The Relationship Between Board Activity and Firm Performance: a Study of Firms Quoted on the Nairobi Stock Exchange

Abstract

Corporate governance, the manner in which companies are controlled and evaluated continues to attract intense interest in emerging and developing economies as the link between good corporate governance and national economic development becomes clearer. Furthermore, investors have become more discerning and insist on high standards of corporate governance in companies in which they invest and shareholders are more demanding that they receive maximum value for their investment. The monitoring role of the board of directors has long been recognized as a crucial component of corporate governance. In practice however, the board of directors is often criticized as a toothless bulldog characterized by dysfunctional behaviour and largely ineffective in overseeing top management. This study, using secondary data from the quoted companies in the Nairobi Stock Exchange established that board activity as measured by the frequency of board meetings is influenced by factors such as board size, the number/ percentage of shares held by offices and directors (inside ownership); the number of executive and independent directors serving in the board; the number/ percentage of total shares held by unaffiliated block holders and the number of standing board committees in a manner that is consistent with the contracting and agency theory. The study using regression analysis further finds that board activity is positively related to the financial performance of fmns suggesting that board activity is a value relevant attribute in corporate governance in that board activity increases when a firm's financial performance is poor and there is improvement following intense board activity. These results suggest that board meetings are an important dimension in board operations and particularly in the boards' ability to effectively monitor management and improve firm's performance thereby benefiting shareholders.