Relationship between board composition and financial performance of companies listed at the Nairobi securities exchange

Abstract

The purpose of this study is to establish the relationship between board composition and financial performance of quoted companies at the Nairobi Securities exchange. In specific terms the study reviewed whether board size, independent directors and board committees, age of the directors, Gender mix, level of education and founder directors have any effect or influence on financial performance of companies. This study employed co relational survey design. The population of this research consisted of all the listed companies in the Nairobi Security Exchange. The study used secondary data. Financial performance (ROA) was collected for a period of three years (2010 to 2012). Data was analyzed using Statistical Package for Social Sciences (SPSS) and results were presented in frequency tables and figures. The study results suggest that the size of the board plays an important role in influencing the financial performance of quoted companies. Regression results indicated that there was a positive relationship between board size and financial performance and that board size has a positive impact on operational efficiency. The findings indicate that there was a positive and significant relationship between number of independent directors and financial performance of listed firms. Overall, the study found a strong and positive relationship between board composition and firm financial performance of quoted firms at the Nairobi Securities Exchange. The data was then analyzed in terms of descriptive statistics like frequencies, means and percentages. The study recommends that the management should ensure that corporate governance practices are adhered to strictly as they are good determinants of financial performance. It is also recommended that the firm should have non-executive directors who act as “professional referees” to ensure that competition among insiders stimulates actions consistent with shareholder value maximization. On the same note, the study recommends that non-executive directors/ foreign ownership be handled with care for their participation is significant. Non-executive directors/ foreign ownership should be designed to enhance the ability of the firm to protect itself against threats from the environment and align the firm's resources for greater advantage.