Research On Director's Duty Of Diligence

Directors have a wide range of management power defined in the law of articles of corporation. However, no power goes without duties and liabilities, since power is always abused. According to the general theory, the duties of director are classified as duty of loyalty and duty of care. The duty of care requires that a director should perform faithfully for the corporation, with the care an ordinarily prudent person in a like position would exercise under similar circumstance, in the hope of maximizing the profit of the corporation. The newly Corporation Law 2005 in our country adopts the legal language of "duty of diligence" instead of "duty of care". The 148^th item of Corporation Law2005 defines the duty of diligence as a director, however, the content of diligence, the test of diligence, the enforcement of liabilities, the exemption of legal liabilities are not well defined. The 150^th item of Corporation Law 2005 generally says "if a director, when performing his duties, violates national law, administrative regulations, or the articles of corporation, and the corporation suffers loss because of the action, the director should compensate the corporation".Before us, the primary question is that "is the duty of diligence conceptually the same with or different from duty of care?" May the former evolve from the latter, according to the tendency in the modernization of corporation law, combining the development of our social economy and the practical experience of corporation law? Secondly, since the articles in Corporation Law are lacking of specification, convenience, and foreseeablity , in reality, many directors with no expertise, doing nothing, violating the duty of diligence are being not imposing the deserving liability. On the other hand, many cowards, with excellent expertise of management are encumbered in becoming directors, because the test of duty of diligence is blurred, and the responsibilities are unforeseeable. Even when the cowards become directors, they always hesitate in deciding, which affects the company negatively.In my opinion, in order to improve the situation, the factors of duty of diligence and the test of duty of diligence must be defined. Duty of diligence has a close relationship with duty of care; test of duty of diligence are different in different country, and the test is evolving in every country. The tendency is that a subjective test is being replaced by the objective test and the dual objective/subjective test. The content of duty of diligence in Corporation Law includes, basing on the legal theory, what kind of diligence duty a director must perform, how much degree diligence a director must show, what constitute violation of duty of diligence. Directors are to be clear about that. And only the imposition of liabilities and exemption of liabilities on directors violating duty of diligence are codified, can we say the legal system about this aspect is perfect.Decision is the soul of a corporation, while good decision comes from good directors. When duty of diligence is well defined in Corporation Law, experts in management will be attracted to the director professionals, and their wisdom and experience on management will encourage the modernization of corporation. Further a good definition of duty of diligence will serve as a mechanism curbing and overseeing management and directors, and will also secure the benefits of shareholders and the ongoing of corporation.About these issues, this article is divided into four chapters. In chapter 1 I will first introduce outset of duty of diligence; after formulating the concept of duty of diligence, I will analyze the difference and relationship between duty of diligence and duty of care; further the basic legal principles and value oriented analysis will be in this chapter; the definition of duty of care in different legal area will also be involved. In chapter2, I will first compare duty of diligence with duty of loyalty. I will introduce duty of care in corporation law of U.S., Britain and civil law countries, and the famous "business judgment rule" in U.S. Conceptually, tests of duty of diligence are analyzed. In this chapter, I will illustrate the current definition of duty of diligence in Corporation Law and other regulatory papers. The 3^rd chapter will concentrate on the liabilities when directors violate the duty of diligence, including the classification of liabilities, the imposition of liabilities. The issues that difference in liabilities of different directors when violating duty of diligence and the exemption of liabilities are addressed. The last chapter will present some proposals the legislation about duty of diligence: the factors of duty of loyalty should be specified, and the prospects of institute the tests of duty of diligence in legislation.The conclusion is that director's duty of diligence is close to duty of care, but in our country according to the Corporation Law, duty of diligence is slightly different from duty of care, but duty of diligence evolved from duty of care, according to the tendency in the modernization of corporation law, combining the development of our social economy and the practical experience of corporation law. Specification of duty of diligence in corporation law is indispensable.