EFFECT OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS LISTED IN THE NAIROBI SECURITIES EXCHANGE (NSE)

Abstract

This study investigates the effect of the corporate governance on firm performance of commercial banks listed in the Nairobi Securities Exchange (NSE) and unlike a number of researches conducted in the past, this research will use sophiscated statistical and some econometric tools to explore the relationships in more detail with the objective of getting a clearer indication of the relationships between the variables under sturdy in the Kenyan context. This study primarily employs four corporate governance mechanisms: Board size, Gender Diversity, Independent directors/board composition and Chief Executive Officer (CEO) Duality to establish effect of corporate governance and firm performance. This research has adopted a panel data analysis approach comprising of 11 financial institutions (banks) Listed at the NSE with four variables of data for each bank spanning a period of 8 years (2006-2013).The researcher used descriptive statistics and panel multiple regression analysis. The collected data was coded and analyzed using the descriptive statistics, to describe each variable under study, by the use of STATA.The result obtained from the correlation result showed that the board size was found to be positively associated with ROA and ROE of banks listed in the NSE. A unit change on Board size would positively enhance ROA and ROE. On board independence, results showed that higher ratio of independent directors were positively related with ROA and ROE. The result also revealed that, at a 95% significant level, there was a positive relationship between the proportion of female board members and ROA and ROE. The findings are in line with the research by Konrad et al., (2008) that Female directors are more likely to ask questions rather than nodding through decisions they are also more inclined to make decisions by taking the interests of multiple stakeholders into account. Finally on CEO duality, the result showed a positive relationship between firm performance and non-CEO duality. The study recommends that stakeholders in banks listed companies should take in to account the corporate board structure variables i.e. gender, board size, board independence and board committee when electing board of directors. The study recommends that corporate board structure should be based on skills, experience and professional qualifications to steer managerial functions. The study also recommends that policy makers should set an index on corporate governance to act as a base to all banks listed at the NSE so that the efficiency of governance committees can be enhanced. Based on the study research findings, the study recommends that; Special attention should be taken upon when dealing with the number of board members. The size of the board should match with the size of the firm