Effect of Corporate Governance Practices on Financial Performance of Firms Listed at Nairobi Securities Exchange

Abstract

The paper sought to investigate corporate governance on the performance of NSE listed companies at 31 December 2017. From a contextual perspective, the justification for studying this topic is premised on the fact that most of the studies in this area have been done in the US, Britain, Europe and Scandinavian countries. few authors have investigated these variables in Kenya. Data was collected from a census of 65 listed companies in Kenya for a period of five years (2013 -2017). The dependent variable under the study is performance while the independent variables include, CEOs duality, director‟s independence, education of directors, gender of the directors and the size of the board. The empirical justification for this study rest on the fact that previous local and international studies have not given conclusive results. Some studies indicate a positive result yet others conclude that there is a negative association between the variables. Further some studies concluded that there is no statistically significant relationship between governance and performance. A non-directional two tailed test indicate that the model as constituted above contributes to 10.4 % of the changes in performance. This model was also found to be statistically significant at 95% confidence interval. The Pearson correlation matrix indicate that there is a positive correlation between performance and the number of directors, the number of female directors and directors with post graduate education. Moreover, the results indicate that there is a negative relationship between the number of independent directors and the performance. The paper used the ordinary least square regression model to assess the impact of explanatory variable on the dependent variable at 95% level of significance. The research concluded that there is a positive relationship between the board size and performance. These findings are consistent with the assumptions of the resource dependency theory. The findings also indicate that independence of the board affect performance positively. The level of education also has been found to have a positive significant relationship with performance. These findings support the agency theory assumptions which state that an increase in monitoring leads to increased goal congruence and performance. The positive association between the education level and performance confirms the assertions of resource dependency theory. The negative association between board independence and performance also confirms the moral hazard and adverse selection assumption of the agency theory. Further research should be done on the relationship between board independence and performance of organizations as a stand-alone study. This will give more insights on the moral hazard assumptions and will contribute to literature in this area. The study contributes towards policy development by recommending to CMA that ordinary shareholders should be taken through training on board selection and appointment of directors. This is because it is evident from the findings that shareholders may lack the necessary skills needed to select effective boards.