Effect of Corporate Governance on Financial Performance of Public Listed Companies in Kenya

Abstract

Due to the obvious reasons why companies exist, there is ever a growing need that company financial performance is empasised and this makes it a critical area of research. This study aimed at exploring some of the factors which can affect financial performance with the aim of contributing to the existing liretarure and advising management on what can affect the performance of their firms. The study explored corporate governance effect on financial performance and explored it together with other variables which could potentially affect the relationship between the two key variables. The other variables were the board composition as indicated by the proportion of non executive directors and leverage as measured by the ratio of debt to equity. The study established that corporate governance and board structure affects performance negatively as indicated by their negative coefficients of -10.03 and -0.006 respectively. Whereas the effect of corporate governance was significant, that of board composition was insignificant at a 5% significance level, with p-values of 0.025 and 0.864 respectively. On leverage, the study established that it impacts on financial performance positively with a coefficient of 0.0198. Its effect is however insignificant at 5% significance level as indicated by the insignificant p-value of 0.635. Based on these findings, there is a need for company stakeholders in Kenya to relook at the boards and ensure that companies boards are not unneccesarily too big. Increasing the number of board members should be supported by an advantage like oversight, expertise or diverse experience but not by virtual assumption that financial performance can be improved by board sizes composed of more members. On the boards composition, it is very likely that the advantage of oversight provided by non executive directors is watered down by their lack of knowledge on the specific company operations. Companies should therefore not have more than 40% of its board being non executive directors as they would not advise on challenges and opportunities of their specific company which could have brought a strategic advantage as well as their commitment. More executive directors should therefore be sought with even functional departments. The findings of this research support other researches and therefore suggest that further researches be done to establish why big board sizes and bigger proportions of non executive directors cause a poor performance to be experienced by firms as it is not enough to know the relationship. Knowing why the relationship helps convince and take corrective measures.