A survey on corporate response to poor performance by companies listed on the Nairobi stock exchange

Abstract

This study sought to establish what course of action companies choose to take in times of poor performance. There are two broad categories of actions that firms may pursue in lean times. One is that companies in an effort to improve performance will take action that is geared towards cutting of costs. Such action includes among others closure of non profitable branches, layoff of staff and omission of dividend payments. The other category of action that companies may elect to pursue are those that are geared towards increased revenue generation. Such actions include increased market effort by moving to new market areas, forming strategic alliances and employing managers with skills that will enhance the performance of a firm. In the extreme case companies may file for protection under the bankruptcy Act in the event that they are unable to meet their financial obligations as they fall due. Others may altogether fold up. Yet others may relocate from one geographical position to another. Whatever the case firms respond one way or the other in lean times. The Kenyan economy has been on the decline since the early 1990's, because of poor weather, a dilapidated infrastructure and a decline of prices for Kenyan goods in the international market. Other factors attributed to this state of affairs include an increase in the price of oil in the early 1990's caused by the Gulf War, a drop in the Tourism industry and an Aid embargo from the Development Partners. Almost all companies in their annual reports state that they have operated under difficult conditions prevailing in the economy. It is therefore worth finding out what corporate response firms have taken in the prevailing circumstances. An investigation of companies listed on the NSE was carried for a ten year period ending the year 2000. This was done by computing return on assets for each company. Those companies whose return on assets was below the average return together with those whose return was above average formed the sample. An analysis was then done by looking at the annual accounts of each company under study. The study established that in times of poor performance the most preferred response was that of top management replacement followed by dividend omission and employee layoffs in that order. All poor performing companies in the commercial and finance sectors replaced top management. In the industrial and agricultural sectors 69% and 63% replaced their top management respectively. Another interesting observation was that in the industrial and commercial sectors all the poor performing companies omitted dividend payments while in the finance and agricultural sectors only 47% and 36% omitted dividends respectively. Less than 50% of all poor performing companies in each market sector laid off employees. The above three were the major responses that were tested. Another response noted was asset restructuring. One company sought to improve its revenue by seeking a strategic alliance. It was noted however that there was no difference between poor performing companies and well performing companies when it comes to Top Management replacement. That response was not unique only to poor performing companies. 5 companies were wound up because of consistently making losses. The study also established that neither any characteristic considered nor the market sector has any influence on the course of action poor performing companies will take