Corporate Governance Structures and Performance in Firms Quoted in the Nairobi Stock Exchange

Abstract

The aim of this research was to see if firms listed on the Nairobi Stock Exchange (NSE) change their corporate governance structures when experiencing performance declines. Several components of corporate governance including Chief Executive Officer (CEO) compensation, board composition, CEO and insider equity holdings, and frequency of board meetings are studied with reference to the financial performance of firms. The study followed a cross-sectional survey design that sought to identify differences in governance structures between companies facing a decline in value and those with appreciating values, and those with stable values over the calendar years 2000, 2001, 2002, 2003, 2004 and 2005. The study used the four governance structures favoured by companies in sustained financial crises. This study targeted all 47 companies quoted on the NSE for the period of five years from the beginning of 2000 through 2005. The Tobin's Qs (or Book-to-Market ratios), for all listed companies were computed at the end of the calendar years 2000, 2001, 2002, 2003, 2004 and 2005. The Tobin's Q ratios served as the basis of examining the relationship between firms' performance and governance structures. The findings established that there are positive relationships between listed firms' performance and frequency of board meetings, the ratio of outside directors to total directors, percentage of insider share ownership, and executive compensation. The study concluded that the way forward in examining corporate governance structures for Kenyan firms, perhaps, might be increasing the focus on shareholder interest and concerns, and identification of some widely accepted guiding principles, rather than trying to find some specific structures which are universally applicable, for effective corporate governance.