Research On The Duty Of Care And Responsibilities Mechanism Of Independent Directors

In accordance with Article 147 in Corporation Law, the directors should bear the duty of loyalty and duty of care to the company. In terms of duty of loyalty, there is no large difference between independent directors and executive directors, so this essay will focus on the study of independent directors’ duty of care. Based on the theory that independent directors need to pay attention to their obligation, this essay will explore the criteria standards of independent directors’ duty of care which should combine both subjective and objective standards. Furthermore, this essay will analyze the independent directors’ breach of duty of care; based on the fact that even though independent directors have to be responsible for the violation of the duty of care, we still need to recognize that independent directors have different responsibilities compared with executive directors so their responsibilities should also be different. Under the condition of the independent directors’ violation of the duty of care, we should on one hand not allow them to evade responsibility and should also not blindly increase the responsibility of the independent directors. In some particular cases, we also need to limit the responsibility of independent directors when they breach the duty of care.Accordingly, this essay is divided into four chapters.Chapter one focuses on the theoretical basis of independent directors’ duty of care. In exploring the legal basis of the directors’ duty of care, this part discusses the particularity of independent directors’ duty of care. Viewed from the design of the independent directors system, in order to ensure the function of independent directors, their rights and obligations should also be different from executive directors. Since independent directors are rarely involved in the company operation with information asymmetry, various knowledge structure and professional backgrounds as well as different rights and responsibilities, the independent directors’ duty of care shall be different from executive directors s. The particularity of the independent directors’ duty of care is mainly manifested in the duty of being informed, business judgment duty and supervision duties.Chapter two discusses about the criteria standards of independent directors’ duty of care. Criterion of independent directors’ breach of duty of care is the core problem of independent directors’ duty of care, since the criteria standards of independent directors’ duty of care is directly related to the definition and bears the related responsibility. So far, there is no regulation on the criteria standards of independent directors’ duty of care in China’s legislation and there is no different between the duty of care for independent directors and executive directors. The legislative status quo of independent directors’ judgment standard has led to many problems which increase the administrative bodies and judicial organs in judging the difficulty of independent directors who are in violation of the duty of care. Meanwhile, the independent directors cannot anticipate that whether their behavior is in violation of the duty of care or not. This paper argues that China should adopt the combination of objective and subjective judgment standard. In terms of knowledge structure of preference, as part of the independent directors has operations related professional knowledge, skills, and for such special knowledge structure of independent directors, the public has reason to believe that they should have a higher degree of duty of care so as to achieve a higher degree of attention. In addition to the knowledge structure of preference for independent directors, independent directors on the company’s management and the relevant intermediary agencies have reasonable trust rights. According to the particularity of independent directors’ responsibility, we should not only consider the knowledge structure of the independent directors’ preference, but also fulfill the duty of care by the independent directors by setting a standard which mainly focuses on the objective sides of the standard.Chapter three elaborates the liability of the independent directors when they breach the duty of care. At present, the legal liability system in our country presents the trend where administrative responsibility is more important than civil liability when it comes to the duty of care of independent directors. Objectively, it not only can make the victim damage for breach of duty of care to get some compensation, but also can achieve the purpose of deterring independent directors’ behavior, prompting the independent directors to perform his duty of care to the company. Apart from promoting the civil liability status in the independent directors’ legal responsibility system, the legal liability system for independent directors shall also be designed in a specific way. Legal responsibility of independent directors’ duty of care should match the rights and obligations of independent directors, and the legal responsibility should be consistent with the income obtained by the company. In general, the civil liability of independent directors’ breach of duty of care should be lighter than ordinary directors.Chapter four focuses on the civil liability limitation of independent directors’ breach of duty of care. We need to realize that if too much attention has been paid to legal responsibility, in the short term the independent directors will bear "harsh punishment" which will force them to perform their duty, but in the long run "harsh punishment” will make excellent talents escape from the market without serving as independent directors any longer. As a result, the legislature in the construction of the independent directors’ legal responsibility mechanism can neither ignore the independent directors’ liability nor add too much legal responsibility on the independent directors. Instead, they should balance the rights and responsibilities of the independent directors. Based on the differences between independent directors and executive directors s, if it does not make a clear distinction between them then it will be obviously unfair for them. Therefore, the legal liability of the independent directors system design should also reflect both benefits and risks; otherwise it will hinder the development of the independent directors system. Based on the autonomy of will and the principle of fairness, this essay will also talk about the restriction on the duty of care of independent directors in our countries. Suggestions include clear party autonomy in the process of independent directors in our country legislation principle, should allow the company’s articles of association of the independent directors legal liability limit agreed upon in advance, will allow the shareholders after the fact by the shareholders meeting resolution of legal liability limit of independent directors’ duty of care. Apart from the principle of autonomy, when constructing the mechanism of limitation of independent directors’ duty of care we also need to learn from Japan’s practice in terms of Corporation Law, that is, we need to combine the legal responsibility of independent directors’ duty of care with their compensation gained from the company. At the same time, the construction of legal system of independent directors’ duty of care also need to consider the introduction of direct compensation mechanism so as to disperse the risk of independent directors from in an internal way. Besides, we should also establish and perfect the system of independent directors civil liability insurance in our country via transferring the risk of the independent directors to the insurance company so as to realize the purpose of limiting the civil liabilities of independent directors’ duty of care. In addition to the restriction of independent directors’ civil liability of for violating the duty of care, we shall also introduce the business judgement rule to establish the exemption mechanism of independent directors’ civil liability for violating the duty of care.