The Relationship Between Ownership Structure and Corporate Governance Practises of Listed Firms at the Nairobi Securities Exchange

Abstract

An organization's corporate governance is influenced by its ownership structure. Corporate governance mechanisms, which vary by company and are often tied to ownership structures, might affect the board's deliberations. The study set out to determine how various types of ownership affect the methods of corporate governance used by firms listed on the Nairobi Securities Exchange (NSE). Multiple forms of corporate ownership were used in the current study. These forms of ownership included both outside and inside investment, as well as varying degrees of concentration and control by management. The shareholder theory, sometimes known as the Friedman doctrine, and the agency theory were both applied in this research project at various points. A total of 64 firms whose shares are now trading on the Nairobi Securities Exchange were the intended recipients. Our research relied entirely on secondary resources. Descriptive statistics and inferential statistics (such as studies of correlation and multiple linear regression) were employed in the study's analysis. The current study found that 90% of NSE-listed companies followed the recommendation that there be more than 55% independent and non-executive directors on the board, while all of the companies followed the guideline that there be at least 33.3% independent and non-executive directors on the board. Further, the current study's findings show that NSE-listed firms' directors generally follow the guidelines set out in their corporate governance charters. And more than 95% of NSE-listed firms' directors have met the attendance standards set down in their corporate governance charters, which typically range from 75% to 100% of scheduled meetings. Further study findings detail that foreign investors do not own the majority of issued equity securities in Kenya. Additionally over 5% of the firms’ listed at the NSE did not have any foreign shareholding and were fully locally owned while slightly over 25% of the listed firms had foreigner investors having a controlling stake of over 50%. Also, over 50% of the listed firms had local investors having a controlling stake of over 50%. Additionally the study findings revealed that institutional investors own the majority of issued equity securities in Kenya. Further, over 5% of the firms’ listed at the NSE did not have any institutional shareholding while slightly over 50% of the listed firms had institutional investors having a controlling stake of over 50%, while less than 25% of the listed firms had individual investors having a controlling stake of over 50%. Further study findings enumerate that the top five shareholders own the majority of issued equity securities in Kenya. In addition, the top five shareholders have a controlling stake of over 50% in over 75% of the listed companies. Also, the study findings showcased that the executive directors do not own the majority of issued equity securities in Kenya. Additionally, over 50% of the firms’ listed at the NSE do not have any managerial shareholding while less than 1% of the listed firms had executive directors having a controlling stake of over 50%. The current study findings also displayed that the general utilization of debt in the listed firms in the NSE is between 11.5% to 23%. Additionally, over 5% of the firms’ listed at the NSE have utilized more debt than the equity in their capital structure while 4% of the firms’ listed at the NSE did not utilize debt in their capital structure. The research also found that the model including foreign ownership, institutional ownership, ownership concentration, managerial ownership, and the debt to equity ratio describes corporate governance practice to the least degree possible and cannot meaningfully predict corporate governance practice. The study concluded that there is a positive, statistically significant association between managerial ownership and good corporate governance standards. Instead, the present analysis found that institutional ownership was correlated with a worse standard of corporate governance, whereas foreign ownership, ownership concentration, and debt to equity ratio ownership all had weak positive correlations and effects. It is recommended that government officials, policy formulators, and the Capital Markets Authority, the regulator of the capital markets, shift their attention away from the ownership xi structure and capital structure of listed firms in order to better enforce the corporate governance code and improve corporate governance practice more generally. They should, instead, be paying attention to other factors that affect corporate governance procedures. Additionally, they should enact regulations and policies that discourage managerial share ownership as increment in managerial share ownership would lead to watering down of corporate governance practice. Recommendations are made to listed, as well as other commercial firm’ management and consultants should try to minimize the managerial ownership of their current firms to boost corporate governance practice as well as to signal quality corporate governance practice. Finally, recommendations are made to equity analysts and investment banks to make buy recommendations to their clients on counters which have minimal managerial ownership while recommendations are made to individual investors to place a long position on counters with minimal managerial ownership.