Effect of Corporate Governance on Financial Performance of Public Universities in Kenya

Abstract

Corporate governance plays an important role in the economy and that’s why it has attracted a lot of interest in the recent past by various stakeholders as they are becoming increasingly aware of its influence on the socio-economic wellbeing of the organizations and the society as a whole. There has been little consensus in terms of theoretical and empirical review on the relationship between the two variables i.e. corporate governance and organizational performance. This lack of consensus has largely been attributed to contextual variations. However there is a significant growth in literature as to the effect that the two are associated. The predictions of agency and stakeholder theories were used to carry the current study. The current study, therefore, sought to answer the question: What is the effect of corporate governance on financial performance of public universities in Kenya? The objective, therefore, was to establish the effect of corporate governance on financial performance of public universities in Kenya. The study also examined the control effect of corporate diversification and size in the relationship between corporate governance and financial performance. The study used census survey to examine all the 31 public universities in Kenya. Secondary data was extracted from the financial reports of each university, after which revenue change indices for the period 2013 to 2016 were calculated and used as a proxy measure for financial performance. Corporate governance was measured using the council expenses, with time series indices used in this regard. Diversification was measured using the changes in the total revenue from IGUs and the appropriate indices used accordingly. Corporate size was measured using the number of graduands annually, representing the number of students; with the time series analysis done to develop the annual variation indices. Data analysis was done using SPSS version 20 and descriptive and regression analyses were undertaken accordingly. The study revealed that if corporate governance, diversification, and corporate size were each held constant, the financial performance would increase by 0.081 representing 8.1%. However, units change in each of the three independent variables: corporate size, diversification, and corporate governance, would lead to change in financial performance by factors of 0.772, -0.114, and 0.049 respectively. At 5% level of significance, corporate governance, diversification, and corporate size were found to significantly influence financial performance. The findings were consistent with the general postulations of both agency and stakeholder theories. The findings were, however, in conflict with some prior studies; and consistent with a few others. Accordingly, the study prop..................................................................