Directors'Duty of Diligence from a Functionalist Perspective
The newly revised Company Law provides for the first time that"directors shall act in the best interest of the company,and exercise reasonable care that administrators would ordinarily be required to exercise in the course of performing their duties."Nevertheless,it remains unclear as to how directors should perform their duty of diligence and what liabilities they should bear for breach of duty,which have become contentious issues in theory and prac-tice.The mainstream view is that the director's liability is tortious in nature.However,it should be noted that,in the system of"tort liability"established by the Chinese Civil Code,there is no mention of the constituent elements of a tort committed by a director.The director's liability must be heavier if imposed according to the general law,which undermines directors'initiative to perform their duties.It is submitted in this article that the duty of diligence is an abstract duty,so the content of the duty and the determinants of its breach vary among different types of directors based on their different"roles".The recognition of this idea is demonstrated by the usage of terms like"performing duties"and"administrator"in the newly revised Compa-ny Law.Based on the provisions of the Company Law and their implementation,directors are divided into three categories.Specifically,the first category comprises executive directors and chairmen of board acting as the corporate representatives and therefore becoming the sole per-sons representing the company externally.The second category refers to managing directors who are responsible for administering the company's affairs,including directors acting as adminis-trators or directors in charge of a specific business of the company.The third category consists of external directors and independent directors,who have no right to administer the company's affairs internally or to represent the company externally and mainly perform their roles by way of attending meetings of the board of directors and so on.The contents of directors'duty of dili-gence differ,as directors have different"roles".It is also submitted in this article that the pro-vision on directors'duty of diligence in the Company Law has two purposes.First,to provide a set of standards of behavior for directors to follow in the course of performing their duties,so as to ensure that they exercise reasonable care as administrators.Second,to equip judges with a set of grounds for properly adjudicating cases according to case facts and legal provisions.When directors violate the corresponding standard of behavior,the company is entitled to remove them from office,but not necessarily entitled to trigger their compensatory liability.When judges de-cide whether to make a defendant director liable for compensation,they ought to consider the particular role taken by the director,as well as the existence and the degree of fault.A director bears compensatory liability only in the case of gross negligence and he can rely on the"busi-ness judgment rule"to escape from such liability.
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