Corporate governance and firm performance: an empirical test of competing governance theories on companies quoted on the Nairobi stock exchange
Abstract
The role of the Board as a corporate governance tool is widely acknowledged in much of
the literature on Corporate Governance. Scholars and practitioners have sought to
understand the relationship between various board composition variables and some
measure of performance as a means of establishing what the significant board
composition variables are and the effect of adding or dropping some of these variables
from designing effective boards. The most frequently used measures of performance
linked with board composition have been the Return on Assets and the Tobin Q ratio.
This study investigated significance of the board composition variables of size of the
board, proportion of outside directors, proportion of inside directors, and the role of CEO
duality on firm performance. The focus was on linking these variables to the contrasting
and competing theories of Corporate Governance such as Agency Theory, Stewardship
Theory, and Resource Dependence Theory, among others.
The study found that the overall regression models for firm performance for both the
Return on Assets and Tobin Q ratio are significant. This means that the board
composition variables cited above are important predictors of firm performance. The
study also found that the significance of the individual variables in the overall
specification models have differing significant variables on the basis of the measure of
performance selected for the firm. For example, when film performance is measured by
the Return on Assets, the significant variable in the model is the size of the board. Under
the Tobin Q ratio firm performance measure, on the other hand, proportion of outside
directors is the significant variable. These results imply that under the ROA, there seems
to be a dominance of the Resource Dependence Theory while under the Tobin Q ratio,
the Agency Theory dominates.
The study also found that most surveyed firms tended to favour outside directorships over
inside directorships. The prevalence of outside directorships was twice as much as for
inside directorships and is in favour of the Agency Theory. The study also found that
surveyed firms tended to favour having different persons occupying the TWO positions of
CEO and board chairman and this is in line with the Agency Theory
Citation
Masters of Business Administration, University of Nairobi (2009)Publisher
University of Nairobi School of Business