Directors’ Duty of Care from the Functionalist Perspective

Abstract

The directors’ duty of care is an inherently abstract legal concept, requiring directors to perform their duties with due care, loyalty, and good faith. To guide directors to perform their duties diligently and conscientiously, the Company Law (2023 Revision) sets out directors’ duty of care and stipulates that directors shall meet the general standard for the duty of care when performing their duties. However, imposing broad liability on directors for corporate loss caused by the breach of this duty is a disregard for the intricate dynamics of corporate governance and will give rise to a chilling effect or expelling effect. It may even have a certain impact on economic development. In view of this, the jurisprudential interpretation of the Company Law (2023 Revision) should further clarify the behavior standard for directors. Judges should adhere to the general behavior standard for the duty of care while exercising measured discretion in casespecific adjudication, thereby working out a set of judicial review standards aligned with commercial realities. A good system of directors’ duty of care should embrace the binary structure of behavior standards and review standards and acknowledge the different roles and responsibilities among directors. Corporate entities should generally bear the risks arising from directors’ performance of duties, and the director is liable for compensatory damages exclusively under limited conditions.

Keywords

directors’ duty of care / directors’ roles / behavior standards / review standards / compensatory liability

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Higher Education Press