Relationship Between Board Characteristics and Financial Risk Management of Firms Listed at the Nairobi Securities Exchange

Abstract

The complexity of the present-day corporate operations and the global economy’s rapid change has brought into fore the difficulties managers have in understanding their own risk exposures in the course of their daily operations. The main objective of the study was to determine the relationship between board characteristics and financial risk management of firms listed at the Nairobi Securities Exchange. Based on the research topic and related variables, Agency Theory, Stewardship Theory and the resource dependency theory formed the theoretical review literature that connect the theory and practice in regard to board characteristics and organizational risk management. The study adopted a correlation research design. A correlation research design aims at explaining phenomena by using quantitative data analysed using mathematical based methods. The 49 operational firms that are members of the NSE made up the Study's population. In addition, the main source of data for this study was secondary sources. The study conducted both descriptive and inferential statics. The descriptive statistics showed that directors with financial expertise in majority of the firms ranges between 1 to 7 of the board of the firms listed at the NSE. Based on initial multicollinearity tests Number of directors appointed after CEO appointment was excluded implying that the variable was closely represented by another one among the rest hence the variable was dropped from further analysis. The study established that increasing the number of directors on the board by a single unit decreases Financial Risk Index (FRM) by 0.23 (β = - 0.238) implying the firm’s ultimate financial risk management is in turn only improved by a factor of 0.23 but this impact may be due chance as the variable is also not significant at (α=0.586). According to the study, independence of the of the board has a positive relationship with organizational financial risk management 1.47 (β = - 1.475) but not significant (α=0.065). Similarly, the study established that financial expertise has a positive (β=0.78) but not significant (α=0.384) relationship with financial risk management. The study established that gender diversity positively (β = - 1.558) affect financial risk management and was significant (α=0.04). The view that having more women on the board leads to better financial risk management did hold in this study. Considering control variables, only age of the firm has a significant impact on financial risk management (α=0.012) and (β = 0.064) implies the study found out that the older the firm the lower the financial risk hence implied a better financial risk management approach is in place. Impact of number of regulators was found to be not significant (α= 0.075) on financial risk management however the presence of more than 1 core regulators for a firm in a segment led to better financial risk management practices that more than proportionately reduced financial risk in the firm (β = - 4.244). Finally, in regard to Size of the firm, the study found out that if the size of the firm is increased by Kes 1,000 this negligibly decreases Financial Risk Index (FRM) by 0.0000000009178 (β = 0.0000000009178) hence in turn ultimate financial risk management is improved by a marginal factor of 0.0000000009178 but this impact may be attributed to chance as it is not significant at (α=0.863). The study recommends that the firms should harmonize the number of directors on the board to an average of 10 to ensure enhancement of other board characteristics contribution towards financial risk management. The study also recommends that the firms under study should consider financial expertise of a director during recruitment. Furthermore, the study recommends that the firms should incorporate more independent directors. Lastly, the study results imply that in the context of an average board size of 10 directors for firms listed on the NSE, use of a higher number of regulators in providing external oversight to financial industry segment may be an effective approach in forcing the boards to agree and adopt a risk governance rule set towards reduction of financial risk management in the firm.