Corporate governance compliance and financial performance of listed companies in Kenya

Abstract

Corporate governance has been the subject of discussion globally in recent years. Various events arising from corporate fraud in the last ten years have resulted in the heightened interest in the subject. In Kenya, the corporate sector has also faced corporate governance challenges and investors have lost funds to the tune of more than Ksh. 200 Billion in relation to poor corporate governance. The Capital Markets Authority (CMA) therefore formulated a Code of Corporate Governance for Issuers of Public Securities, 2015 (the CMA Code) to promote and regulate governance structures and protection of investors. This study investigated the level of compliance of companies listed on the Nairobi Securities Exchange with the CMA Code. In addition, the study also investigated the effect of compliance on financial performance, which was measured through the Return on Equity ratio. The study used both primary and secondary data to investigate the research questions and the study drew conclusions from the two data sets independently. Primary data was collected using survey questionnaires issued to respondents at management level at the various companies. Secondary data was collected in relation to the level of compliance with the CMA Code and Return on Equity from the individual annual reports form the years 2017 to 2019. A single regression model was fitted to the data sets independently in order to test the effect of the independent variables on the dependent variable. The study found that there was a significant improvement in the implementation of the CMA Code from 54% in 2017 to 71% in 2019. Based on the results from the secondary data, the corporate governance metrics had no significant impact on financial performance while primary data showed that respondents were of the view that transparency and disclosure had a significant impact on financial performance.