The Effect of Board Characteristics on the Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

The characteristics of the board of directors have received considerable attention in recent years. This is because the function performed by the board is significant to firm performance as the board executes its responsibilities. Empirical evidence provides conflicting views as to the impact of board characteristics on the financial performance of a firm. Several studies have been conducted investigating the relationship between board structure and company performance with the assumption that the company’s financial performance is mainly determined by board characteristics. Research conducted by different scholars on the impact of board characteristics on the financial performance of a firm remains inconclusive. The aim of the study was to establish the effect of board characteristics on financial performance of the quoted firms at the NSE.The population of the study was all the 64 firms quoted at the NSE as at 31st December 2017. Data was obtained from 53 out of the 65 listed companies giving a response rate of 82.81%. The independent variable for the study was board characteristics as measured by board composition and board size. The control variable was liquidity as measured by current ratio and firm size as measured by natural logarithm of total assets. Financial performance was the dependent variable which the study sought to explain and it was measured by ROA. Secondary data was collected for a 5 year time frame (January 2013 to December 2017) annually. The descriptive cross-sectional research design was employed for the study and the association between the study variables established using multiple linear regression model. Statistical package for social sciences version 22 was used to analyze the data. The results of the study produced R-square value of 0.287 which means that about 28.7 percent of the variation in the financial performance of companies quoted at NSE could be explained by the four selected independent variables while 71.3 percent in the variation of financial performance of was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with financial performance (R=0.536). ANOVA findings show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the association between the selected variables. The results further revealed that firm size and liquidity produced positive and statistically significant values for this study while board composition and board size were found to be statistically insignificant determinants of financial performance of firms at the NSE listing. The study’s recommendations were that measures should be put in place to enhance firm size and liquidity as this will improve financial performance of firms at the NSE listing.