The effect of board size on share performance of quoted companies at the Nairobi stock exchange

Abstract

The issue of whether directors should be employees of/or affiliated with the firm (inside directors) or outsiders has been well researched, yet no clear conclusion has been reached. On the one hand, inside directors are more familiar with the firm's activities and they can act as monitors to top management if they perceive the opportunity to advance into positions held by incompetent executives. Outside directors may act as "professional referees" to ensure that competition among insiders stimulates actions consistent with shareholders value maximization. It has also been argued that boards of directors are more independent as the proportion of their outside directors increases. There is a view that large boards are better for corporate governance because they have a range of expertise to help make better decisions and harder for a powerful CEO to dominate. However, recent thinking has leaned towards smaller boards. Considering the important role the directors play in creating value for the shareholders of corporations and the associated agency problem, this research sought to determine the relationship between Board size and share performance; if so, what is the nature of the relationship. An empirical study of the firms listed on NSE was conducted. This study was facilitated by the use of secondary data. The board sizes of the quoted firms and the share prices for the years 2004 and 2008 will be obtained from the NSE database and Company registry. The data collected was analyzed using regression and correlation analysis. The results show a strong positive relationship between board size and share returns with a P value of 0.78 indicating that the board of directors actually plays an important role in the governance of corporations; it is generally acknowledged that the legal and contractual settings as well as the structure and activities of the board of directors have an impact on the share performance