Relationship Between Level of Implementation of Cma Guidelines on Corporate Governance and Profitability of Companies Listed at the Nairobi Stock Exchange.

Abstract

The objectives of this study were to establish the level of implementation of CMA guidelines on corporate governance by companies listed on the NSE and to establish the relationship between level of implementation of the corporate governance guidelines and financial performance of the listed companies. Corporate governance is the system through which corporations are directed and controlled. The main goal of a firm is shareholders wealth maximization. CMA guidelines act as a benchmark for companies to follow. The population of the research consisted of all the companies quoted at the Nairobi Stock Exchange over the period of the study from 2003 – 2006. 2003 was considered suitable because it is immediately after CMA gazetted the Corporate Governance guidelines for firms quoted on NSE while the year 2006 is the most current that has suitable data. A census of companies quoted on the NSE during the period 2003 – 2006 was carried out with exclusion of those companies suspended for whichever reason. This census study ensured that each company is given an equal opportunity of being interviewed. Questionnaires to investigate level of implementation of CMA guidelines were filled by managers. The dependent variable, company performance was measured using Return on Assets (ROA) and Market Based Values. Independent variables were measured using the appointment to the board, proportion of outside directors, accountability and audit, and Board meetings per year. Both independent and dependent variables were classified in market segments and SPSS used to analyze it. The ROA over the study period was averagely 0.554 while the MBV was 0.885 It can be concluded from this study that all the companies listed at NSE have implemented the CMA guidelines on CG. It can also be concluded that the performance of the listed companies at the NSE has been in the increase. The market value and return on asset being the indicators for the improvement. It can also be concluded that the increase in performance can be attributed to the high level of adoption of the CG guidelines, the size of the Boards, proportion of outside directors, and the number of meetings in a year. Therefore these independent variables taken for the study can be authoritatively cited as key determinants of the improved performance as all the categories reported increased performance across these variables.