Corporate governance and organizational performance:The case of companies quoted at the Nairobi Stock Exchange

Abstract

Corporate Governance, the system by which companies are directed and controlled, continues to gain prominence mostly triggered by the globalization of economies and the financial and investment markets. Increasingly, investors are demanding high standards of corporate governance in the companies in which they invest. In Kenya the need for corporate governance, as is the case in many parts of the world, is becoming more pronounced as a way of safeguarding various stakeholders interests. Corporate Governance is now generally taken as an important ingredient for the economic health of companies and society in general. The research objectives of this study centred on establishing the extent of corporate governance practised by companies quoted at the Nairobi Stock Exchange (NSE) and to evaluate the correlation between performance and corporate governance. To facilitate and achieve objectives of the study, secondary data from all the 47 companies quoted at NSE was used. The various elements of corporate governance practices were scored out of 100%. Performance in terms of turnover, net profit and market share price for all the listed companies were recorded in a data collection form and the average for 5 years to end December 2004 calculated. The data was then analysed for all the companies as a group and then separately for the five different market segments as categorised at the Nairobi Stock Exchange namely Agricultural, Commercial and Services, Finance and Investment, Industrial and Allied and Alternative Investment Market segment. Companies in different investment categories scored differently on corporate governance. The segments were ranked as follows in terms of corporate governance score: Agricultural, Finance and Investment, Industrial and Allied, Commercial and Services and lastly Alternative Market Segment. Performance of the companies under review generally correlated with the extent of corporate governance. The correlation was stronger with certain aspects of performance measures than others. Agricultural sector gave the highest correlation followed by Industrial and Allied category. Alternative Investment Market Segment gave the weakest correlation. The research fmdings show that most of the companies quoted at the NSE practise high level corporate governance. The results further reveal that generally there is a correlation between performance and corporate governance. The strength of correlation however varies depending on the market segment considered and the performance measure used. The Government and other stakeholders in companies should demand high levels of corporate governance as a way of enhancing performance in the long run and safeguarding the shareholders interests. It is appreciated that factors other than corporate governance play an important role in the performance of the companies. These extraneous factors were not considered in this study as this was not the part of the research objective. This notwithstanding the research objectives were met.