The Effect of Board Characteristics on the Performance of Firms Listed on the Nairobi Securities Exchange

Abstract

The study of BOD characteristics is a subset of the study of corporate governance. Poor corporate governance practices have been blamed for the devaluation of the shareholders’ wealth. They have been blamed for the failure of multinationals. This study investigated the effect of BOD characteristics on the financial performance of the 64 companies that are listed in the Nairobi Securities Exchange. The study would have considered all the companies listed but due to the difficulty in calculating leverage for companies listed in the financial sector, only 42 firms were included in the study. Even though there are many BOD characteristics, only four were considered. These are financial literacy of the BOD members, the size of the board in terms of number of directors, the number of BOD meetings per year and the independence of the board which was assessed by calculating the ratio of independent directors against executive directors. The research design approach used was descriptive research design approach and focused on the firms listed between 2010 and 2014. Firms listed in the financial segment of the NSE were not included in the study due to the difficulty in calculating their leverage ratio. This study used secondary data that was sourced from the firms’ financial statements filed at the NSE and CMA library. The characteristics of the BOD were logged in the model as the independent variables. Financial performance was captured in the model as the dependent variable. Control variables were leverage and firm size. Regression was used to estimate the relationship amongst the variable. This study found that number of board meetings, board size and financial literacy to be statistically significant in determining firm performance while BOD independence was found not to be of statistical significance. This was at 5% level of significance. This study recommends that, further research is carried out in this area of corporate governance. Further research may look at more characteristics of the BOD and may also use other scores to measure the performance of a firm other than ROA.