The Relationship Between Corporate Governance And Financial Performance Of Previously Government Owned Companies Quoted On The Nairobi Stock Exchange

Abstract

Corporate governance is the system by which companies are directed and controlled. It is concerned primarily with management and stewardship issues of companies with an aim of increasing firms' performance and increasing share holders' value. However, this has not been the case as witnessed in some companies especially those that are state-owned. Even with institutionalization of good corporate mechanisms, there is evidence of collapse of some of these companies. Therefore, the purpose of this study was to examine the relationship between corporate governance mechanism and performance of previous state-owned firms listed in Nairobi Stock Exchange. Specifically, the study established whether there is relationship between the return on assets and corporate governance mechanisms measured by auditors' fees, board remuneration and size of board and board composition. The descriptive research methodology was adopted in this study. Purposively ten previously state-owned companies in the main investment market segment were studied. Data was obtained from financial statements of the ten companies to be covered, and is also published by NSE. Correlation and regression analysis were used to achieve the study objective in data analysis. Correlation matrix showed that there is a strong correlation between performance and good corporate governance. Regression results revealed that institutionalization of good corporate governance costs: auditors' fees, management fees and director ownership have strong and significant marginal effects on returns on asset and hence they were found to mitigate agency costs and consequently increase firms' performance. They revealed that there exists positive relationship between corporate governance mechanisms and performance for the firms studied. From the study, it can be concluded that the institutionalization of good corporate governance can help reduce (mitigate) the agency costs resulting to high return on asset for the previous state-owned companies quoted on the Nairobi Stock Exchange.