Effects of corporate governance on financial performance of companies quoted at Nairobi securities exchange

Abstract

Good corporate governance system helps people tasked with decision making, accountability and responsibility within and outside a corporate body in making optimal decisions. It ensures varying interests of all stakeholders are obtained to an acceptable level. The purpose of this research was to analyze whether there is a relationship between corporate governance and financial performance of the 62 companies listed at the NSE. Data was obtained from 48 companies listed at the NSE for the period January 2009 to December 2013 using a check list to obtain data relevant to the study. The data obtained was analyzed on a multiple linear regression model using Statistical Package for Social Sciences (SPSS). The analysis included descriptive statistics, correlation coefficients, beta coefficients of the variables and the coefficient of determination. From the regression analysis it was revealed that Board Size, Board Composition, CEO duality and size of the firm to a constant zero , financial performance of listed companies would stand at 0.567 , a unit increase in board size would lead to decrease in financial performance (ROA) of listed companies by a factor of 0.017, unit increase in Board Composition would lead to increase in financial performance of listed companies by a factor of 0.172 , a unit decrease in CEO duality would lead to increase in financial performance of listed companies by a factor of 0.057 and unit increase in size would lead to increase in financial performance of listed companies by a factor of 0.109. The data analyzed showed that there was a positive relationship between corporate governance attributes and firm performance. The relationship was found to be significant at the 95% level. It can therefore be concluded that it would be beneficial for a firm to institute corporate governance practices and measures. The study recommends that public listed companies should carefully select board composition so as to strike a balance between executive and non-executive, female directors, should consider the age and the profession of the chair and other members of the board in relation to the nature of the company. The board needs to be comprised of welleducated people since they are actively involved in shaping firms strategy. Ownership concentration needs to be reduced to avoid control being in the hands of a few people as this will enhance monitoring. Employees should be encouraged to be more active in financial management aspects of the business. Finally, the study recommends that financial monitoring should be done thoroughly by the board. Companies should consider adopting regular Corporate Governance Audits and Evaluations.