The Effect of Board Characteristics on the Financial Performance of Firms Listed in the Manufacturing and Allied Sector of the Nairobi Securities Exchange

Abstract

Corporate boards oversee executive decision making and proffer tactical and strategic advantages to firms. The relationship between board characteristics and firm financial performance has been widely studied with the aim of establishing the board characteristics that significantly affect financial performance. This study investigated the effect of board characteristics variables of board size, board independence, board diversity, board compensation, CEO duality and audit committees on financial performance, as measured by return on assets, return on equity and Tobin’s Q. The study is based on the manufacturing and allied sector of the Nairobi Stock Exchange for the period 2009 to 2012. Secondary data was collected from the publicly available annual reports and financial statements of the companies, with further corporate governance and market performance data gathered from Capital Markets Authority library and Nairobi Stock Exchange website respectively. Regression analysis, correlation analysis and descriptive statistics were used to analyze the data collected using statistical package for social sciences (SPSS). The study found that board independence has a significant negative correlation with financial performance as measured by Return of Equity, Return on Assets and Tobin’s Q. Board diversity was also found to have a significant positive effect on financial performance as measured by Tobin’s Q. However, Board size, board compensation, CEO duality and Audit committee were found not to have a significant relationship with financial performance.