The Relationship Between Corporate Board Structure and Financial Performance of Companies Listed at Nairobi Securities Exchange

Abstract

Boards of directors have been largely criticized for the decline in shareholders’ wealth and corporate failure. Thus, corporate governance affects firms’ financial performance as companies with better corporate governance guarantee the payback to the shareholder and limit the risk of the investment. This study examined the relationship between corporate board structure and the financial performance of companies listed at the NSE. It investigated the composition of boards of directors in the listed firms and analyses whether board structure has an impact on financial performance, as measured by return on assets (ROA). The study took a causal research design approach and focused on the firms listed between 2009 and 2013. The study used secondary source data collected from the firm’s financial reports filed at the NSE and CMA library. It specifically looked at four board characteristics (board independence, board size, gender of the board of directors and number of board committees) which were set as the independent variables. The Ordinary Least Squares (OLS) regression was used to estimate the relationship between corporate performance measures and the independent variables. Findings from the study show that there is strong positive association between board size and corporate financial performance. Evidence also exists that there is a positive association between board independence and corporate financial performance. Good positive association was observed between number of the board committee and gender of the board members, and firm financial performance. The study suggests that large board size should be encouraged and the composition of outside directors as members of the board should be sustained and improved upon to enhance corporate financial performance.