Is China's independent director system working? The case of the electronics industry

Purpose – This paper sets out to explore the effects that the setting-up of an independent director system has on the operating efficiency of information electronics companies in China. Design/methodology/approach – This paper uses 87 Chinese listed electronics companies during the initial stages of the independent directors system from 1999 to 2002 as sample subjects, and employs a two-stage procedure for empirical investigation. Findings – The non-parametric test results verify that there is no significant difference in the operating efficiency of Chinese electronics companies following the establishment of an independent director system. The Tobit regression results show that the establishment of an independent director system in the Chinese electronics industry does not influence overall technical efficiency (TE), pure technical efficiency (PE), or scale efficiency (SE). Research limitations/implications – Whether the related schemes of the current corporate governance structure practised in China can achieve their expected results, as well as the possible future development direction of the governance structure, is of the utmost importance, and is a research subject worth examining in greater depth. Practical implications – It is of the utmost urgency for such corporate governance to improve the selection mechanism for independent directors, to establish incentives and responsibility-taking mechanisms for independent directors, and to amend the company law and securities law to perfect the rules of an independent director system. Originality/value – By using DEA and the Tobit regression model, this study attempts to investigate whether China, in addition to fraud prevention, has improved corporate operating efficiency by introducing a system of independent directors. JEL classification: G320, G340, P310China, Corporate governance, Electronics industry, Independent director system