Effect of Corporate Governance Practices on the Financial Performance of Small and Medium Manufacturing Enterprises in Nairobi County

Abstract

The main purpose of this study was to establish the effect of corporate governance practices on financial performance of small and medium manufacturing enterprises (SMMES) in Nairobi County. The theories underpinning this study were agency theory, stewardship theory, stakeholder‟s theory and resource-dependency theory. The study was undertaken using a descriptive research, employing both secondary and primary quantitative data. The data was obtained from annual reports of the Kenya Association of Manufacturers. The population for this study constituted of 279 SMMEs registered by Kenya Association of Manufacturers (KAM). The study sample was 162 obtained by the Krejcie and Morgan formulae. All the data was brought together by examination of documents, annual reports and a questionnaire. The chosen interval was year 2012 to year 2016 (5 years). The study employed frequencies, averages and percentages to present the findings. Statistical Package for Social Sciences (SPSS) aided in generating the descriptive statistics as well as the inferential results. Regression analysis was used to demonstrate effect of corporate governance practices on performance of small and medium manufacturing enterprises (SMMES) in Nairobi County. The conclusions were depicted by employing tables and figures to give a representative of the research findings at a peek. Regression results showed that CEO Duality had a significant and adverse impact on financial performance. Board Size, Board Independence, Frequency of Board Meetings, Size of the Firm had a positive and significant impact on financial performance of SMMEs. However, regressions results showed that the Age of the firm and Board Diversity were positively and insignificantly related to the financial performance of SMMEs. Based on the findings, the study resolved that CEO Duality, Board Size, Board Independence, Frequency of Board Meetings, Size of the Firm affect financial performance of small and medium manufacturing enterprises (SMMEs). The study recommended for adoption of corporate governance practices as they have a positive influence on performance of small and medium manufacturing enterprises (SMMEs) in Nairobi County. From this study, SMMEs are left with no option but to adopt better governance practices that impact positively on their financial performance in order for them to remain afloat and even grow. In conclusion, area for further studies could consider effect of individual corporate governance such as board composition and CEO duality on financial performance of SMMEs.