The Effect of Board Diversity on the Financial Performance of Companies Listed at the Nairobi Securities Exchange

Abstract

In the recent past, board diversity and its relationship with financial performance has closely been monitored. Boards of directors are representatives of shareholders and are elected to make decisions on various important company issues. Since shareholder wealth maximization and welfare of stakeholders are the priority concerns for BODs, it is crucial that specific individuals are chosen from a diverse pool to represent their interests. The aim of this study was to establish whether board diversity has an effect on the financial performance of companies listed at the Nairobi Securities Exchange.58 companies were studied for the period between 2011 and 2015 using a causal and descriptive research design to study the various board diversity variables including: age of board members, gender, educational qualification, nationality and board member independence. Analysis of data was done using descriptive and inferential statistics. Correlation analysis findings show a positive relationship between ROA and age of board members, their nationality and independence, and a negative or rather insignificant relationship between ROA and gender and educational qualification of board members. Descriptive statistics indicate that women and non-Kenyan nationals are generally underrepresented on most boards, and that a majority of directors are highly educated, are non-executive, and above 45 years old. Of all the variables under study, educational qualification, nationality and age of directors were found to be relatively significant predictors of financial performance, while gender and independence were found to be insignificant predictors of ROA. Generally, it was established that the study‟s independent variables could explain only 4% of the variations of ROA within companies listed at the NSE. The following are the recommendations from the study: the listed companies should consider electing independent, non-Kenyan nationals, and members above 45 years old since these have been shown to have a positive correlation with ROA. However, it is generally recommended to have younger members on boards in the wake of the technological era-in order to maximize shareholder wealth. The concept of gender diversity is inconclusive and more research on this area is recommended.