Effect of Corporate Governance Practices on Working Capital Management for Listed Companies at the Nairobi Securities Exchange

Abstract

Corporate governance strategies must take into consideration the interests of stakeholders both in the short term and in the long term. Working capital management involves ensuring that the firm’s operations are carried out efficiently to enable the firm to meet its financial obligations to suppliers as well as its operational needs. Improperly managed working capital has the potential to adversely affect the running of the organization. Corporate governance aspects such as size of the audit committee, the board size and board composition have diverse aspects on working capital management in firms. The executive directors who also have administrative functions in the organization have an in-depth understanding of the firm’s operations and requirements from an insider’s perspective. They are thus critical in enabling the board to reach adequate working capital requirements and management aspects. This study aimed to establish the effect of corporate governance practices on working capital management for firms listed at the Nairobi Securities Exchange (NSE). It looked into the influence of the independence of the board, the size of the board and the size of the audit committee on various working capital management aspects for firms listed at the NSE. The study utilized a descriptive research design in order to study the variables in their natural form. The target population was the 65 companies listed at the NSE. The study used the census survey since all the companies were examined. The annual reports of listed firms for five years from 2012 to 2016 were used to collect secondary data obtained from the websites of the NSE and the Capital Markets Authority (CMA). Data was analysed using Statistical Packages for Social Sciences (SPSS). Descriptive analysis including the means, frequency distributions and percentages were used to reveal patterns. Multiple linear regression was used for inferential statistics. The regression analysis indicated that the days sales outstanding had a negative relationship with the number of directors (board size), proportion of non-executive directors (independence of the board), number of audit committee members (size of the audit committee), firm size and sales growth independently. The regression analysis results indicated that inventory holding period had a positive relationship with the board size due to a regression coefficient of 24.468. The board size, independence of the board and the size of the audit committee had a positive influence on days payable outstanding, but firm size and sales growth had negative relationships on days payable outstanding. The study further found that the corporate governance metrics and firm size and sales growth are jointly positively correlated (R=0.650) with the days payable outstanding to the tune of 0.650. The independence of the board, size of the audit committee, firm size and sales growth had negative vi relationships with inventory holding period due to regression coefficients of -248.53, -39.165, -71.090, and -0.845 respectively. Since the regression analysis indicated that both the days sales outstanding and the days payable outstanding each had negative relationships with the firm size and the sales growth, the conclusion was therefore that the big firms had a lower number of days sales outstanding and a lower number of days payable outstanding compared to smaller firms. From the study’s finding that the board size had a positive influence on the inventory holding period, it was recommended that the board size should be enhanced in the listed companies for there to be a positive influence on the inventory holding period. In the context of the days of payable outstanding, the board size, independence of the board and the size of the audit committee had positive regression coefficients. The study therefore recommended that these aspects should be emphasized in the firm in order for the days payable outstanding to improve. The study also recommended for further studies the examination of the corporate governance measures on working capital management based on segmentation of industries such as agricultural firms, manufacturing firms and others due to varying practices within the firms.