Comparative Study On The Civil Liability Of Independent Directors In China And The United States For Violation Of Diligence Obligation

The independent directors in the Kangmei Pharmaceuticals case were liable for sky-high compensation,triggering a wave of resignations of independent directors.As China’s Company Law is being revised,it is necessary to review the civil liability system for independent directors.The independent director system in the United States was established to monitor management,while the independent director system in China was introduced to optimize the corporate governance structure.Theoretically,the duty of diligence of independent directors can be divided into two aspects: the duty of care under corporate law and the duty of disclosure under securities law.In the U.S.,independent directors’ breach of duty of care is rare and usually does not lead to liability because of the lenient standard of duty of care set by corporate law and securities law and the multiple performance protection mechanisms set by law.In China’s practice,there are no cases of civil liability for breach of the duty of care under the Company Law by independent directors,and there are few cases of civil liability for breach of the disclosure obligation by independent directors due to the impediment of the prior procedures.With the release of the prior procedures and the enhancement of securities investors’ rights awareness,the risk of independent directors being sued increases;while the company law lacks a mechanism to exempt directors from liability,the joint and several liability set by the securities law also brings the risk of sky-high compensation to independent directors;the civil liability system of independent directors has the problem of imbalance of power and responsibility.In-depth study reveals that the system of independent directors in China has a deep-rooted contradiction of unclear positioning,and regulators and the public have many unreasonable expectations of independent directors.The independent director system should return to its origins and play a supervisory role.In addition to legal liability,the reputation mechanism of directors can also discipline independent directors and encourage them to be diligent and responsible.China should set a reasonable standard of liability in light of its national conditions: to mitigate the risk of independent directors’ performance,to avoid the “sky-high” compensation in the Kangmei case,and to use legal liability to urge independent directors to be diligent.In terms of legislation,the Company Law should clarify the meaning of the duty of diligence of independent directors,add provisions on the limitation and exemption of directors’ liability,and set up directors’ liability insurance.With regard to the civil liability system for securities misrepresentation,the standard of diligence of independent directors should be established,and a reasonable amount of liability should be set.Finally,the independence of independent directors should be enhanced,and the incentive mechanism of independent directors should be improved,so that independent directors can truly play a supervisory role.