Effect of Corporate Governance on the Performance of an Organization
CHAPTER ONE
Objectives of the study
To determine the effect of corporate governance on the performance of firms
CHAPTER TWO
LITERATURE REVIEW
Introduction
The theories that help in the understanding of the theory of corporate governance as a concept, corporate governance structures and the empirical literature on corporate governance effect on financial health are discussed in this chapter. The importance of this section is to identify the potential knowledge gaps on the studies already conducted on corporate governance structures and financial performance as the main variables.
Theoretical Foundation
Literature review basically identifies and examines the work done by other researchers and scholars concerning the impact of corporate governance on the banks’ financial health. This review provided a detailed knowledge of what has been done and provided a platform upon which the findings were interpreted and also to overcome the previous studies’ limitations. The following section described and discussed the different theories such as Stakeholder and Agency Theory.
Agency Theory
This philosophy argues that a relationship subsists between the principals i.e. the company’s shareholders and the agents who act as the managers and executives of the company. Meckling’s and Jensen’s proposition on agency theory mark by the whole of a red letter that the veto between ownership and ministry may show once and for all in division problems being talented in many latter organizations (Jensen &Meckling, 1976).
The dominant, who gives the press some decision-making restraint, incurs salt mine costs accruing from the departure from the norm of shareholders’ interests with those of attend managers. Meckling and Jensen and represent agency costs as the finale of bonding charge, residual ceasing to exist and monitoring costs. Despite monitoring and bonding costs inquired, residual loss still occurred as a result of managers and shareholders interest not being fully aligned. Alignment of interests occurs when there is harmony between objectives of agents acting within an organization and those of the organization as a whole (Jensen & Meckling, 1976).
Incentives such as stock options, bonuses, and profit related pay can be used as a method of aligning interest of the agent with those of the principal since these are directly related to how well the result of management decision serves the shareholder decisions. Agency theory advocates for self-interest by the managers and employees that. This calls for the agents to conduct their duties while keeping the interests of the principals in mind. The agents are governed by rules made by the principals, with the maximizing of shareholders value as the main objective. Hence in this theory a more individualistic view is applied (Nambiro, 2007).
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter contains facts about the research, population and sample that was selected for the study. Data collection, data analysis and presentation criteria that was employed in the study are highlighted in this chapter.
Research Design
Khumar (2005) described research design as that method that is procedurally acquired by the researcher and that which enables the researcher to be able to answers questions accurately, validly, objectively, and economically. According to Wanyama and Olweny (2013), a research design aims at improving the ability of the research in conceptualizing an operational plan in order to be able to embark on the various techniques available and required tasks for the completion of the study while at the same time ensuring that that the procedures used are sufficient enough to acquire valid, objective and precise responses to the research questions.
Descriptive cross sectional research design was applied to solve this research problem. A descriptive study aims at finding out the what, where and how of a phenomenon (Cooper & Schindler, 2003). The appropriateness of this design allowed researcher to utilize both quantitative and qualitative data so as to establish the impact of corporate governance on the listed firms’ performance at NSE.
Descriptive cross sectional design was utilized in gathering information, summarizing, presentation and interpretation it in order to obtain more clarification on issues. The researcher chose descriptive survey research design because his interest was primarily on the current state of affairs in the field rather than manipulating variables.Cross-sectional study methods are done once and they represent summary at a given timeframe (Cooper and Schindler, 2008).
CHAPTER FOUR
DATA ANALYIS, FINDINGS AND DISCUSSIONS
Introduction
The chapter presents the analysis, findings and discusions on the data collected in relation to the effect of corporate governance on the performance of firms listed on the Nairobi Securities Exchange. The primary data was acquired from the senior level managers and board of directors of all listed firms by use of using semi structured questionaires.The data was analysed using descriptive methods such as frequencies, standard deviations, means and percentages and then presented using tables and figures. SPSS was used to run the regression analysis to ascertain the impact of corporate governance on organisational performance.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
The study’s summary, conclusion and recommendations are presented in this chapter. The study’s objective was to establish the impact of corporate govenance on the perfomance of firms at the NSE listing. The chapter also presents recommendations for practice and policy as well as suggestions for future studies.
Summary of Findings
The study’s objective was to explore the effect of corporate governance on the performance of firms listed in the NSE . In order to establish the effect of corporate governance on the performance, regression analysis using SPSS. The components of corporate governance that were considered are: board diversity, board size, number of committees and number of meetings and board independence.
The study established that smaller boards improve the performance of the firm although larger size boards are more capable in the provision of resources.. The study further established that boards of firms listed at the NSE are diverse in terms of gender and that the aappointment of board members considers a mix of skills required in the stewardship of the organization such as education and industry experience. The study also established that the boards of firms listed at the NSE are independent since there were more non- executive than the Executive and therefore adds value to the firms since they have attachment to the firms. Further, the study found out that the existence of independent committees and the number of board meetings held annually enhances the organization’s financial performance .
Regression findings revealed a stong association (R= 0.723) exists between corporate governance and financial performance with corporate governance accounting for 52.3% of the total variance in firms performance. Further, the study established that corporate governance components.
Conclusion
It can be concluded from the findings that a strong association exists between corporate govenance and the firm performance of the firms at the NSE listing. Corporate governance accounts for 52.3% of firm performance of the companies at the NSE listing. It also concludes that corporate governance components (board size, board independence, board diversity, number of committees, number of meetings) have positive and strong impact on the performance of listed firms.
Recommendations
The study found out that board diversity, number of committees and number of meetings affects firm performance positively. This study therefore recommends that the shareholders should promote board diversity, promote independence of audit committees and increase the frequency of the board meetings as this translate to improved firm performance. The study also established that number of non-executive (independent) directors and the affects firm performance of listed companies positively. The study therefore recommends that the shareholders of listed firms should keep the number of independent directors higher than the insiders as this allow them to make appropriate and non-partisan decisions.
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