Effect of Board Characteristics on Financial Performance of Commercial State Corporations in Kenya

Abstract

The implementation of financial performance standards within the commercial state corporations was aimed at aligning it to the country’s development blueprint, however, this has not been fully realized (Nyamita, et al., 2014). The importance of board of directors in an organization management cannot be underestimated, board of directors is an essential element of corporate governance. Cheung, et al., (2011) remarked the need and effective characteristic of the role played by board of directors in running management affairs of the organization. The study was anchored by agency theory. The study was supported by stakeholder theory, Stewardship theory and Resource dependence theory. The study adopted correlational design of study. The target population for the study was 33 commercial state owned corporations in Kenya over the period 2016-2021. The study employed census because the target population was small. Secondary data was collected from the annual financial reports of the state corporations audited by the office of auditor general. The data was analyzed using Stata software where descriptive and inferential statistics were generated. The descriptive tests included the mean, minimum, maximum and standard deviation. Also, panel regression was employed to determine the effect of board characteristic on the financial performance of commercial state-owned corporations. The descriptive finding established that Kenya generating Electricity Company made the highest profit within the period 2016 to 2021 as shown by the return on asset of 5.1745. The study revealed that most of the state corporation made loss within this period. Kenya Ports Authority had the largest board size constituted of 16 directors. The study established that most commercial state corporations had an average of 10 board members. The study noted that most of the commercial state corporations recorded a board independence above average. The study established that Kenyatta international convention center had more women in the board. Kenya Railways Corporation recorded the highest number of board meetings occasioned by the continuous loss making. Agro-Chemicals and Food Company had accumulated longest board tenure among commercial state owned corporations. The panel regression established that board size has a negative and significant relationship with financial performance of state corporations (β =-0. 1948413, p=0.000<0.05). The study finding established that there exist a positive and significant relationship between board independence and financial performance of commercial state corporation (β =1.121613, p=0.044<0.05). The study also found out that board diversity has a positive and insignificant effect on the financial performance of commercial State Corporation (β =1.054611, p=0.121>0.05). It was also revealed that board meetings have a positive and insignificant effect on financial performance of commercial state corporations (β =0.0147901, p=0.341>0.05). Additionally, the study revealed that firm size has a positive and significant effect on the financial performance of state corporation (β =0.3051079, p=0.006<0.05). The study concluded that large board size negatively affects financial performance of a state corporation. It also concludes that board independence has a positive influence on financial performance of commercial State Corporation. Board diversity has a positive and insignificant effect on the financial performance of commercial State Corporation. Further, the study conclude that board meetings have a positive and insignificant effect on financial performance of commercial state corporations. Additionally, it can be concluded that board tenure has a negative and insignificant effect on financial performance of commercial state corporations. Finally, the study conclude that firm size has a positive and significant effect on the financial performance of State Corporation. The study recommends the establishment of an optimal board size that is manageable. It is further recommending the strengthening of independence within boards by increasing the number of non-executive board members to a majority in all state corporations. Engineering of growth of firm size so that they derive economies of scale associated with large firms. On the areas of further research, the study recommends further investigation on the relationship between board tenure and financial performance. The study experienced methodological limitations occasioned by firm closure and lack of substantial boards.