Effect Of Corporate Governance On Financial Performance In Manufacturing And Allied Firms In Kenya

Abstract

The study investigated the effect of corporate governance on financial performance of manufacturing and allied firms in Kenya. The objective of the study was to establish the relationship between the corporate governance characteristics: board composition, board remuneration, and director’s equity holdings on financial performance measured using ROA and ROE. A cross-sectional survey design was used in the study. Of the target population of 62 listed companies at the NSE, the 9 companies under the manufacturing and allied segment were selected for the study. Secondary data was collected from statements of financial performance such as balance sheets and income statements of individual companies. All the data collected was analyzed by first entering the raw data into an Excel spreadsheet and uploading it to the Statistical Packages for Social Sciences (SPSS Version 21) software for descriptive and inferential statistical measures. Pooled cross-sectional time-series data analysis was used to establish the relationship between corporate governance and financial performance and descriptive narrative was used to explain and interpret the findings. Descriptive statistics showed that the highest proportion of independent directors was 76% of the total number of directors. The highest annual average of board remuneration was KES 12,438,100, while the lowest was KES 2,795,200. There was a wide variation in the amount of compensation awarded to directors. There were very low levels of director’s equity holding, with the exception of one company, where the Government held a shareholding of 20%. The findings show that there was a positive and significant relationship between board composition (p=0.002), board remuneration (p=0.004), and director’s equity holding (p=0.031) and ROA. There was no significant relationship between corporate governance variables and ROE. Firm size was positively and significantly associated with both ROE and ROA. Corporate governance variables have positive impact on performance of manufacturing and allied firms. The study recommends that manufacturing and allied companies listed at the NSE can pursue sound corporate governance frameworks as a way of improving financial performance.