The Relationship Between Corporate Governance and Financial Performamnce of State Owned Commercial Enterprises in Kenya

Abstract

The environment in which the state owned commercial enterprises operate is not static; it is made up of radically changing internal and external behavior patterns. The aim of this study was to establish whether there is a relationship between the corporate governance and financial performance of state owned commercial enterprises in Kenya. The study was conducted using data from 127 state owned enterprises. The sample was selected based on the percentage of the Government of Kenya (GoK) shareholding. Half (50%) of both the majority (between 51% to 99% ownership) and minority (50% and below ownership) GoK shareholdings commercial enterprises were selected, this made a sample of 42 state owned commercial enterprises. The questionnaires were administered to senior officers of the sampled 42 state owned commercial enterprises in Kenya; these are the Directors, CEOs, Managers and Chief Officers. Out of the 42 questionnaires distributed; 33 questionnaires were received back fully answered, making a response rate of 78.50%. This was an excellent response as per the case of Mugenda (2003). The corporate governance elements employed in the study were the size of BODs, their gender, their educational level, their working experience, their independence, the audit committee’s competence and the duality of the CEOs, which were all found to be directly related to the financial performance of the state owned commercial enterprises. Regression model was employed in the analysis of data to estimate the quantitative effect of corporate governance on the financial performance of the state owned commercial enterprises in Kenya. The study established a Pearson correlation value R of 0.5713 which depicts that there is a linear dependence of corporate governance elements on return on assets (ROA). R square revealed that governance attributes influenced about 76.85% of variation in return on asset. The value of adjusted R square was established to be of 77% which clearly brought out that the relationship between the ROA of the state owned commercial enterprises and corporate governance is strongly positive. Generally, the study came to a conclusion that there exists a positive relationship between corporate governance and financial performance of the state owned commercial enterprises in Kenya. This implies that a good corporate governance practices (a bigger size of BODs of at least 12 members with an inclusion of female members, ensuring the directors are well educated and have a good experience in their respective area of study, the audit committee’s independence and competence and allocation of the positions of the CEO and COB to different parties) enhances good financial performance of the enterprises. Therefore, the policy makers and the management of the enterprises need to ensure that the tenets of good corporate governance are applied to the latter so as to enable them realize a better financial performance.