The relationship between corporate governance principles and financial performance of investment banks in the Nairobi securities exchange

Abstract

Corporate governance is an area that has grown rapidly in the recent years as an emerging issue due to the global corporate scandals and collapse of big companies. The corporate governance principles hence adopted by any corporate entity affects the firm’s ability to respond to the content and context in which it operates and its overall performance. The purpose of this study was to assess the relationship between corporate governance principles and financial performance of investment banks in the Nairobi Securities Exchange. The objectives of the study were to investigate the relationship between corporate governance principle aspects (board composition, CEO duality, board size principles) and ROA of investment banks in the Nairobi Securities Exchange. The study used a descriptive research design where primary data was collected from the seven investment banks in the Nairobi Securities Exchange in Nairobi County using a questionnaire issued to the managers while secondary data was in the form of published financial statements. Statistical Packages for Social Sciences (SPSS) was used by the researcher to facilitate the analysis and interpretation of data and the results obtained was presented using tables, frequencies, graphs and charts for easy interpretation. The correlation results indicated that the corporate governance principles (CEO duality and Board composition) had a strong negative correlation on financial performance in investment banks while board size had a weak negative correlation on financial performance in investment banks. The regression analysis showed that CEO duality, board composition, board size and their combined contribution had a significant effect on the financial performance in investment banks. The study recommends that investment banks operations were to be governed through a clear management structure that enhances security of shareholder wealth and sustainability of the organisation. This is to be achieved by continually reviewing regulations regarding management governance structures so as to assure transparency in limiting CEO duality thus assuring legitimacy in the firm performance. The board members in investment banks should entail a pool of diverse skills and expertise to enhance innovative ways in steering business performance. This could be enhanced through independent recruitments from a pool of experts and the pre-allocation of equitable balance in the boards and the board member number should be maintained on an optimal basis of five or less. The study purpose thus requires institutions to invest in the optimal operationalization of the corporate governance focused in this study.