Tài liệu An analysis of the role of supervisory boards in syate owned joint stock companies

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOCMICS TEACHING PROGRAM DINH HOANG THANG AN ANALYSIS OF THE ROLE OF SUPERVISORY BOARDS IN STATE-OWNED JOINT-STOCK COMPANIES THE CASE OF VIETNAM CONSTRUCTION AND IMPORT-EXPORT JOINT-STOCK CORPORATION MASTER OF PUBLIC POLICY THESIS HO CHI MINH CITY, 2014 AN ANALYSIS OF THE ROLE OF SUPERVISORY BOARDS IN STATE-OWNED JOINT-STOCK COMPANIES THE CASE OF VIETNAM CONSTRUCTION AND IMPORT-EXPORT JOINT-STOCK CORPORATION Public policy Code: 60340402 Supervisor: Dr. Huynh The Du (i) CERTIFICATION I certify that the substance of the thesis has not already been submitted for any degree and is not being currently submitted for any other degree. I certify that to the best of my knowledge any help received in preparing the thesis and all sources used have been acknowledged in the thesis. The study does not necessarily reflect the views of the Ho Chi Minh City Economics University or Fulbright Economics Teaching Program. Author Dinh Hoang Thang (ii) ACKNOWLEDGEMENTS I would like to express my deep gratitude to my parents who always encourage me in my life. I would like to express my sincere appreciation to my supervisor, Dr. Huynh The Du, who has helped me in performing the thesis. With rich knowledge, experience and enthusiasm, he has effectively contributed to my thesis. I am graceful to Dr. Tran Thi Que Giang, Mr. Do Thien Anh Tuan, Ms. Dinh Vu Trang Ngan, Mr. Vo Duy Minh for thoughtful and valuable comments on the very beginning of my thesis. I would like to thank all my teachers in Fulbright Economics Teaching Program, who have retransmitted their deep knowledge and experience to me as well as my classmates. Last but not least, I express my thanks to all of my friends, especially Ms. Nguyen Thi Nhung and Ms. Do Trieu Anh, Ms. Tran Thi Loc, who help and motivate me in pursuing the study. Ho Chi Minh City - May, 2014 Dinh Hoang Thang (iii) ABSTRACT The role of the Supervisory Board (SB), in accordance with Vietnam’s legal regulations, is to protect shareholders’ interests by monitoring the duties of the Board of Management (BOM) and the CEO, examining the reasonableness, legitimacy, honesty and caution of management; appraising the business operation report of the CEO, management report of the BOM and financial reports of the company. However, hardly has the SB been considered as successfully fulfilling their designated jobs, especially in State-owned enterperises. This study was done in its case study paradigm to explore the actual role of the SB in Vietnam Construction and Import-Export Joint-stock Corporation (Vinaconex), as the typical company for research purpose. Data used to perform the purposes of the thesis are widespread official information of the company, working papers, and other kinds of information related to the study. Upon applying Agency theory and experience of other countries, this study identifies that the Vinaconex’s SB does not have real power to protect shareholders’ interests, including the State and minority shareholders’ interests due to conflicts of interest and information asymmetry between the SB and shareholders, the SB and the BOM/CEO; lack of independence of the BOM/CEO in terms of personnel, finance and duty and low competency of the SB members. Thesis’s policy recommendations focus on the enhancement of those areas including: improvement in the independence of the SB’s members in term personnel, finance and duty; standardization of the framework of information provided to the SB and higher frequency of the SB’s meetings and reports; higher technical competency of the SB members. Further, it is needed to decrease control of the Party and the Government over the company, privatize and reduce the State ownership /./ Keywords: Supervisory board, agency theory, shareholders, interest. (iv) ABBREVIATIONS Abbreviations English Vietnamese AGM Annual General Meeting Đại hội đồng cổ đông BOD Board of Directors Hội đồng quản trị, Ban điều hành (in two-tier model) BOM Board of Management Ban điều hành, Ban Giám đốc (in two-tier model) Hội đồng quản trị (in Vietnam) CEO Chief Executive Officer Giám đốc/ Tổng giám đốc/ Giám đốc điều hành SB Supervisory Board Ban Kiểm soát SCIC State Capital Investment Corporation Tổng công ty Kinh doanh Vốn Nhà nước SOE State-owned enterprise Doanh nghiệp nhà nước Viettel Viettel group Tập đoàn Viễn thông Quân đội Vinaconex Vietnam Construction and Import-Export Joint-stock Corporation Tổng công ty Xuất nhập khẩu và Xây dựng Việt Nam (v) TABLE OF CONTENTS CERTIFICATION .................................................................................................................... (i) ACKNOWLEDGEMENTS .....................................................................................................(ii) ABSTRACT........................................................................................................................... (iii) ABBREVIATIONS ................................................................................................................ (iv) TABLE OF CONTENTS......................................................................................................... (v) LIST OF GRAPHS ................................................................................................................. (vi) LIST OF TABLES .................................................................................................................. (vi) LIST OF BOXES .................................................................................................................... (vi) CHAPTER 1: INTRODUCTION ............................................................................................... 1 1.1. Introduction ...................................................................................................................... 1 1.2. Research Objective ........................................................................................................... 3 1.3. Research Questions .......................................................................................................... 3 1.4. Research Methods, Sources of Information and Research Scope .................................... 4 1.5. Thesis structure ................................................................................................................ 4 CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW................... 5 2.1. CORPORATE GOVERNANCE AND SUPERVISORY BOARD IN VIETNAM ........ 5 2.1.1. Corporate governance ............................................................................................... 5 2.1.2. Supervisory board in joint-stock company ................................................................ 6 2.2. THEORETICAL FRAMEWORK AND LITERATURE REVIEW ............................... 7 2.2.1. Agency theory ............................................................................................................ 7 2.2.2. Design a contractual relationship ............................................................................. 8 2.2.3. Literature review ..................................................................................................... 11 2.3. EXPERIENCE OF OTHER COUNTRIES ................................................................... 15 CHAPTER 3: VINACONEX CASE ........................................................................................ 20 3.1. VINACONEX ................................................................................................................ 20 3.2. Supervisory Board of the Company ............................................................................... 21 3.3. The flow of work related to the SB in Vinaconex.......................................................... 24 3.4. Principal-Agent problem between Supervisory Board vs. the BOM/CEO .................... 26 3.4.1. Goals/given tasks ..................................................................................................... 26 3.4.2. Agency cost .............................................................................................................. 27 3.4.3. Current Interest alignment instruments and Information system ............................ 31 3.5. Principal-Agent problem between Supervisory Board vs. Shareholders ....................... 32 3.5.1. Goals/given tasks ..................................................................................................... 32 3.5.2. Agency cost .............................................................................................................. 33 3.5.3. Current Interest alignment instruments and Information system ............................ 36 3.6. The technical competence of the Supervisory Board members ..................................... 37 3.7. The dependence of Supervisory Board .......................................................................... 37 3.7.1. The dependence in term of personnel, finance and duty ......................................... 37 3.7.2. The real incentives of the SB, BOM members ......................................................... 39 CHAPTER 4: CONCLUSION, POLICY RECOMMENDATIONS AND LIMITATIONS ... 42 4.1. Conclusion...................................................................................................................... 42 4.2. Policy recommendations ................................................................................................ 42 4.3. Limitation of the study ................................................................................................... 44 REFERENCES ......................................................................................................................... 45 APPENDIX I. REGULATION ON SB IN THE ENTERPRISES LAW 2005 .......................... 57 APPENDIX II. REGULATION ON SB IN THE CORPORATE CHARTER .......................... 60 APPENDIX III. REGULATION ON SB IN THE ORGANIZATION AND OPERATION REGULATION OF THE SB...................................................................................................... 62 (vi) LIST OF GRAPHS Graph 1.1: One-tier board structure and Two-tier board structure ............................................ 1 Graph 2.1: Agency relationship related to the SB ...................................................................... 8 Graph 2.2: External and Internal Categories of Interest Alignment Instruments ..................... 9 Graph 3.1: The company structure ............................................................................................ 21 Graph 3.2: The Structure of Supervisory Board in Vinaconex ................................................ 22 Graph 3.3: Flow of monitoring function of the SB .................................................................. 24 Graph 3.4: Flow of periodical/unusual inspection function of the SB .................................... 25 Graph 3.5: Flow of creating the SB’s report ............................................................................. 26 Graph 3.6: The mixing role of the SB members in Vinaconex and in block holders ............ 28 Graph 3.7: The mixing role of the SB in Parent company and Subsidiaries .......................... 29 Graph 3.8: Conflict of interest between Inside and Outside members .................................... 34 Graph 3.9: Dual participating mechanism in Vinaconex ......................................................... 41 LIST OF TABLES Table 3.1: Share structures of Vinaconex ............................................................................. 20 Table 3.2: Number of shares owned (share of parent company) .......................................... 23 LIST OF BOXES Box 1: The Responsibilities of the boards of SOEs as OECD guidelines ............................ 18 Box 2: Member of the Supervisory Board in Vinaconex Jsc ................................................ 23 -1- CHAPTER 1: INTRODUCTION 1.1. Introduction There are two common models of corporate governance around the world: one-tier and two-tier board structure (Jungmann, 2006). The difference between them is that in two-tier board structure, there is an additional board called Supervisory Board (SB) who supervises the Executive Board in managing and running the company. The one-tier board structure is more popular in the world, especially in Anglo-Saxon countries such as the UK, the US while the twotier board is common in continental European regions such as Germany and the Netherlands… (Kruijs, 2012; Maassen, 2002). The following outline summarizes the differences between the two corporate governance structures. Graph 1.1: One-tier board structure and Two-tier board structure Source: Author’s illustration based on Peij (2010) In Vietnamese corporate governance, there is also a board called Supervisory Board in joint-stock company. However, even with the same name, Vietnamese SB is different with the one in two-tier model. According to the current regulations, each joint-stock company with over 11 individual shareholders or has an organizational shareholder who owns over 50 percent of shares, must establish a SB who is independent of both the BOM and the CEO (Enterprises Law 2005). See Graph 3.1 in page 21 for visualization. -2- As regulated in the Enterprises Law 2005, the SB’s role is to protect shareholders’ interests by monitoring the duties of the BOM/CEO; examining the reasonableness, legitimacy, honesty and caution of management; appraising the Business Operation Report of the CEO, the Management Report of the BOM and financial reports of the company; giving opinions and petitions to the BOM/CEO or even Annual General Meeting (AGM – Dai hoi dong co dong) about the violation of the BOM/CEO if needed. However, hardly has the SB been considered as successfully fulfilling their designated jobs, especially in state-owned joint-stock companies (Nguyen Viet Thinh & Nguyen My Hanh, 2012; Nguyen Dinh Cung, 2008). In reality, the SB has to face many difficulties in order to get the equal position compared to the BOM/CEO (Tran Minh Son, 2010). As the result of a survey conducted in Vietnam, 36 percent of the respondents believe that the SB just “exists on paper” (ton tai tren giay) and it is established to satisfy the requirement of law only (Lan, 2004 as cited in Hai & Nunoi, 2008). There might be a lot of reasons for the ineffectiveness of the SB, namely conflict of interest, information asymmetry and dependence of the SB on other boards (Tran Minh Son, 2010). The SB seems lack of actual power to act upon interests of shareholders and the operations of the SB are formalistic only (Le Minh Toan, 2013; Tran Thanh Tung, 2009). In state-owned joint-stock company, the SB might have more responsibilities due to it has to represent and protect the interest of not only minority shareholders but also the State. Minority shareholders’ interest is that “shareholders unanimously want firms and managers to maximize share value” (Gordon, 1990, p. 1). Besides maximizing the share price as minority shareholders, the State prioritizes to preserve and increase the state properties’ value, including broader social interests (Voss & Xia, 2012). Additional complexities are added to the corporate governance since the state has different interests other than individual shareholders (Pande, 2012). It might pursue political or policy goals instead of maximizing shareholders’ benefit. In this case, protecting minority shareholders’ interest and determining whether an action serves policy or political goals will be more challenging (Pande, 2012). This thesis aims to deeply understand the causes of the SB’s lack of actual power in SOEs, and give policy recommendations for this issue through the case of Vietnam Construction and Import-Export joint-stock Corporation (Vinaconex hereafter). -3- The thesis chooses Vinaconex as the typical company for the research purpose because this corporation was one of the first SOEs privatized from the corporation 90 1 to take advantage of capital market potentials for its competitiveness and economies of scales. The Corporation went public on 1st Dec 2006, listed as VCG on Hanoi Stock Exchange, which marked a milestone in its history and a step towards the leading position in Vietnam (Vinaconex, 2012a). The state ownership in Vinaconex is quite large, around 79 percent, that adds more responsibilities for both the SB, the BOM and the CEO in managing and using the State resources. 1.2. Research Objective The objective of the thesis is to identify whether the SB of SOEs in general and Vinaconex in particular, have power to protect shareholders’ interests (including the State and minority shareholders) in reality or not. And then, the thesis proposes policy recommendations to increase the actual power of the SB in SOEs. 1.3. Research Questions In the thesis, the research objectives were formulated as research questions. The central theme of this research is to analyze the functions and characteristics of the SB in SOEs through the case of Vinaconex and answer these three following questions: (i) How does the Supervisory Board in Vinaconex perform its work? (ii) What are the factors which affect the function of the Supervisory Board in Vinaconex? (iii) Does the Supervisory Board in Vinaconex have power to protect the interests of shareholders including the State and minority ones in reality? Due to Vinaconex is still a state-owned joint-stock company with up to 79% of shares belong to the State, the public policy meaning of those above questions is to identify the problems of the Vietnamses SB, find the way to improve its actual role and protect the State's resources and interest. 1 Corporation 90 was regulated in the Prime Minister Decision No. 90 on 7 th Mar 1994 to continue on the arrangement of state enterprises in which corporation 90 is the state enterprise of at least 500 billion VND legal capital. -4- 1.4. Research Methods, Sources of Information and Research Scope The thesis employs a case study for research purpose. The collected data are mainly publicly official information of the company and its subsidiaries. Working papers and other useful information related to this study are also included. The thesis chooses Vinaconex as the typical company because it was one of the first SOEs privatized from state corporations. Moreover, its chartered capital is quite large, up to VND 4,417 billion (as at 29 th Mar 2012) and although it went public in 2006, the company still remains 79% of the State ownership. The research period is from 2006 to present. Subjects to be studied are both members of the SB/BOM/CEO of the parent company (Vinaconex) and its subsidiaries (Vinaconex 1, Vinaconex 2, Vinaconex Xuan Mai…). The scope of the research is the power of the SB of Vinaconex in both theory and reality. 1.5. Thesis structure The rest of the thesis is organized as follows: Chapter 2 is about theoretical framework, literature review and experiences of other countries. Chapter 3 analyses the case of Vinaconex, each agency relationship and its characteristics as well as the independence of the SB. Chapter 4 suggests policy recommendations and conclusions. Besides, limitation of the study will be mentioned at the end of this chapter. -5- CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW 2.1. CORPORATE GOVERNANCE AND SUPERVISORY BOARD IN VIETNAM 2.1.1. Corporate governance Corporate governance has always been discussed as a hot topic in both literature and practice, and it plays an important role in economics, business and society (Meer, 2009). As defined by the OECD (1999): "Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance" . The main concern of corporate governance is the separation of ownership and control in a company, which is first introduced by Berle & Means in 1932 (Meer, 2009). This was then developed by Jensen & Meckling in 1976, that the separation of ownership and control in a company might create agency cost because of the conflict of interest between owners and managers who are hired to operate the company on behalf of the owners. The most focused point on corporate governance is to reduce agency cost by aligning the interests of those above stakeholders (Meer, 2009). In Vietnam, the BOM (Hoi dong quan tri) are nominated and appointed in AGM (Dai hoi dong co dong) to determine and execute the company policies to maximize the shareholders’s interest. The CEO (Giam doc, Tong Giam doc) are nominated and hired by the BOM to run the company following the defined policies. The SB is established by the shareholders through AGM to protect the interests of shareholders by monitoring the actions of the BOM/CEO (Enterprises Law 2005). -6- 2.1.2. Supervisory Board in joint-stock company in Vietnam In Article 95 and 121 of the Enterprises Law 2005, a Vietnamese company with over 11 individual shareholders or has an organizational shareholder who owns over 50 percent of shares, must establish a SB. All the SB members internally elect one of them to be the Head of the SB. More than half of the SB members must be permanent residence in Vietnam. At least one SB member must have knowledge of accounting or auditing. In a joint-stock company, the SB has the role to examine, supervise and be the counterweight to the BOM/CEO to increase the transparency and protect shareholders’ interests (Tran Minh Son, 2010). With 79 percent of the State ownership, the SB of Vinaconex has more responsibilities than other companies. The SB has to supervise the BOM/CEO not only to protect minority shareholders but also to preserve and increase the State’s asset. As a joint-stock company, Vinaconex also issues the Organization and Operation Regulation of the SB (Quy che to chuc va hoat dong cua Ban Kiem soat) that officially regulates the organization and operation of the SB. The regulation details all the rights and obligations of the SB, the Head of the SB and each of its members, as being stated in the Enterprises Law and the Corporate Charter (Dieu le to chuc va hoat dong cua Tong cong ty). According to those regulations, theoretically, the SB and its members play highly important roles in the corporate structure (Nguyen Viet Thinh & Nguyen My Hanh, 2012). See Appendix I, II and III for the regulations related to the SB (the Enterprises Law 2005, the Corporate Charter and the Organization and Operation Regulation of the SB of Vinaconex) -7- 2.2. THEORETICAL FRAMEWORK AND LITERATURE REVIEW 2.2.1. Agency theory Principal - Agent problem Agency problems or the principal agent theory was introduced by Jensen & Meckling in 1976, and it has become very popular in many fields of study, especially corporate governance (Hájek, 2006). Agency relationship was defined as “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent ” (Jensen & Meckling, 1976, p. 5) Agency cost According to Jensen & Meckling (1976), agency costs appear due to the separation of ownership and control. They defined that agency costs are the sum of (i) the monitoring expenditures by the principal; (ii) the bonding expenditures by the agent and (iii) the residual loss. Bundala (2012) summarizes that monitoring expenditures are the expense to monitor the agents which are not only observing but also controlling the agent’s behavior by budget limitations, compensation policies and operating rules. Bonding expenditures appear when the principal pays the agent to expend resources to ensure that the interests of the principal will not be harmed and this cost may be a substitute for monitoring expenditures and vice versa, the increase of bonding costs may reduce the need for additional resources in monitoring (Bundala, 2012). The residual loss is the loss of principal’s welfare due to the divergence of the principal’s and agent’s interests, and it mainly accounts for the agency cost. (Bundala, 2012; Suzuk, 2006) Two inherent features of agency problem The first inherence of an agency problem is the conflict of interest (Wright et al., 2001). It happens since each party is perceived to maximize his own profit (Waterman & Meier, 1998). For example, managers (as agents) may use a large amount of perquisites, which favors their own welfare (Shleifer & Vishny, 1989). The second inherence of an agency problem is information asymmetry (Shapiro, 2005). It can easily occur when different persons understand different things” (Stiglitz, 2002). Information -8- asymmetry contains “hidden characteristics”, “hidden action”, “hidden information” and “hidden intentions” (Schölermann, 2003 as cited in Mitzkus, 2013). Agency relationship related to the SB Incorporation with the two-tier system, there are some types of principal-agent relationship. According to discussions in previous sections, each agency relationship related to the SB, is identified as the diagram below. Graph 2.1: Agency relationship related to the SB Source: Author’s illustration as described in Pirchegger and Schöndube (2006), Onetto (2007) 2.2.2. Design a contractual relationship The main purpose of agency theory is to generate the optimal design of a contractual relationship between principal(s) and agent(s) in the presence of conflicts of interest and information asymmetries (Spremann, 1987) Goals or given tasks Goals can be simply determined by how the agent performs given tasks under the agreement with the principal (Rungfamai, 2008). The goals/given tasks of the Vietnamese SB are -9- stated in the Enterprises Law 2005. They are also supplemented in the Corporate Charter and the Organization and Operation Regulation of the SB. Agency cost As discussed above, two inherent features of agency costs are the conflict of goals (interests) and the information asymmetry between the agent and the principal. These issues related to the SB can be found in many forms (See Graph 2.1 above) and will be discussed in detail in Chapter 3. Strategy to tackle agency problems The main topics in the literature on corporate governance are instruments to protect and maximize shareholders’ interests in the presence of principal and agent problem (Becht et al., 2003 as cited in Drescher, 2014). Mechanism to reduce information asymmetries Financial reporting and disclosure practice: OECD states the role of transparency in financial reporting and disclosure practice, as the main corporate governance solution to decrease the information asymmetry (Leung & Ilsever, 2013) Mechanism to reduce conflicts of interest According to Drescher (2014), mechanisms to align interests in agency theory can be classified as external or internal categories. He summarizes the most important ones in the literature as follows: Graph 2.2: External and Internal Categories of Interest Alignment Instruments Source: Drescher (2014), Insolvency Timing and Managerial Decision-Making, (2002) -10- Laws and regulations are one of the most important interest alignment instruments between owners and managers and they are used to determine the optimal contractual relationship to protect each party's interests (La Porta et al, 1997 and 1998 as cited in Drescher, 2014). (Financial) disclosures and auditing align managers’ behavior by constraining them to disclose the company performance (Eng & Mak, 2003 as cited in Drescher, 2014). Product market competition implies the requirement for company performance to achieve or retain its competitiveness. This forces managers to spend resources on company performance rather than pursuing their own interests (Allen & Gale, 2000 as cited in Drescher, 2014). The market for corporate control puts managers on the presure of replacement when the company is poorly managed (Holmström & Kaplan, 2001 as cited in Drescher, 2014). The managerial labor market implies the future career chances of managements outside their current position. Since their past performances will be the main criterion to measure their management capacity, managers will have the incentive to build their reputation by contributing to current jobs (Gibbons, 1998 as cited in Drescher, 2014). Capital markets have the effect on behavior of the management, which relate to the provision of capital. For instance, share price valuations refer to the expectations of future development of shareholder value and can therefore be considered as the feedback for actions of managers (Warner et al., 1988 as cited in Drescher, 2014). The public and media continuously inquire about business performance taken by managers. Therefore, managerial incentive value may increase (Deephouse, 2000 as cited in Drescher, 2014). Control systems describe that shareholders must be informed about management actions in case their interests are neglected (Jensen, 1993 as cited in Drescher, 2014). Balance of power and decision rights reflect regimes to limit the discretion of managers. Managerial authority is divided and allocated to different individuals within the company in order to reduce individual decision-making (Westphal & Zajac, 1995; Finkelstein 1992 as cited in Drescher, 2014). Compensation helps increase the incentives of the managers by remunerating money or other benefits for their performance (Bebchuk & Fried, 2003; Core et al., 2003; Murphy, 1999 as cited in Drescher, 2014). Ownership structure implies that the higher ownership concentration allows controlling shareholders to supervise the managers closely (Yermack, 1995 as cited in Drescher, 2014). Capital structure refers to the proportion of debt in total capital. It can be considered that the free cash flow will be reduced to finance for associated interest payments, and therefore, reduce the -11- incentive of the manager to spend resources on their own interests (Bebchuk & Grinstein, 2005; Core et al., 2003 as cited in Drescher, 2014) 2.2.3. Literature review Although the SB in two-tier board structure is different with the Vietnamese SB, it is still useful to review the world literature about the SB in two-tier board structure, identify some similar types of problem and experiences to enhance the role of Vietnamese SB. Many studies have examined the unitary board, however few papers have analyzed the SB in two-tier board structure (Wang, 2013). Some studies find out the effectiveness of the SB, nevertheless, the real value of this board is ranging from providing an actual contribution to being an injurious organ (Van Hamel et al, 1998, as cited in Wang, 2013). In Germany, when analyzing the facts that may influence the independence and the control over the BOD of the SB in the mid to late 1990s, Tüngler (2000) summarized many factors which could affect the SB. First of all, there is a conflict of interest, including strong position of bank, problem of interlocking directorships, and other personal links. For strong position of bank, the SB in German is often dominated by large banks or some individuals, whose have close business relationships with the company, so the SB members are not independent (Andre, 1995). Relating to the interlocking directorships, the SB members of a company can be members of the SB or management board of other companies that would lead to the conflict of interests (Raiser, 1996 as cited in Tüngler, 2000). To solve this problem, one solution is that the SB candidates should disclose their mandates and employers before the election (Tüngler, 2000). For other personal links, the close relationship between the SB members and the management board prevent them from following their statutory requirements (Tüngler, 2000). A solution for this is the establishment of judge to regulate the conflict of interests (Hopt, 2000 as cited in Tüngler, 2000). Second, co-determination which means that employees have representatives in the SB, is also a problem since they are not considered as the substantial collaborators for supervising (Tüngler, 2000); Third, auditing process is also not independent since de facto, the company’s auditor is selected by the BOD, not by the SB (Prigge, 1997 as cited in Tüngler, 2000). The solution is that the auditor should be hired directly by the SB. Fourth, nomination process of new members is neither independent because CEO and head of the SB strongly influence on the selection of the new SB members as well as the BOD