Board of directors' attributes, strategic decision-making and corporate performance of firms listed on the Nairobi Stock Exchange
The separation of ownership and control of corporations lies at the core of the debate on the involvement of Board of Directors (BoDs) in strategic decision-making and the influence of the board attributes on corporate performance. Corporate governance scholars and practitioners have argued that individual board member demographic characteristics as well corporate board composition influence firm performance. Despite the increased focus on BoDs' contribution to the corporate performance, little research exists in developing countries. This study therefore sought to contribute to knowledge by assessing the relationship between BoDs' attributes, strategic decision-making processes and corporate performance among the listed firms in Kenya. The study used an integration of agency, stewardship, resource dependency and stakeholder theories of corporate governance. The board attributes studied were board cornpositron features such as board size, executive, non-executive and independent directors. Other board composition attributes studied were interlocking directors and Chief Executive Officer (CEO) duality. Individual board member demographic characteristics included age, gender diversity, educational background and professional experience of the board members. Board involvement in strategic decision-making was analyzed as a moderating factor in the relationship between board attributes and corporate performance. Board operating environment and firm characteristics were also examined as intervening variables in the relationship between board attributes and corporate performance. The main objective of the study was to analyze the relationships between board of directors' attributes, strategic decision-making and corporate performance. The specific objectives were to assess the extent to which board of directors' attributes determine their (board) involvement in strategic decision-making; establish the effect of board attributes on corporate performance and determine the effect of board environment on organizational performance. Other specific objectives included assessing the influence of firm characteristics on corporate performance and establishing the relationship between Board of Directors' involvement in strategic decision-making, board operating environment, firm characteristics and corporate performance. The population of the study consisted all the forty-seven (47) companies listed on the Nairobi Stock Exchange under the main investment market segment (MIMS) as of December 2010. The study was a cross-sectional design. The survey period covered four financial years from 2006 to 2009. Both primary and secondary data was collected and analyzed. Corporation secretaries or in their absence a member of the board filled the questionnaire. Hypotheses were tested on a sample of 40 firms, which responded to the questionnaire representing 85 percent response rate. Empirical analyses were undertaken using the Ordinary Least Squares (OLS) that included Correlation analysis, multi-variate regression analysis and descriptive statistics. The findings of the study indicate that the board size in Kenya among the listed firms consist of an average of nine (9) board members. We also found out that that the average age of the board members of the firms surveyed was 56 years old. Majority of the board members were male board members at ninety-three (93) percent while women made up only seven (7) percent of the total board members. The most common area of educational specialization for most of the board members was Business Administration (21 percent) and Finance and Accounting consisted 22 percent. The two options had a combined total of 43 percent. While there was statistically significant relationship between the number of Executive Directors sitting on the board and the number of inter-locking directors and Return on Assets (ROA), Executive Directors and Inter-locking directors were statistically significant in determining firm performance measured using ROA and ROE. CEO duality was negatively statistically significant in determining performance-using ROE as a measure of firm performance. From the findings, we conclude that there was statistically significant relationship between the number of Executive Directors sitting on the board and the number of interlocking directors and return on equity (ROE). We further concluded that there was statistically significant relationship between non-executive directors (NEDs) and PriceEarnings (PIE) Ratio. The rest of the board composition attributes had no statistically significant relationship with PE. The findings further showed that with regard to moderating effect of board involvement in strategic decision-making (SDM), the number of Non-Executive Directors (NEDS) had a non-statistically significant negative relationship with board's involvement in strategic decision-making. With respect to moderating effect of board attributes, there seemed to be an impact on ROE arising from executive directors, interlocking directors and board appointment criteria. There was also a moderating effect by board appointment on ROA. None of the Board of Directors' demographic characteristics had statistically significant moderating effect on the relationship between board attributes and firm performance. However, the results revealed that the moderating effect of board involvement in strategic decision-making increases the relationship between the Board of Directors attributes such as CEO duality as well as the explanatory power of the board composition over PE ratio. It had no effect on the other measures of corporate performance. The results indicated either a support or positive relationship between Board of Directors' involvement in strategic decision-making and some measures of corporate performance. There was a positive significant relationship between board involvement with reference to Executive Directors and interlocking board members in strategic decision-making and corporate performance with regard to ROA and ROE. There was no statistically significant relationship between firm characteristics and firm performance. Future research could consider the role of women on boards and dynamics of their presence on the board, which requires an observational and qualitative study.