Effect of Corporate Governance Practices on the Financial Performance of Manufacturing Firms Listed at Nairobi Securities Exchange

Abstract

The evolution of governance in the corporate sector has yielded a structured system of rules, practices, and laws, aligning organizational strategies with prevailing regulations. The role of efficient corporate governance cannot be overemphasized in maintaining balance and transparency. It is critical in productivity, highlighting its pivotal role in organizational success. The stability of an organization is intrinsically linked to the strength of its corporate governance. Thus, current research seeks to determine the corporate governance policies on the financial performance of the 10 listed manufacturing firms. The exhaustive examination of archival data over an 8-year span, ranging from 2015 to 2022 to reach conclusive findings. The study was guided by the theories including stewardship, stakeholder and agency theories. The determinants of corporate governance identified included board independence, diversity, compensation, size and finally firm size. The study utilized secondary data obtained from the financial records of the 10 listed manufacturing firms at NSE. Descriptive research design was further employed in the study. The data analysis was analyzed using SPSS and STATA software and the results presented and interpreted. The results indicated that board independence has a positive correlation with financial performance. In addition, board independence posted positive interaction with the financial performance of the listed manufacturing firms. Executive compensation had a positive correlation and a positive linear relationship with the financial performance of the listed manufacturing firms. Board diversity has a positive correlation with financial performance. It also had a linear relationship with the financial performance of the listed manufacturing firms. Board size has a negative correlation with financial performance. It also had a linear relationship with the financial performance of the listed manufacturing firms. Firm size has a positive correlation and a linear relationship with the financial performance of the listed manufacturing firms. In conclusion, the study recommends that the manufacturing firms should advance on diversity within the board, as this is pivotal for transformation. In addition, the firms should proactively identify and recruit candidates from a wide array of backgrounds, experiences, and areas of expertise. The firms should further review and enhance the Structure of Executive Compensation to enhance performance. The firms should also strategically harness the independence of the board as well as calibrate the board size for optimal impact. Finally, the manufacturing firms should leverage on the magnitude of firm size, which is a critical component for performance.