The basic obligation of the supervisory board is to oversee the activities of the management board, so that it acts in compliance with applicable laws, good practices and the company’s best interest. Based on the draft bill amending the Code of Commercial Companies, the lawmaker intends to extend the powers of supervisors, e.g. by allowing them to obtain information on the company’s operations, which is supposed to ensure information-related balance between the management board and the supervisory board. At the same time, the plan is to implement more options of penalizing supervisory board members. Supervisory authorities are starting to set requirements that few supervisory board members are able to meet.
Capacity to act as a supervisory board member
The activities of supervisory boards at joint-stock companies are governed predominantly by article 382 § 1 of the Code of Commercial Companies, according to which a supervisory board performs ongoing supervision over the company’s operations in all their aspects. Who can serve as a supervisory board member? Pursuant to article 18 of the Code of Commercial Companies, this can be a natural person who has full legal capacity and has not been convicted for specific offences under the Criminal Code, i.e. offences against protection of information, credibility of documents, assets, business, civil-law transactions, and money and securities trading, as well as the offences discussed in articles 585, 587, 590 and 591 of the Code of Commercial Companies.
Additional requirements need to be fulfilled by candidates for supervisory board members at enterprises owned in total or in part by the State Treasury. These criteria are covered by articles 19-21 of the State-Owned Assets Management Act, and involve (among others) the obligation to have adequate educational background, professional title and certificates (incl. ones awarded on the basis of relevant exams).
Pursuant to the Certified Auditors Act, it is required to appoint an audit committee at public interest entities only. One of the members of such committee needs to have knowledge and skills in accounting or auditing.
Consequently, there are no additional criteria regarding knowledge or experience, which should be met by supervisory board members, unless they also serve as members of the audit committee. This means that shareholders are free to choose supervisory board members who – due to their professional skills and qualifications – will ensure effective supervision over the company’s operations.
Supervisory boards made up of financial experts only
We have recently witnessed a change in the approach of the Polish Financial Supervision Authority which is starting to require all members of supervisory boards to have substantial expertise in accounting or auditing, combined with knowledge of the industry in which a given company operates, even if they do not act as members of the audit committee. As a result, the Polish Financial Supervision Authority is increasingly pointing to the liability of supervisory board members in case of any inadequacies in the financial reporting processes.
It is worth analyzing two main provisions that determine the scope of tasks performed by supervisory board members, i.e. article 382 of the Code of Commercial Companies and article 4a of the Accounting Act. They form the basis to assume that a supervisory board is obliged to verify the accuracy of the procedure involving the preparation and submission/publication of financial statements. The above does not mean, however, that members of supervisory boards are responsible for a substantive review of financial reports, or that they are obliged to arrive at the same findings as those identified by accounting professionals, i.e. auditors or audit committee members. The objective of the supervisory board’s evaluation of financial reports is to determine whether they fairly present the company’s financial standing. Nevertheless, supervisory board members are not required to boast specialist knowledge of accounting; instead, they are only supposed to showcase the knowledge of basic functions and principles related to balance sheets, profit and loss accounts, other financial documents and balance sheet valuation. Their knowledge of these areas is necessary to make a general assessment of whether the management board’s key accounting decisions reflect the company’s interests, have been made with due diligence and are reasonable from the economic perspective[1].
Financial reporting and the audit committee
As a general rule, public interest entities are obliged to have an audit committee whose members are responsible for a comprehensive audit of the company’s financial reporting. The role of the audit committee is to release the supervisory board (as a whole) from the obligation to perform professional monitoring over financial reporting. This conclusion also arises from the Code of Best Practices for WSE-Listed Companies, which notes that the scale and nature of operations of most public companies are extensive. Hence, it is virtually impossible for supervisory board members to independently perform the supervision tasks specified in applicable legal regulations. This produces a situation in which the supervisory board needs to rely on internal processes and functions, e.g. the audit committee; sometimes, it is also necessary to use the services of external entities/individuals, particularly auditors and audit firms[2].
The above leads to the conclusion that joint-and-several liability of members for inadequacies in financial statements may only emerge if it is established that each of the members bears individual liability resulting from failure to abide by the standards applicable to their functions, so long as the obligations and requirements for each member of the supervisory board have been precisely defined[3].
Different qualifications = broad supervision options
If all members of a supervisory board had financial expertise, this would make it nearly impossible to properly supervise the operations of a given company. For example, it would be extremely difficult to analyze contracts or transactions in various fields as supervisors would simply not have any idea about them. Consequently, it is crucial to combine diverse industry-specific experience and the professional skills of supervisory board members. Apart from financial and legal expertise, industry knowledge and the ability to broadly analyze a company’s problems, the ability to thoroughly review the company’s transactions or to assess HR issues are of considerable importance for the efficient operations of a supervisory board and proper cooperation with the management board.
As noted in the Diversity in Supervisory Boards 2021 report, it is not the supervisory board’s task to persistently contest the management board’s actions or to blindly accepts such actions. Given the vast number of tasks and responsibilities, only a diverse (in terms of education, experience, qualifications, age and gender) supervisory board, which is at least partially independent from the majority shareholder, offers an actual opportunity to come up with the best solutions and effectively supervise the company’s operations[4]. Supervisory boards should be composed in a way that ensures the representation of different skills/qualifications, thus favorably influencing the overall quality of supervision.
Summary
Supervisory board members should always be selected on the basis of the needs of a given company, the scale and profile of its operations, business dynamics, technological developments or the expectations of its customers. Only by staffing the supervisory board with specialists in various fields is it possible to ensure proper supervision. Needless to say, some members should have knowledge and skills in accounting and auditing, e.g. in order to form the company’s audit committee or to properly analyze financial documents. However, it cannot be expected that all board members will be financial experts because in such case, there would be an insufficient number of adequate candidates in the market. This is yet another reason to negatively assess any legislative changes, such as the intended new version of article 96 section 6a item 2 of the Public Offering Act, which would make it possible to impose liability directly on supervisory board members for companies’ offences related to financial reporting. The same applies to the Polish Financial Supervision Authority’s extension of requirements concerning the financial knowledge of all supervisory board members. Such actions will result in a drop in the number of professional members of supervisory boards, who are aware of the growing risks associated with the performance of supervisory functions.
[1] E. Krześniak, Odpowiedzialność członków rady nadzorczej spółki akcyjnej za prawidłowość sprawozdań finansowych spółki [Responsibility of supervisory board members at a joint-stock company for the adequacy of the company’s financial statements], Przegląd Prawa i Administracji 112, 2018; https://repozytorium.uni.wroc.pl/Content/109206/07_Krzesniak_E_J_Odpowiedzialnosc_czlonkow_rady_nadzorczej_spolki_akcyjnej_za_prawidlowosc_sprawozdan_finansowych_spolki.pdf
[2] https://www.gpw.pl/pub/GPW/files/PDF/dobre_praktyki/Wskazowki_DPSN2021_v2_29.07.21.pdf
[3] Nowe obowiązki spółek publicznych i członków organów – implementacja do prawa polskiego dyrektyw 2006/43/WE i 2006/46/WE [New obligations of public companies and members of their bodies – transposition of directives 2006/43/EC and 2006/46/EC], prof. dr hab. Adam Opalski, MOP 2010, No. 5.
[4] za: Piotr Rybicki [w:] https://www.wmadvisory.pl/wp-content/uploads/2021/11/Raport-30-Club-Poland-Investor-Group-final.pdf
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