Corporate governance, strategy implementation, industry competition and performance of companies listed on the Nairobi securities exchange

Abstract

The purpose of the study was to establish the effect of strategy implementation and industry competition on the relationship between corporate governance and performance of firms listed on the Nairobi Securities Exchange (NSE). The study sought to establish the mediating and moderating effect of strategy implementation and industry competition, respectively, on the relationship between corporate governance and firm performance. It developed a corporate governance index as a proxy for corporate governance based on the seven attributes of the recently revised Capital Markets Authority’s draft code of corporate governance practices for public listed companies in Kenya. These are: board operations and control, rights of shareholders, stakeholder relations, ethics and social responsibilities, accountability, risk management and internal audit, transparency and disclosure, and supervision and enforcement. Review of literature provided conceptual and empirical gaps that formed the basis of the research hypotheses. The population of the study consisted of the 56 companies listed on the Nairobi Securities Exchange. The study used cross-sectional survey design, where data was collected at one point in time across all the organizations covering the four financial years, from 2012 to 2015. The survey questionnaire was the main tool of data collection and was distributed to 56 CEOs and corporation secretaries. Annual reports for the year 2015 were used to compute the CGI score for the different organizations. A score of 1 was awarded where an attribute was clearly reported and 0 if not. Scores of 0.25, 0.5 and 0.75 were awarded to recognize partial compliance. Annual reports were also used as sources of data on the financial performance and ages of company directors. The response rate from the field was 49 out of the 56 companies (87.5%). The reliability test showed that the study dimensions were reliable. The researcher divided the hypotheses into two categories: financial and non-financial. The hypotheses were tested one at a time beginning with the non-financial, where linear regression was conducted. Due to lack of evidence to support a linear relationship between corporate governance and financial indicators, optimal scaling was used to test the financial measures of performance. The study found that there was a significant relationship between corporate governance and non-financial performance, and financial performance measured by earnings per share (EPS). The findings also indicated that there was no significant relationship between corporate governance and return on assets, return on equity and Tobin’s Q of firms listed on the NSE. It was found that strategy implementation mediates the relationship between corporate governance and non-financial performance and financial performance. Industry competition moderates the relationship between corporate governance and financial performance but not on non-financial performance. The study established that the joint effect of corporate governance, strategy implementation and industry competition on non-financial performance and on financial performance measured by EPS was greater than the effect of corporate governance and performance, confirming that organizations can enhance their performance by implementing good corporate governance, specifically those attributes of good corporate governance that matter. The results have diverse implications for policy, practice and research. There were limitations on the study but they did not affect the credibility of the results.