Effect of Corporate Governance on Financial Performance of Companies Listed at Nairobi Securities Exchange, Kenya

Abstract

The main objective of this study was to establish the effect of corporate governance on financial performance of companies listed at Nairobi Securities Exchange. Specifically, the study examined the composition of board members, shareholders, board size and CEO (Chief Executive Officer) duality has an effect on financial performance of companies listed at the Nairobi Securities Exchange. The study population consisted of all the sixty-six companies that are listed at Nairobi Securities Exchange as at December 2016. The sample population was thirty-five companies listed at NSE. From the multivariate regression analysis, the study established that corporate governance practices such as board composition negatively and significantly affects the financial performance while board size and CEO duality has a positive effect on the financial performance while shareholding has a positive and insignificant effect financial performance of companies listed at the Nairobi Securities Exchange. The study established the existence of significant relationship between corporate governance and financial performance of companies listed at the Nairobi Securities Exchange. The study established that shareholding (ownership concentration) has insignificant effect on financial performance of companies. The study also established that CEO duality and board size positively influences the performance of companies. The study further established that board composition has a negative influence on the financial performance of companies. The study recommends the companies to ensure there is a good balance between the non-executive members and executive members in their boards to ensure the level of their autonomy is high. Further, the study recommends that the chief executive officers especially in a case where the owner doubles up as a chairperson and as a CEO to continue serving in various roles in a company. The study further recommends companies to encourage large shareholders to invest more as they have tendency for monitoring, controlling and ratifying roles in the company. This can improve the performance of the company especially when some of the shareholders are managers.

Key Words: Board Composition, Ownership Concentration, Board Size, CEO Duality, Financial Performance