An Empirical Study On Directors’ Duty Of Diligence

As one of the two pillars of the fiduciary duties,the system of directors’ duty of diligence is a key instrument of modern corporate governance and holding directors liable through the duty of diligence is the primary choice to solve agency problems and reduce agency costs.However,China’s current company law system does not systematically construct the duty of diligence for directors,and the lack of connotation of the duty of diligence has caused many uncertainties and ambiguities in the application of the court,and the standard cannot be unified,leading to the deficiency of the duty of diligence.With the revision of the company law,the company law legislation has shifted towards board-centrism,the functions of directors have expanded,and the board of directors has become the centre of corporate decision making,which in turn has led to an urgent need to increase directors’ responsibilities and achieve a balance between directors’ powers and responsibilities.This article mainly adopts an empirical research approach,based on the empirical legislative and judicial studies of directors’ duty of diligence at home and abroad,analyzing the current situation and difficulties of judicial adjudication of directors’ duty of diligence,and at the same time combining the different models of judicial adjudication standards of directors’ duty of diligence in foreign countries,and putting forward suggestions for the improvement of the systematic construction of directors’ duty of diligence in China.The article is divided into five main parts.The first part is an empirical analysis of directors’ duty of diligence,which is an empirical study of the current judicial practice of directors’ duty of diligence in China from both the overall and case-by-case perspectives,firstly explaining the data sources and data categorisation and screening,secondly summarising the characteristics and problems of judicial practice from the empirical data,and finally analysing the causes from the problems to provide support for the in-depth study in the later part.The second part focuses on the measurement of the benefits of the duty of diligence of company directors,exploring the necessity of constructing a system of duty of diligence from three perspectives: before,during and after.Firstly,the incompleteness of the contract leads to the inevitable existence of loopholes in the ex ante contractual regime,pointing to the functional value of a diligence regime to fill the contract.Secondly,from the conflict of interest of stakeholders within the company,it points out the functional value of the diligence obligation system in reducing agency costs and regulating conflict of interest.Finally,from the perspective of postaccountability,it points out the functional value of the duty of diligence system in balancing the power and responsibility of directors and exerting discipline.The third part focuses on the standard of conduct for the duty of diligence of corporate directors,returning first to the debate on the nature of the duty of fiduciary duty,the superior concept to the duty of diligence,where the setting of the standard of conduct for the duty of diligence will be key to the balance between statutory obligations and contractual freedom.Then,considering the overlap between the duty of fidelity and the duty of diligence in judicial practice and the high degree of overlap between the forms of liability for breach of the duty of diligence and tort liability,two sets of comparative studies are adopted.Finally,the legislative advancement of the standard of conduct for the duty of diligence is analysed to clarify that the core of the duty of diligence always lies in the setting of the standard,and it is suggested that the standard of conduct for the director’s duty of diligence be typologically defined in the form of a cluster of obligations.The fourth part focuses on the clarification of the relationship between the duty of diligence of company directors and the business judgment rule.Considering the background of a statutory country in China,the business judgment rule should be introduced into the system of duty of diligence as an exemption from liability.This chapter analyses the four main problems arising from the introduction of the rules of judicial determination by the courts in China,starting from the strengths and weaknesses of the commercial judgment rule,and then analyses the models adopted by the United States,the United Kingdom,Germany and Australia in the application of the judicial judgment standard,so as to provide suggestions for the improvement of the judicial judgment standard for the duty of diligence of directors in China in the latter part.The fifth part focuses on the improvement of the duty of diligence of directors in China.Based on the discussion in the former four chapters,this paper will improve the duty of diligence from three perspectives: the objective standard of conduct,judicial review,and exemption levels.Firstly,the objective duty of diligence will be clarified in the company law to provide effective guidance to directors and enriched by judicial interpretations and guiding cases;secondly,at the level of judicial review,objective standards will be established as the main criteria,supplemented by subjective standards,and through the arrangement of reversing the burden of proof,the review will focus on the decision-making process of directors to maintain the judicial modesty of the content of directors’ decisions;finally,the exemptions from the directors’ duty of diligence should be enriched by allowing certain exemptions from the statute and introducing the business judgment rule as an exemption.