A Survey of the Role of Board of Directors in the Capital Budgeting Process for Companies Quoted at the Nairobi Stock Exchange

Abstract

This study differed from the earlier ones as it sought to establish specifically the role of the board of directors in the capital budgeting process. It contributes to the body of knowledge by appraising the board structures and the influence of the board committees in the capital budgeting process and how their decisions complement existing theory. The objective of this study was to determine the role of Board of Directors in the capital budgeting process for companies quoted at the NSE. The approach that was used in this study was descriptive. The target population was made up of the 54 companies currently listed at the Nairobi Stock Exchange (NSE Handbook). A sample of forty (40) was selected representing active counters that have been continuously listed at the NSE for a period of five years from year 2005 to 2009. The instruments that were used to collect data were questionnaires; these were used to collect Primary data. Data was captured and analyzed using Statistical Package for the Social Sciences (SPSS) version 17. The results were then used to make inferences about the roles that board of director play in the capital budgeting process and presented in a tabular form. The study concludes that majority of the listed companies have special board committees that is highly involved in deciding on capital investments. The study also concludes that financial analysis and project selection are the most critical stages in capital budgeting process. It was also clear from the study that the listed companies consider derived benefits when evaluating social projects, social responsibility and moral issues when evaluating social projects. However the NSE listed companies do not consider subjectiveness, not seen as capital and legal requirements when evaluating social projects. From the findings, it is concluded that investment is never accepted on non-financial ground, the NSE listed companies use safety of employees or the public as non-financial criteria in major investment decisions and the companies used necessity of maintaining existing program or product lines. With regard to the highest risk stage in capital budgeting, financial analysis and project selection was found to be the highest risk stage in capital budgeting stage, project definition and cash flow estimation was the highest risk stage in capital budgeting stage. In the choice of appraisal methods, majority of the companies moderately prefer Net Present Value (NPV), Present Value Payback (PVP) and Accounting Payback (AP). Others moderately preferred internal rate of Return (IRR), and Profitability Index (PI), while some of the companies slightly prefer Return on Investment (ROI) as the most important capital budgeting method.