Relationship between board committees and financial performance of companies listed at the Nairobi stock exchange

Abstract

This study sought to analyze board committees In terms of their size, composition, structure and diversity (gender and ethnic) and the effect this has on firm financial performance. The study hypothesized that there is a positive relationship between board committees' characteristics and financial performance of firms listed at the NSE. In achieving the above objective, the study applied secondary data obtained from the audited financial statements of the listed firms for the period 2002-2006. Data were obtained from the Research Department at the Capital Markets Authority. A multiple regression model was applied in determining the nature of relationship between firm performance and characteristics of board committees. The study has established that non executive directors and presence of several board committees has an effect on firm-level financial performance. This implies that properly constituted board committees with the right mix of non executive directors tend to contribute more to performance than boards with a predominance of inside directors. Ethnic diversity of board committees also enhances firm profitability and market fundamentals. Membership on board committees provides a more accurate picture of each director's role on the board which should lead to a more accurate test of the relationship between board composition and board effectiveness. The study recommends that further research should be conducted with the view of performing inter-sectoral comparison across various market segments. Further research may also incorporate other fundamental characteristics of board committee's members such as age diversity and skills diversity within the research model.