors are involved in decision making at the highest level, they should have a macro understanding of company operations, along with sufficient experience, qualifications and ability to make informed decisions beneficial to the company as a whole; and
- Employee directors should also have a solid connection with the workforce, demonstrating strong co-ordination skills and common sense instincts to decide appropriate timing, methods and channels to communicate with employees.
While the new law may present some ambiguities, current regulations do not preclude companies from imposing additional qualifications for employee directors through their articles of association.
In fact, some listed companies often specify particular requirements for employee directors in their public documents.
On the premise of ensuring legality and reasonableness, it is recommended that companies clearly define the qualifications for employee directors in their articles of association – as well as rights of the shareholders’ meeting to appoint and remove them – to ensure effective implementation of the employee director system within enterprises.
Reasonable paths for personalised implementation of the employee director system may also be appropriate for different enterprises and regions.
George Lu is a chief partner at Lanbai Law Firm. He can be contacted at +86 21 3251 1296 119 or by e-mail at george.lu@lanbailawfirm.com
Tara Tang is a partner at Lanbai Law Firm. She can be contacted at +86 21 3251 1296 119 or by e-mail at tara.tang@lanbailawfirm.com
Wu Jiali, a paralegal at Lanbai Law Firm, also contributed to the article
