The Relationship Between Corporate Governance Structure and the Performance of Banks Listed on the Nairobi Stock Exchange

Abstract

Corporate governance practices, principles and structures have recently gained popularity in the developing world. Corporate governance is the system through which corporations are directed and controlled. On the other hand, the main goal of company is to maximize the wealth of shareholders. With the recent problems across the world for example the collapse of major corporations like Enron and Lehman brothers, the impact of corporate practices has increased profoundly. Governments are also reducing their control in state owned corporations through the sale of their shareholding to the public (KCB and NBK). With such growth in the amount of control being relinquished to the public in return demand better governance of their corporations.

The research was conducted using a Cross-sectional survey that sought to identify differences in corporate governance's structures between listed banks facing a decline in values and those with appreciating values, and those with stable value on calendar years 2003, 2004, 2005, 2006, 2007 and 2008. The study targeted all banks in Kenya for the period of five years (2002 to 2007). The sample size included all the listed banks (nine in number) in the stated period. Secondary data sources were used where by internal secondary research i.e. information acquired within an organization where research is being carried out. Various options of panel data regression were done, fixed effects, random effects and OLS panel. And the results were presented in tables.

The study found that Q-ratio of all the companies were below 1. Since the Tobin's q is less than 1, then the market value is less than the recorded value of the assets of the company which suggests that the market may be undervaluing the banks. The study found that there was a variation Tobin Q over the previous year and they were not consistent at the end of the year according to their performance. This study concludes that board size negatively affects firm's market performance while board composition affects market performance positively the most and a unit increase in executive remuneration has the least positive influence. The study recommends that for banks to have better market performances should adopt better corporate governance practices since corporate governance practices affects the market performance of the banks positively.