The effect of corporate governance on financial performance of small and medium enterprises in Nairobi county, Kenya

Abstract

The SME sector in Kenya has undergone tremendous growth and transformation oyer the past and has come out as the most active sector in the Kenyan economy. Currently, Kenyan SMEs are responsible for about 80% of employment and contributes about 40% of the GDP. However, due to the dynamic nature of the business environment, SMEs are adopting the corporate governance practices in order to maintain a competitive edge in the market. Corporate governance is the means by which an organization is directed and controlled and held accountable. In this regard, it has been noted that well governed firms largely perform better and that good corporate governance practices is of essence to any firm‟s financial performance. The main objective of this study was to investigate the effect of corporate governance on financial performance of Small and Medium Enterprises in Nairobi County, Kenya. Specifically, the study examined existence of the various corporate governance practices in the sampled SMEs in Nairobi County such as CEO duality, size of the board, number of board sub-committees, number of subcommittee meetings and size! age of the SMEs and how they affect their financial performance. The performance of SMEs was measured using Return on Assets (ROA).The study adopted descriptive research design. The population included all the SMEs in Nairobi County operating as at 30th December 2013 and a sample from each category of business was identified and used to collect information. The study made use of primary data collected using the questionnaires. Data was analyzed using a multiple linear regression model. The study found that there is a significant strong relationship between the SME‟s financial performance and corporate governance. The number of Board meetings, number of board sub-committees‟ meetings, and the size!age of the SMEs were found to significantly affect the financial performance of SMEs in a positive direction. The CEO duality was however noted to be common in most SMEs. The study recommends that the government of Kenya be supportive to the SMEs by providing incentives to help them in implementing the corporate governance practices. SMEs are also encouraged to embrace corporate governance to the fullest to achieve better financial performance. SMEs are also recommended to consider financial monitoring to be done by the board of managers and board sub-committees. The board and managers also need to be enlightened on the importance of corporate governance.