The relationship between board size and board composition on firm performance: a study of quoted companies at the Nairobi stock exchange

Abstract

There is no gainsaying of the fact that corporate governance structure of a firm has critical impact on the responsive ability of a firm to external factors that impinge on performance. Well governed firms have been noted to have higher firm performance. Though corporate governance is multi-dimensional, this study examined the relationship between board size and board composition on performance measured by Tobin Q and ROA of non-financial listed firms on the Nairobi Stock Exchange. Annual data covering 2000-2002 was used. The findings suggest that the size of the board of directors is an independent corporate governance mechanism. This implies that any relationship between board size and firm valuation is indeed casual. However in contrast to previous studies, there was no significant relationship between board size and firm valuation. On average, firms choose their number of board members just optimally. The mean board size was found to be 7.18 and the maximum was fifteen with a deviation of2.85. It was also evident from the sample that most firms in Kenya adopt the two-tier board structure where the positions of board chairman and CEO are occupied by different personalities thereby reducing the agency cost. The firms are of similar sizes indicated by their asset base, fixed assets forms a major component of their total assets and that most of the firms depend on debt financing as compared to equity financing.