Corporate Governance and Wealth Creation by Companies Quoted in the Nairobi Stock Exchange

Abstract

Corporate governance is a system in which companies are directed and controlled. In the recent past, there has been renewed interest in corporate governance practices of modem corporations since 2008, due to the collapse of a number of large United States of America with seven of some of the largest bankruptcies in American history happening in the year 2002. Corporate governance is important in management mainly because it ultimately leads to greater investor confidence which often leads to more wealth creation. Investors are willing to pay more for a corporation’s stocks if it is known to have good corporate governance. This study was designed to fill the gap that existed in earlier studies, undertaken in the field of corporate governance. These studies have not been clear on the relationship between corporate governance and wealth creation by companies quoted in the Nairobi Stock Exchange. The earlier studies tended to have concentrated on compliance issues and structures regarding corporate governance. This study sought to address the effect of adopting corporate governance on wealth creation by companies quoted in the Nairobi Stock Exchange. The objective of this study was to determine the relationship between adoption of corporate governance and .wealth creation among companies quoted in the Nairobi Stock Exchange. The research was a cross sectional survey design involving companies quoted and trading in the Nairobi Stock Exchange as at 16th August 2011. A total of 42 companies were interviewed and there results presented. The findings of the survey are that most companies that are listed in the Nairobi Stock Exchange are complying v with the Capital Markets Authority guidelines on corporate governance. There was found to be a significant increase in company share prices five years after adoption of corporate governance as compared to five years before adoption of the practice. During this period the NSE 20 share index increased to a high of 6,161.47 points in year 2007 as compared to a high of 3,675.44 points in 1997. This has in turn led to wealth creation by the quoted companies for their shareholders and even themselves more so when they sell their shares to the public. It is also worth noting that 60% of the total respondents reported benefits outweighed costs of implementing corporate governance. It recommended for both public and private companies to adopt corporate governance practices since it is expected to increase wealth of at least the share holders. Further, in order to have convincingly functional audit committees, ways of ensuring corporate governance guidelines are adhered to should also be strengthened in order to avoid misleading compliance. One of the limiting factors experienced by the researcher was lack of total and outmost disclosure by the respondents regarding the details of their directors especially when dealing with the negative aspects were being touched on. Response time was also limited since response was given during normal working hours Interruptions during response time could have affected the quality of output. Finally, it has been suggested that more research be conducted regarding adoption of corporate governance by unquoted firms as well as benefits that may arise thereafter for this organizations and related parties.