The Effect Of Board Diversity On The Financial Performance Of Trading And Manufacturing Companies Listed In The Nairobi Securities Exchange

Abstract

Scholars and researchers have in over the past two decades tried to determine the relationship between company board of directors’ attributes and the financial performance of firms listed in the securities exchange all over the world. Several studies show that companies with more diversified boards in terms of age, gender, education, board size, ethnic or racial orientation of the board members among other diversity variables have greater financial performance measured using the Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q. The objective of this study was to establish the effects of board diversity variables viz board average age, gender, education level, nationality, board independence and size of the firms and the financial performance of companies Listed in the Nairobi Securities Exchange. Financial performance was measured in terms of Return on Assets (ROA). Age attribute was measured by determining the log of the average age of the board members, gender was measured by the proportion of female to the total number of the board members, education levels of the board members were obtained by administering questionnaires designed to capture levels of education as either ‘O’-level / KCSE, diploma, graduate level, masters / post graduate, PhD and above. Dummy variables were used to measure the education attribute. Nationality was measured by the proportion of the non-Kenyan to the total number of the board members. Board independence was measured by the proportion of outside directors to the total number of the board members while company size was measured by the log of total assets. The findings show a strong positive relationship between board nationality and the financial performance. Also, board average age, gender, education, board independence and size of the firm had a weak positive relationship to the financial performance of the Trading and Manufacturing companies Listed in the Nairobi Securities Exchange.