Effect of Corporate Governance on Financial Performance of Public Listed Companies in Kenya
Abstract
Due to the obvious reasons why companies exist, there is ever a growing need that company
financial performance is empasised and this makes it a critical area of research. This study
aimed at exploring some of the factors which can affect financial performance with the aim of
contributing to the existing liretarure and advising management on what can affect the
performance of their firms. The study explored corporate governance effect on financial
performance and explored it together with other variables which could potentially affect the
relationship between the two key variables. The other variables were the board composition as
indicated by the proportion of non executive directors and leverage as measured by the ratio of
debt to equity. The study established that corporate governance and board structure affects
performance negatively as indicated by their negative coefficients of -10.03 and -0.006
respectively. Whereas the effect of corporate governance was significant, that of board
composition was insignificant at a 5% significance level, with p-values of 0.025 and 0.864
respectively. On leverage, the study established that it impacts on financial performance
positively with a coefficient of 0.0198. Its effect is however insignificant at 5% significance
level as indicated by the insignificant p-value of 0.635. Based on these findings, there is a need
for company stakeholders in Kenya to relook at the boards and ensure that companies boards
are not unneccesarily too big. Increasing the number of board members should be supported
by an advantage like oversight, expertise or diverse experience but not by virtual assumption
that financial performance can be improved by board sizes composed of more members. On
the boards composition, it is very likely that the advantage of oversight provided by non
executive directors is watered down by their lack of knowledge on the specific company
operations. Companies should therefore not have more than 40% of its board being non
executive directors as they would not advise on challenges and opportunities of their specific
company which could have brought a strategic advantage as well as their commitment. More
executive directors should therefore be sought with even functional departments. The findings
of this research support other researches and therefore suggest that further researches be done
to establish why big board sizes and bigger proportions of non executive directors cause a poor
performance to be experienced by firms as it is not enough to know the relationship. Knowing
why the relationship helps convince and take corrective measures.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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