The Supervisory Board is an important element in corporate governance. It ensures independent control over the running of the company. In Czech law, the role of the Supervisory Board is regulated by the Business Corporations Act, and its competences, responsibilities and practical functioning may be a topic full of questions for many. So let’s go through everything you need to know about the supervisory board.
The concept of a supervisory board is regulated by the Commercial Corporations Act. The Supervisory Board is a collective body that is established mainly in joint stock companies in the dual system and limited liability companies. However, its establishment may also be mandatory for certain other entities, such as foundations or state-owned enterprises.
The main task of the Supervisory Board is to supervise the Board of Directors and at the same time to protect the interests of the company and the shareholders. The members of the supervisory board have the right to inspect all company documents, check the accounts and review the financial statements. The Supervisory Board reports on its activities to the General Meeting, which it may convene if necessary.
According to the CCC, the company’s articles of association determine the number of members of the supervisory board. In public limited companies with a dual system, there must be at least three members. If the public limited company employs more than 500 persons, one third of the supervisory board must be composed of employee representatives.
Members of the supervisory board shall be elected by the general meeting for a maximum period of five years. Both natural and legal persons may be members of the Supervisory Board, but the legal person must authorise a natural person to perform the function.
The Supervisory Board is also subject to some restrictions. The law also states that members of the supervisory board may not be members of the board of directors at the same time. For limited liability companies, it applies that a member of the supervisory board cannot also be a managing director. Nor can such a member act as a liquidator or receiver in a company. Finally, membership of the supervisory board is also incompatible with the position of proxy. These prohibitions are there primarily to avoid conflicts of interest and to ensure that the supervisory board’s control function is truly independent.
Similarly, members of the Supervisory Board are obliged to comply with the non-competition prohibition. This means that they cannot perform functions that might conflict with their role on the supervisory board.
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The biggest responsibility the Supervisory Board has is to oversee the proper management of the company. All members of the Supervisory Board have a duty to act with professional care and loyalty to the company.
The case law of the Supreme Court of the Czech Republic demonstrates that the supervisory board has a duty not only to passively receive information from the management board, but also to actively request supporting documents and to inquire thoroughly when in doubt. If it fails to do so, it is liable for the damage that the company suffers as a result of the lack of control.
At the same time, the Supervisory Board has several powers that enable it to perform its function to its full extent. What can and must the Supervisory Board do?
The main task of the Supervisory Board is to supervise the performance of the Board of Management’s duties. This means that it must not only formally check the financial statements, but also monitor whether the Board of Management is acting in accordance with the company’s strategy and protecting its long-term interests. And it is not just a formality, because this control must be proactive – the Supervisory Board is not only obliged to receive information from the Management Board, it must also actively request it.
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The Supervisory Board is legally entitled to inspect all accounting records, books of business and other documents of the company. This right ensures that scrutiny is truly effective. In practice, this means that the Supervisory Board should regularly familiarise itself with the accounts, balance sheets and profit and loss accounts. If any member of the Supervisory Board finds any inconsistencies in these documents, he or she is obliged to demand clarification. Sometimes he may even order an independent audit on this basis.
The General Meeting bases its decisions on information provided by the Supervisory Board. The Supervisory Board is therefore required to submit a written report to the General Meeting each year on the results of its audit work. This report should include, on the one hand, whether there is any malpractice in the company’s management and, on the other hand, any risks, conflicts of interest and other areas of concern.
Although the Supervisory Board does not have executive powers, there may be specific situations where its approval is necessary. This often applies, for example, to major strategic decisions such as mergers, acquisitions or the sale of important company assets. The requirement that the Executive Board also obtain the Supervisory Board’s approval before entering into these transactions should be written into the company’s Articles of Association. In this way, the supervisory board can also significantly influence the future direction of the company.
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To be effective, the Supervisory Board should meet regularly, have a prepared agenda and keep proper minutes of its meetings. These formalities protect the members from liability while ensuring transparency and accountability regarding their oversight activities.
In practice, the question often arises as to whether the supervisory board has the power to stop a decision of the management board. The legislation is clear on this point: the Supervisory Board can only issue instructions where the Articles of Association so provide. Otherwise, its role is one of control, not management.
If we were to look at some of the problems that arise around supervisory boards, the most common is certainly inaction or lack of control. Fortunately, the system has arrangements in place so that if the supervisory board repeatedly fails to fulfil its duties, the general meeting can remove it. Indeed, even inaction by a member of the supervisory board can be a direct cause of damage to the company. All members should therefore be sufficiently aware of their liability for damages if they neglect their duties.
The supervisory board is an essential pillar of good corporate governance, protecting the interests not only of the shareholders but also of the company itself. The quality and accountability of the Supervisory Board’s supervisory work is a guarantee of transparency and long-term business stability. Regular communication with the Board of Management, careful study of the documents and a proactive approach guarantee that the work of this body will be successful.
If your company is looking for ways to improve the effectiveness of the Supervisory Board or if you need legal advice on corporate governance, do not hesitate to contact us. Our experts will help you create a strong and functional control mechanism.
The supervisory board plays a key role in corporate governance, overseeing the activities of the board of directors and protecting the interests of the company and its shareholders. Its powers and responsibilities are enshrined in the Companies Act, and its members have a duty to act with professional care and loyalty. The Supervisory Board has the right to audit the accounts, inspect the documentation and report to the General Meeting. Its effective functioning ensures the transparency and stability of the company. If you need legal advice on the functioning of the Supervisory Board, we will be happy to help you set up optimal control mechanisms.
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