Board Composition And Performance In Quoted Companies In Kenya

Abstract

This study examines the effect of board composition on firm's performance. The focus is on all the quoted companies in Kenya for a period of ten years starting from 1994 to December 2003. The basic methodology involved sampling the companies that were continuously listed in the Nairobi Stock Exchange for the entire period. The primary data was collected using a questionnaire method. Secondary data was also utilized. A multiple regression model was used to analyze the data gathered. The dependent variable was the company's performance measured by Return on equity (model l ) and Tobin's q (model 2). The independent variables included "elements of board composition practices (board independence, audit committee independence, CEO duality and directors from financial institutions) and other important control variables including firrns size, financial leverage and board size. We find no significant relationship between firms' performance as measured by Return on equity and board composition variables. We also find some evidence that firm's performance measured by Tobin's q has a significant relationship with firms leverage and size. These empirical findings suggest that, adding outside directors to the board, audit committee independence, directors from financial institutions, CEO duality are not performance enhancing. We also document that the most popular or preferred board mix consists of an average of 8 members in size, 70%nonexecutives and no CEO duality. The findings reflect that boards in Kenya are embracing the recommendations on good corporate governance outlined by Capital Market Authority 2002.