Effect Of Firm Performance On Corporate Governance Practices Of Firms Listed At Nairobi Securities Exchange

Abstract

With the heightened sensitivity of shareholders towards corporate governance practices, the study sought to establish the effect of firm performance (ROA) on corporate governance practices of firms listed at Nairobi Securities Exchange. The corporate governance practices studied were board size, number of outside directors, frequency of board meetings and CEO replacement. The study adopted the descriptive study design and the sample consisted of all the firms listed at Nairobi Securities Exchange for a period of 7 years from 2007 to 2013 which ranged between 42 and 61 firms. After calculating firm performance (ROA), the listed firms were classified into declining, improving or mixed firms based on their performance for two consecutive years and corporate governance practices were observed a year later for all the declining and improving firms. Data was analyzed using descriptive statistics (frequencies, means and percentages) as well as inferential statistics (Pearson correlation and simple regression). Pearson correlation was useful in depicting the correlation between the dependent and independent variables whereas simple regression was useful in ascertaining the sensitivity of corporate governance practices to firm performance as measure by ROA. Findings from the study indicated that for declining firms, firm performance had a significant positive effect on the board size as well as the number of outside directors but no significant effect on the frequency of board meetings and on CEO replacement. For improving firms, the findings indicated that firm performance had no significant effect on all the four corporate governance practices. The study recommended that declining firms need to evaluate their corporate governance practices and adopt sound corporate governance practices like improving the number of outside board members who may bring in a wealth of industry knowledge that may assist in successful turnarounds and avoid failure