The Effect of Corporate Governance on Financial Performance of Firms Quoted at the Nairobi Securities Exchange University of Nairobi

Abstract

Corporate governance is no doubt one of the most essential tools and principle used in management and running of entities in modern times. It is a critical component of success that many institutions are embracing today due to its impact on the performance of such institutions. The objective of this research project was to establish the effects of corporate governance on financial performance of firms quoted at the Nairobi Securities Exchange. The research focused on forty-three firms quoted at the Nairobi Securities Exchange in the period commencing January 2012 to 31st December 2016. The study relied mainly on secondary data drawn from audited consolidated annual financial reports of sampled firms listed at the NSE. It detailed the cross-sectional analysis over a duration of five years covering the year 2012 to 31st December 2016 with a bias on quantitative analysis. Inferential and descriptive statistics was employed in verifying the association between corporate governance and financial performance while financial performance was determined by return on assets. Corporate governance on the other hand was determined in terms of board composition, institutional shareholding, firm size and managerial shareholding. Correlation coefficient was used to explain the extent of strength between different variables. Analyzed data was presented in terms tables, pie charts, bar charts and percentages where appropriate. To ascertain the association between financial performance and corporate governance in Kenya, the multiple regression analysis was employed. Quantitative data was analyzed using advanced MS Excel and SPSS Version 21.0 to derive co-efficients of constants of various variables and data preparation. The study confirmed the existence of a direct association between financial performance and corporate governance while inverse association between financial performance and firms’ size. Corporate governance entails structures and processes of managing business efficiently with an aim of firm value and profit maximization. Good corporate governance practices enhance long term organizational performance and ensure accountability of managers and transparency thus reduction in corporate risks. Through corporate governance, there is reduction in agency cost since there is separation of control and ownership of companies. Firms achieve their financial performance in terms of profitability in order to be sustainable and it is a measure of efficiency. From the study, there is a direct association between financial performance, board composition, institutional shareholding and managerial shareholding. Successful firms have effective board that aid in drawing and planning of corporate strategy while maximizing shareholders’ value. Board members have a fiduciary task to ensure that their firms are well managed. Corporate governance propels firms to gain competitive advantage over their competitors and in effect increase their foreign investment.