The relationship between corporate governance structures and financial performance of manufacturing firms in Kenya

Abstract

Corporate governance in business circles is merely understood to mean ensuring that the companies are managed profitably in absence of malfeasances by the management or simply “good governance”. Corporate governance structures and their relationship to good governance and hence profitability and financial performance is therefore a higher level understanding of corporate governance. Scholars, investors, top level managers and legal experts are more interested with the structures of corporate governance because they form the engine that determines good governance. In that regard, this study sought to examine the effect of corporate governance structures on the financial performance of the manufacturing firms in Kenya A correlationship research design was adopted in the study of 43 out of a target of 54 manufacturing firms operating in Kenya between the years 2009 and 2013. Descriptive statistics and inferential statistics were used in the study. Descriptive statistics were used to establish the prevalence of the corporate governance structures. Inferential statistics used Pearsons and Spearman least squares to establish correlation between the corporate governance structures and financial performance and the inter-relationship of the governance structures. ROA was used as the financial performance measure. A regression model was applied to establish the relationship between corporate governance structures of; independent directors, audit committees, board size and CEO duality, and ROA. Firm size as measured by logarithm of assets and the age of the firm were used as control variables. The results of the study indicated a strong relationship between corporate governance structures and financial performance of manufacturing firms in Kenya. The relationship however varies between the different structures with independent directors had a strong correlation (0.668). Audit committee also had a strong relationship (0.676). Board size had moderate relationship (0.376) and CEO duality had the least correlation among the corporate governance structures studied (0.253). Among the control variables, firm size had a strong correlation (0.881) while age of the firm had a weak one (0.296). The study has spatial limitations because it was carried out in Kenya and focused to a single sector or industry of manufacturing firms. More broad studies therefore need to be undertaken before generalising the findings of this study.