Corporate Governance and Financial Performance of Regional Development Authorities in Kenya

Abstract

The economic development of a country has been argued to be dependent on the performance of individual organizations in the country. In the same context, the low growth level of developing nations can be attributed to the sub-optimal growth of its organization, especially government owned, which can by extension be linked to the low level of sound Corporate Governance practices. Effective corporate governance is said to affect the performance of an organization though the direction of its influence has been a contentious issue. Adherence of good corporate governance principles has been reinforced by regulatory authorities in different sectors due to its perceived benefits and effect on performance of entities. This study aimed at establishing the effect of corporate governance on the financial performance of Regional Development Authorities in Kenya. The principles of corporate governance to which their effect on performance was determined include board size, board composition, disclosure information and audit committee. The control variables will be firm size and leverage. Secondary data was obtained from annual reports and financial statements of the organizations and the analysis was performed through descriptive and inferential statistics. The results were that board size and composition depends on an effective selection process for new directors, which in turn rests on a clear definition of what the duties of a directors are and a situation be avoided where one director is in more than one committee. The study also established that board (measured by the presence of either gender in the board) had a positive outcome on the financial performance of the firm. In the case of disclosure of information as one of the corporate governance principles, the research found a weak correlation with the financial performance of the regional development authorities. Further, it was established that there is a positive association between the composition of audit committee and financial performance of the Regional Development Authorities in Kenya. The study recommends that; special attention should be taken upon when dealing with the board members’ number. The board’s size should match with the organization’s size to avoid scenarios of having too small boards which will be overburdened with the firm's work which will lead to underperforming, and at the same time boards should not be too large as the inefficiency of large boards will also lead to underperforming of the board members.