The Relationship Between Corporate Governance and Financial Performance of Parastatals in Kenya

Abstract

Recent and continuous global events involving major corporate and business failures continue to reverberate the importance of good corporate governance as a catch phrase necessary for ensuring the financial health and viability of business entities so that the interests of all stakeholders are protected and to prevent the unfair dominance of the interests of any stakeholder over those of the others. Studies on Corporate governance have mainly focused on private firms. Inefficiency, financial impropriety and mismanagement have characterized most public sector financial management. Therefore, corporate governance needs to be emphasized as a means of revitalizing government’s investment and increasing profitability of parastatals. This study sought to establish the relationship between corporate governance and financial performance of parastatals in Kenya. The financial performance parameter used for the study was return on asset while four attributes of corporate governance practice were used, namely, board size, board structure, multiple directorship and audit committee. The study used descriptive research design. The population was 127 parastatals and a sample of 30 was chosen for the study. Data were obtained from 27 of the 30 selected parastatals and analyzed using descriptive statistics and multiple regression analysis between April 2012 and July 31, 2012. In general, the study found that there exists a positive relationship between corporate governance and return on asset. This implies that good corporate governance practices enhance financial performance of parastatals. Therefore, policy makers and management of parastatals must ensure that tenets of good corporate governance should be applied to the latter to enhance performance.