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

Abstract

As the business landscape continues to evolve, the significance of corporate governance in driving financial success is expected to become even more evident. Corporate governance serves as a vital factor in determining financial performance, as it cultivates a culture of transparency, accountability, and ethical management. Effective governance practices boost investor confidence, enhance decision-making, and improve operational efficiency. Financial performance is a key indicator of a company's overall well-being and success, encompassing various metrics and ratios that offer crucial insights into an organization’s ability to generate profits and create value for its stakeholders. This study explored the effect of corporate governance on the financial performance of firms listed at the NSE, drawing on stakeholder theory, stewardship theory, and agency theory. The research employed a descriptive design, focusing on a population of 63 NSE-listed firms from 2019 to 2023. Regression analysis was used to present both inferential and descriptive results. The findings revealed that board diversity has a positive and significant effect on the financial performance of firms listed on the NSE. In contrast, board independence, board size, and executive compensation were found to negatively and significantly impact financial performance. Firm size was observed to have a positive yet insignificant effect. Based on these findings, the study recommends that NSE-listed firms should strive for a diverse and inclusive board to leverage the varied expertise and experiences of its members. Additionally, firms should limit the number of independent directors and maintain a smaller board size for optimal effectiveness. Lastly, the study suggests that firms should not place excessive emphasis on firm size, as it does not significantly influence financial performance