EFFECTS OF CORPORATE GOVERNANCE PRACTICES ON
THE PROFITABILITY OF COMMERCIAL FIRMS LISTED ON
THE NAIROBI SECURITIES EXCHANGE, KENYA
BY
KAREN IBALE
UNITED STATES INTERNATIONAL UNIVERSITY - AFRICA
SUMMER 2020
EFFECTS OF CORPORATE GOVERNANCE PRACTICES ON
THE PROFITABILITY OF COMMERCIAL FIRMS LISTED ON
THE NAIROBI SECURITIES EXCHANGE, KENYA
BY
KAREN IBALE
UNITED STATES INTERNATIONAL UNIVERSITY - AFRICA
SUMMER 2020
EFFECTS OF CORPORATE GOVERNANCE PRACTICES ON
THE PROFITABILITY OF COMMERCIAL FIRMS LISTED ON
THE NAIROBI SECURITIES EXCHANGE, KENYA
BY
KAREN IBALE
A Project Report Submitted to the Chandaria School of Business in
Partial Fulfilment of the Requirements for the Degree of Masters in
Business Administration (MBA)
UNITED STATES INTERNATIONAL UNIVERSITY - AFRICA
SUMMER 2020
ii
STUDENT’S DECLARATION
I, the undersigned, declare that this is my original work and has not been submitted to any other
college, institution or university other than the United States International University - Africa for
academic credit.
Signed
Karen Ibale (ID. No: 631622)
: Date: 07.10.2020
This project has been presented for examination with my approval as the appointed supervisor.
Signed: __________________________ Date: ___________________________ Dr. George Achoki
Signed: __________________________ Date: ___________________________ Dean, Chandaria School of Business
____________
iii
COPYRIGHT
This work is the product of the author; hence, no part of this paper shall be reproduced or
transmitted electronically or mechanically, including photocopying, reprinting or redesigning,
without the prior permission of the author.
© 2020 by Karen Ibale
iv
ABSTRACT
The purpose of the study was to investigate the effects of corporate governance practices on the
profitability of commercial firms listed on the Nairobi Securities Exchange (NSE), Kenya. This
study was guided by the following research questions; how do board of directors’ qualifications
affect the profitability of commercial firms listed on the NSE, how do operational and ethical
controls influence the profitability of commercial firms listed on the NSE and lastly how do risk
governance practices affect the profitability of commercial firms listed on the NSE.
The study adopted a combination of both a cross sectional survey and an explanatory type of
research design. A cross sectional research survey was adopted because it defines a specific
problem for a defined period of time while an explanatory type of research was employed because
it identifies the extent and nature of cause and effect relationships. A population consisting of 11
commercial firms listed on the Nairobi Securities Exchange was studied for the period 2015-2017.
The population of 11 commercial firms was also taken as the sample with the data collected using
secondary sources. The results of the study were presented using descriptive, correlation and
multiple regression analysis.
The findings established that in regards to board of directors’ qualifications and profitability, a
relatively strong and positive correlation exists at a level of r (0.641). The co-efficient of
determination between board of directors’ qualifications and profitability was presented at 41%.
The Analysis of Variance (ANOVA) revealed that the combined effect of the variables of board
of directors’ qualifications was statistically significant in explaining changes in profitability at a p
value of 0.037. In regards to operational and ethical controls and profitability, the study revealed
that a relatively strong and positive correlation exists at a level of r (0.604). The co-efficient of
determination between operational and ethical controls and profitability was found to be 36.5%.
The Analysis of Variance (ANOVA) revealed that the combined effect of the variables of
operational and ethical controls and profitability was not statistically significant in explaining
changes in profitability at a p value of 0.081. Lastly in regards to risk governance practices and
profitability, the study established that a relatively strong and positive correlation exists a level of
r (0.693). The co-efficient of determination between risk governance practices and profitability
was found to be 48%. The Analysis of Variance (ANOVA) revealed that the combined effect of
v
the variables of risk governance practices and profitability was not statistically significant in
explaining changes in profitability at a p value of 0.097.
With regards to board of directors’ qualifications and profitability, the study concluded that a
relatively strong and positive relationship exists between board of director qualifications and
profitability implying that firms’ board directors should be adequately qualified as this
phenomenon is significant to the profitability of firms. With regards to operational and ethical
controls and profitability, the study concluded that the profitability of those firms that employed
operational and ethical controls marginally improved over the three-year period 2015-2017. A
relatively strong and positive correlation was also concluded to exist between operational and
ethical controls and profitability. Lastly, with regards to risk governance practices and profitability,
the study conducted also concluded that a relatively strong and positive association exists between
risk governance practices and profitability.
The study recommended that firms should ensure that there is an appropriate number of directors
on the board with industry specific knowledge, increase the number of corporate governance
trainings, have an appropriate number of directors sitting on multiple boards and lastly have
frequent board meetings. In addition, the study recommended that these commercial firms should
invest substantially in the oversight of operational and ethical controls. Lastly, the study
recommended that the selection process of board directors sitting on risk management committees
be rigorous and transparent given the significance of the risk management function.
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ACKNOWLEDGEMENT
Firstly, I would like to thank God for his providence and that he has brought me to the end of my MBA
degree program. Secondly, I would like to thank Professor George Achoki for his time, guidance and
timely feedback throughout this research project. Thirdly, I would like to thank my family for their
love, support and encouragement throughout my entire degree journey. Lastly, I would like to
acknowledge and appreciate all USIU staff during this Covid-19 season for their dedicated service and
commitment to ensuring that I finalize my MBA degree properly and on time.
vii
DEDICATION
This research project is dedicated to my mother, Mrs. Robinah Sebugwawo Ibale for her
unconditional love, guidance and support.
viii
TABLE OF CONTENTS
STUDENT’S DECLARATION ................................................................................................... ii
COPYRIGHT ............................................................................................................................... iii
ABSTRACT .................................................................................................................................. iv
ACKNOWLEDGEMENT ........................................................................................................... vi
DEDICATION............................................................................................................................. vii
LIST OF TABLES ....................................................................................................................... xi
ABBREVIATIONS AND ACRONYMS ................................................................................... xii
CHAPTER ONE ........................................................................................................................... 1
1.0 INTRODUCTION................................................................................................................... 1
1.1 Background of the Problem .................................................................................................. 1
1.2 Statement of the Problem ...................................................................................................... 7
1.3 Purpose of the study .............................................................................................................. 8
1.4 Research Questions ............................................................................................................... 8
1.5 Significance of the Study ...................................................................................................... 8
1.6 Scope of the Study ................................................................................................................ 9
1.7 Definition of Terms............................................................................................................. 10
1.8 Chapter Summary ............................................................................................................... 11
CHAPTER TWO ........................................................................................................................ 12
2.0 LITERATURE REVIEW .................................................................................................... 12
2.1 Introduction ......................................................................................................................... 12
2.2 Board Directors’ Qualifications and Return on Assets ....................................................... 12
2.3 Operational and Ethical Controls and Return on Equity .................................................... 15
2.4 Risk Governance Practices and Net Margin ....................................................................... 20
2.5 Chapter Summary ............................................................................................................... 24
CHAPTER THREE .................................................................................................................... 25
ix
3.0 RESEARCH METHODOLOGY ........................................................................................ 25
3.1 Introduction ......................................................................................................................... 25
3.2 Research Design.................................................................................................................. 25
3.3 Population and Sampling Design ........................................................................................ 26
3.4 Data Collection Methods .................................................................................................... 27
3.5 Research Procedures ........................................................................................................... 28
3.6 Data Analysis Methods ....................................................................................................... 28
3.7 Chapter Summary ............................................................................................................... 30
CHAPTER FOUR ....................................................................................................................... 31
4.0 RESULTS AND FINDINGS ................................................................................................ 31
4.1 Introduction ......................................................................................................................... 31
4.2 Descriptive Statistics ........................................................................................................... 31
4.3 Board Directors’ Qualifications and Return on Assets ....................................................... 38
4.4 Operational and Ethical Controls and Return on Equity .................................................... 38
4.5 Risk Governance Practices and Net Margin ....................................................................... 38
4.6 Correlation .......................................................................................................................... 39
4.7 Regression ........................................................................................................................... 43
4.8 Chapter Summary ............................................................................................................... 47
CHAPTER FIVE ........................................................................................................................ 48
5.0 SUMMARY, DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS ............ 48
5.1 Introduction ......................................................................................................................... 48
5.2 Summary ............................................................................................................................. 48
5.3 Discussion ........................................................................................................................... 50
5.4 Conclusion .......................................................................................................................... 53
5.5 Recommendations ............................................................................................................... 53
x
REFERENCES ............................................................................................................................ 55
APPENDICES ............................................................................................................................. 67
APPENDIX A: National Commission for Science, Technology and Innovation (NACOSTI)
Research License ...................................................................................................................... 67
APPENDIX B: USIU Authorization Letter .............................................................................. 68
xi
LIST OF TABLES
Table 3.1: Table of Commercial firms at the Nairobi Securities Exchange ................................. 27
Table 4.2: Return on Assets (ROA) .............................................................................................. 31
Table 4. 3: Return on Equity (ROE) ............................................................................................. 32
Table 4.4: Net Margin ................................................................................................................... 33
Table 4. 5 : Board Directors with industry specific knowledge ................................................... 33
Table 4. 6 : Number of firms that carried out Corporate Governance Training ........................... 34
Table 4.7 : Directors sitting on multiple boards ........................................................................... 35
Table 4. 8 : Number of Board Meetings ....................................................................................... 35
Table 4.9 : Firms with Finance & Audit/ Audit Board Committees ............................................. 36
Table 4.10 : Number of firms that employed Ethical Controls..................................................... 37
Table 4. 11 : Number of firms with Risk Committees .................................................................. 37
Table 4. 12 : Model Summary Board of Director Qualifications and ROA ................................. 40
Table 4.13 : Correlation between ROA and Board Director Qualifications ................................. 41
Table 4.14 : Model Summary Operational and Ethical Controls and ROE .................................. 42
Table 4.15 : Correlation between ROE and Operational and Ethical Control Variables ............. 42
Table 4.16 : Correlation between ROE and Operational and Ethical Controls ............................ 42
Table 4.17 : Model Summary Risk Governance Practices and Net Margin ................................. 43
Table 4.18 : Correlation between Net Margin and Risk Governance Practices ........................... 43
Table 4.19 : ANOVA of Board Director Qualifications and ROA............................................... 44
Table 4.20 : Regression Coefficients Board Director Qualifications and ROA ........................... 44
Table 4.21 : Model Summary Operational and Ethical Controls and ROE .................................. 45
Table 4.22 : ANOVA of Operational and Ethical Controls and ROE .......................................... 45
Table 4.23 : Regression Coefficients Operational and Ethical Controls and ROE ...................... 46
Table 4.24 : ANOVA of Risk Governance Practices and Net Margin ......................................... 46
Table 4.25 : Regression Coefficients Risk Governance Practices and Net Margin ...................... 46
xii
ABBREVIATIONS AND ACRONYMS
ANOVA-Analysis of Variance
BME-Bursa Malaysia Exchange
CCG-Centre for Corporate Governance
CEO-Chief Executive Officer
CMA-Capital Markets Authority
IAS’s-International Accounting Standards
IFRS’s-International Financial Reporting Standards
MCCG- Malaysian Code on Corporate Governance
MNE-Multinational Enterprise
NACOSTI-National Commission for Science, Technology and Innovation
NSE-Nairobi Securities Exchange
ROA-Return on Assets
ROE-Return on Equity
SOX-Sarbanes-Oxley Act
UK-United Kingdom
USIU-United States International University
1
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Problem
The most widely used definition of corporate governance is one that was developed by Sir Adrian
Cadbury, the chair of the Cadbury committee that was formulated to review aspects of corporate
governance relating to financial responsibility and accountability of corporations (Ilonga, 2015).
Cadbury (1992) defined corporate governance as a system by which companies are directed and
controlled. Wells (2009) purports that the idea of corporate governance has prevailed for as long
as the discord between investors and managers has been in existence. Wells further contends that
corporate governance can be traced as far back as the 1920’s where writers and scholars
highlighted that the separation of ownership and control as well as the issue of widely dispersed
share ownership as the main topics that were highly pertinent to the management of corporations.
However, the topic of corporate governance is purported to have been reinforced with the
publication of Berle and Means’ work, The Modern Corporation and Private Property published
in 1932. The phenomenon of separation of ownership and control in a modern corporation with
management taking on the responsibility as the shareholder’s trustees and duly acting as such for
their benefit is one of the two features that was highly emphasized in this publication. Another
feature that was asserted is the corporations’ responsibility to exercise its corporate power for the
wellbeing of the public as cited by (Bratton, 2019).
The essence of corporate governance is in creating an environment that facilitates transparency in
operations and enhances disclosures for protecting interest of different stakeholders (Arora and
Bodhanwala, 2018). Corporate governance structures therefore enhance firm performance through
facilitating quality decision making. The practices of good corporate governance have therefore
become a prerequisite for any corporation to be managed effectively in the global market as well
as in the optimal utilization of scarce resources. It also ensures that corporations comply with laws
and regulations which not only benefits the corporation but society as well (Al Manaseer et al.,
2012). It is however important to understand the evolution of corporate governance globally to
determine whether a causality exists between corporate governance practices and profitability;
2
In the United States in the late 1970’s, the rise of corporate governance coincided with a high
level of government distrust at the time. The political and economic atmosphere was tense which
ultimately made it easier for corporate governance to emerge as the best answer for the country’s
woes with an emphasis on the private sector. Corporate governance was viewed as the solution to
the corporate scandals and failures that were plaguing the country, a deterrent to corporations that
were blatantly unethical and also served as a compass to those corporations that were abusing
power. In the 1980’s corporate governance was used as an economic yardstick against booming
economies such as Japan and Germany that seemed to have different systems of corporate
governance in place (Pargendler, 2014).
The United Kingdom (UK) is also a major pioneer in regards to the phenomenon of corporate
governance. The UK spearheaded the development of various committees over the years that
paved the way for the enforcement and adoption of good corporate governance practices among
listed UK companies. The most notable of these committees is the Cadbury committee of 1992
whose most pertinent resolution was the requirement for listed companies to comply with the code
of best practice (Ruparelia and Njuguna, 2016). The Greenbury committee of 1995 is also
considered groundbreaking as it was formed to establish a relationship between a directors’
performance and their remuneration. The Greenbury report also emphasized the importance of
remunerating directors adequately in order to attract and retain a certain caliber of directors who
were capable of running successful large organizations (Mohamad and Muhamad, 2011). The
OECD principles of corporate governance were developed to provide a check and balance for
publicly listed companies to ensure they were operating within the confines of the financial
reporting framework. The principles are non-binding in nature, were developed to be concise,
accessible and understandable and are also ever changing in light of certain circumstances and
information that came to light (OECD, 2015).
In Japan, the corporate governance system that most traditional Japanese companies undertook
was the family owned system where control and management of these companies rested with the
founding families of these companies. These family-controlled businesses called the Zaibatsu’s
proved successful in their operations and in their quest to build a thriving economy. However, in
the mid 1930’s the government abolished these Zaibatsu’s in an effort to emphasize the separation
of ownership and control and also in an effort to increase their tax base through imposing capital
3
taxes on the wealthy (Patrick, 2004). Zysman (1983) asserts that traditionally the Japanese
corporate governance system was credit based characterized by a substantial bank involvement
where the bank held the majority shares in the company and therefore controlled the resource
allocation decisions. The practice of companies holding shares in other publicly traded companies
was also a major feature of the traditional corporate governance system in Japan. The practice of
sharing of board directors by two or more publicly traded companies was also a common feature.
In the emerging economy of Malaysia, the Malaysian Code on Corporate Governance (MCCG)
was introduced in the year 2000 as a basis for improving corporate governance reforms within the
country, having produced positive influences for the corporate governance practices of companies
within the region. These practices recognize that there are aspects of corporate governance where
statutory regulation is necessary and others where self-regulation complemented by market
regulation is more suitable. The MCCG was reviewed in 2012 and later 2017, in order to remain
relevant and is generally aligned with globally recognized best practices and standards such as the
OECD Principles (SCM, 2017). The 2017 revision of the MCCG introduced a five-principle
structure focused on improving the internalization of the corporate governance ideology and
culture. These include; a comprehend, Apply and Report Approach a move from the original
‘comply and explain’ provision to a more flexible ‘apply or explain’ alternative. There is also a
greater emphasis on the intended results of each practice, guidance to enable companies to
understand and enforce these practices practically and lastly ‘step ups’ which identify best
practices which companies should adopt in order to gravitate towards greater excellence (SCM,
2017).
Corporate governance has also been the center of various discussions following numerous scandals
that have rocked the corporate world and the ultimate collapse of renowned corporations that
manipulated systems, controls and information all in the name of profits. The most notable of these
scandals is Enron, a large corporation that purported to be performing extremely well and became
the center of attention when it was discovered that the corporation had been providing falsified
information to its stakeholders in addition to failing to exercise proper oversight over its controls
(Hosseini and Mahesh, 2016). This scandal re-emphasized the need for corporations to adopt sound
governance practices and ultimately spearheaded the emergence of the Sarbanes-Oxley Act of
2002. This law emphasized the accountability of corporations by ensuring that they adopted and
4
adhered to sound national financial reporting standards and new regulations that were enacted. The
act also highlighted the additional requirement for publicly listed companies to undertake
independent audits to ensure sound accounting practices (Stafford, 2015).
The global financial crisis of 2008 most notably put corporate governance on full display as it
played a pivotal role in the greatest economic downturn that the 21st century has seen thus far. It
devastated economies globally as thousands of jobs were lost, markets declined, large companies
failed sending a huge ripple effect throughout the globe. Conyon, Judge, and Useem
(2011)attribute poor risk management systems adopted by large corporations that failed these
corporations and sparked a recession. Company boards are also cited as a contributing factor as
the executive compensation of directors was significantly high among the financial service
companies that sowed the seeds for the crisis to occur. Muller-Kahle and Lewellyn (2011) accredit
the crisis to board members who served on sub-prime boards also sat on other numerous boards
and therefore lacked the time to discharge their duties effectively. It was also identified that these
directors lacked financial expertise and knowledge of sub-prime markets due to the limited number
of years that they had served on the sub-prime lenders’ board. As a result of this crisis, there has
been a shift of focus to the increasing importance of stakeholder welfare (UNCTAD, 2010).
Corporate governance in the developing world of Africa is a relatively new concept and is slowly
gaining momentum with the growth of large corporations and the increasing need for economic
growth and prosperity. In response to trends globally, many African economies have adopted
formal policies having discerned the importance of adopting good corporate governance policies
(Ayandele, I. A., and Isichei Ejikeme, 2013).However, despite these tremendous efforts that have
been put in by African economies, many scholars argue that corporate governance is still the least
of problems for developing economies. African economies are still being plagued by various
concerns such as the low income per capita, unstable political regimes and diseases (Agbonifoh,
B.A, 2010). It’s also asserted by Adepoju ( 2010) that one of the challenges affecting the
fortification of good corporate governance practices in African economies is the unavailability of
sound accounting information. This is particularly an important challenge as sound accounting
information is crucial to aiding providers of finance with the mechanism to hold directors
accountable. This inherently results into an ineffective financial reporting process. Furthermore,
lack of a proper framework is identified by Ayandele and Isichei Ejikeme (2013) as a perpetual
5
factor for the vicious cycle of failure of corporations in emerging economies such as in Africa.
This according to Bhimani (2008) is directly correlated with the need for effective and efficient
corporate governance practices.
West (2009) posits that the corporate governance systems adopted by African economies generally
resemble those of the United Kingdom. This phenomenon is attributable to the fact that many
African countries were colonized by the British and consequently embed a lot of similar laws and
systems with the British. Consequently, according to Kamwachale Khomba and Vermaak ( 2012),
local company laws in Africa are based on the premise of British laws which continue to influence
legal actions and stands taken in these countries although they’re not necessarily obligatory to
these nations. According to reports across Africa, Rossouw (2005) avers that corporations in
mostly sub-Saharan Africa with the exception of Nigeria predominantly consider their
commitment to their stakeholders as their approach to corporate governance. However, in the
pursuit of enforcing inclusive corporate governance guidelines, a lot of large corporations in Africa
have been faced with challenge of having experienced managers with the expertise to adopt these
requirements effectively as well as the challenge of demonstrating their corporate responsibility to
the public (Bendixen et al., 2007).
Similarly, as other countries globally have taken cognizance of the concept of corporate
governance the same also applies for the republic of Kenya. The seed of corporate governance has
been firmly planted and has been supported by various bodies such as the Private Sector Corporate
Governance Trust in 1999 which was later renamed the Centre for Corporate Governance in 2002
(Wanyama and Olweny, 2013). The scholars also proceed to commend the work of the Centre for
Corporate Governance for laying down the foundation for the establishment of a framework which
was later adopted by the Capital Markets Authority as requirements for publicly listed companies.
Rambo (2013) argues that the Capital Market Authority was not only established to promote the
adoption and adherence of sound corporate governance practices in Kenya, it was also intended to
advance the private sector and ultimately stimulate economic growth and demand. He also
proceeds to contend that for a company in Kenya to remain in existence for the long haul, sound
corporate governance practices are mandatory. CMA requires companies to comply with certain
corporate governance codes in order to remain listed on the Nairobi Securities Exchange (NSE).
6
Directors of these companies are therefore held responsible for their corporations future (Obado,
2017).
Studies assert that the regulatory bodies in Kenya have imposed stringent requirements on
companies in an effort to enhance corporate governance practices in Kenya. This is most evident
in the financial services industry with a lot of emphasis placed on financial institutions such as
banks due to the increased responsibility and accountability bestowed on them by the public. This
increased action is also attributed to the downfall of banks such as Euro bank and Daima2 bank to
mention but a few that neglected the needs of their stakeholders (Mang’unyi, 2011). The Kenyan
legal system has spearheaded the movement of the adoption of corporate governance codes by
companies operating in the country. A shift from public to private corporations has also been
observed that has eased the adoption of corporate codes from countries that are considered to have
more vibrant economies than Kenya (Kamau and Basweti, 2013).
Musikali (2008) argues that despite several efforts to promote good corporate governance of
companies in the country, the country of Kenya is characterized by a poor corporate culture. The
issue of ethnic division is proclaimed to be the cause. This division has consequently culminated
into the appointment of directors on boards on the basis of ethnicity rather than on the principles
that corporate governance is based on. Limited resources of regulatory bodies in Kenya have also
hindered the monitoring activities of these bodies in ensuring that companies comply with the law.
It also should be noted that a code of corporate governance for Small and Medium Sized
Enterprises (SME’s) in Kenya still remains underdeveloped. This leaves these enterprises with the
responsibility to establish their own systems (Bernhardt, 2003).
A strong corporate governance framework is pertinent as it helps to ensure that companies are
more accountable to their wide range of stakeholders and that the boards are more responsible.
Good corporate governance practices are important for reducing investor risk, attracting
investment capital and also improving the financial performance of companies (Velnampy and
Pratheepkanth, 2012). Companies that adopt the principles of corporate governance and adhere to
these codes record high and consistent growth rates. The adoption of corporate governance
structures is clearly evident in their performance as these companies report high and stable
financial results with the profitability of these companies standing out. Corporate governance has
also been linked to improving the way corporations adhere to statutory regulations as well as the
7
way they discharge their responsibilities to society which inherently influences their overall
performance (Akinyomi and Adedayo, 2015).
Prior studies have investigated the relationship between variables of corporate governance such
as board size, board diversity, board independence and consequently, contradicting findings have
been discovered between corporate governance disclosures and financial performance (Goel and
Ramesh, 2016). Therefore, this study explores alternative mechanisms of corporate governance
based on past literature review using corporate governance practices such as board member
qualifications, operational and ethical controls and risk governance practices as measured by return
on assets, return on equity and net profit margin.
1.2 Statement of the Problem
Despite several well-meaning attempts by regulatory bodies such as the Capital Markets Authority
(CMA) and the Centre for Corporate Governance (CCG) to foster and enforce sound corporate
governance practices in Kenya, the concept of corporate governance is still weak despite the
concepts’ significance to both the public and private sector. Corporate governance is mandatory
for a company to operate efficiently and achieve its organizational objectives. Failure to effectively
adopt these principles has seen the failure of numerous organizations worldwide as well as the
emergence of devastating economic crises (Mbalwa N. et al., 2014).
The responsibility of any corporation is the ability to efficiently and effectively manage the
company while taking into consideration the needs of its stakeholders. It’s also pertinent that the
company remains profitable as profitability is crucial to a company’s existence for the foreseeable
future. Consequently, good corporate governance is therefore an essential piece of the puzzle to
aid a corporation to uphold its responsibility to its stakeholders, an avenue for long term survival
as well as a mechanism to oversee the corporations’ internal controls (Olayiwola, 2018).
Extant literature highlights a positive relationship between firm performance and corporate
governance (Okoye et al., 2016b). In contrast, a study carried out by Statman and Glushkov (2009)
averred that firms that adopted sound corporate governance principles were not necessarily more
profitable than those with poor corporate governance practices, the relationship was therefore
insignificant. The hypothesis that corporate governance leads to better financial performance was
therefore rejected. An analysis conducted by Halimatusadiah et al (2015) among nine firms over a
three year period of 2008-2010 also concluded that there was no relationship between the
8
implementation and adoption of good corporate governance practices on the profitability of these
companies. Furthermore Chiang (2005) concluded that a negative relationship exists between
corporate governance practices and profitability. Due to the inconsistencies in these researches,
the relationship between corporate governance practices and profitability is weighty and warrants
investigation, hence this study.
1.3 Purpose of the study
The purpose of the study was to investigate the effects of corporate governance practices on the
profitability of commercial firms listed on the Nairobi Securities Exchange, Kenya.
1.4 Research Questions
1.4.1 How do the qualifications of the board of directors affect the profitability of commercial
firms listed on the Nairobi Securities Exchange?
1.4.2 How do operational and ethical controls influence profitability of commercial firms listed on
the Nairobi Securities Exchange?
1.4.3 How do risk governance practices affect the profitability of commercial firms listed on the
Nairobi Securities Exchange?
1.5 Significance of the Study
1.5.1 Board of Directors
Effective corporate governance is pertinent to a corporation as it is correlated with the value of a
corporation’s stock price. The principles of corporate governance advocate for the equitable
treatment of all shareholders, both majority and minority. The study benefits shareholders as it
illuminates their rights as owners of the corporation. These rights are protected by law and
observing them is one of the main objectives of corporate governance.
1.5.2 Management
Managers are the stewards of shareholders and have the responsibility to ensure that the
shareholder’s investment is effectively safeguarded. This study is important to managers as they
require direction on how to efficiently allocate funds and prioritize organizational operations.
Corporate governance also ensures that the interests of managers and shareowners are aligned and
consequently reduces conflicts between these two parties.
9
1.5.3 Directors
The board of directors are considered to be the principal agents of corporate governance. They’re
responsible for strategy implementation, providing direction to management, assessing the
company’s risk appetite as well as evaluating the risks involved in strategy implementation.
Corporate governance is therefore pertinent to directors as it used as a tool to identify those risks
that are a serious threat to the attainment of the company’s objectives. This study is therefore
significant as it clearly articulates the responsibilities of directors in their pursuit of creating a
reputable company.
1.5.4 Shareholders
Investors such as financial institutions are more likely to provide funding to companies that have
sound systems and controls in place in addition to companies that adopt good corporate governance
practices. This is because such investors must ensure that their investments are safely guarded and
that their risks are as low as possible. This study highlights certain variables that profitable
companies are likely to embody therefore illuminating the practices that risky companies are likely
to adopt.
1.5.5 Capital Markets Authority
In order for any governmental body to discharge its duties effectively, it must abide by certain
rules and regulations that guide its direction. This study emphasizes certain corporate governance
practices that several functions in the government can adopt or discard in order to fulfill their duties
or responsibilities as mandated by the law.
1.5.6 Scholars and Researchers
This research provides useful reference material for academicians and researchers seeking
information with regard to the benefits of adopting good corporate governance on profitability.
With so few literatures on corporate governance practices in listed Kenyan commercial firms, this
research is likely to aid further future research on the topic.
1.6 Scope of the Study
The research examined the effects of corporate governance on the profitability of commercial firms
listed on the Nairobi Securities Exchange. The population under observance consisted of 11
10
commercial firms listed on the NSE. This study focused on the effects of corporate governance
practices on profitability for the period 2015-2017. The firms under study were those that were
actively trading on the exchange. The research focused on variables such as board member
qualifications, ethical and operational controls in place as well as the risk governance practices
adopted by these firms.
This study involved secondary data collection using annual reports and financial statements of
these listed firms.
The researcher encountered challenges of retrieving certain data online as the data was historical
and had been archived, special access had to be requested for.
1.7 Definition of Terms
1.7.1 Profitability
Profitability is defined as the return earned from engaging in effective investment activities
(Howard and Upton, 1961). Profitability indicates the effectiveness and efficiency of management
to earn a profit from resources sourced from the market. Profitability is expressed as a ratio
between profit and different types of utilized resources therefore the higher the profit rate, the
higher the profitability ratio (Parvutoiu et al., 2010).
1.7.2 Governance
Governance has existed for centuries in both law and economics and according to McNutt,
governance is defined as the enforcement of contracts, protection of property rights and collective
action as cited by (Mulili and Wong, 2011). Organizations must therefore be effectively governed
in order for them to achieve their intended objectives.
1.7.3 Sub-Prime lender
According to Sengupta and Emmons (2007), despite the confusion as to who a subprime lender is,
the authors highlight the definition that a subprime lender is one who specializes in lending to
borrowers with a poor credit rating or limited credit history. However, it should be noted that the
lender may engage in substandard practices themselves.
11
1.7.4 Return on Assets
Return on Assets is an accounting measure that assesses the efficiency of assets used (Shrader et
al., 1997). According to Okoye et al., (2016a), ROA measures the ability of a firm to generate
positive net income from its investment in assets. ROA is calculated as net income divided by total
assets (Okoth and Coşkun, 2016).
1.7.5 Return on Equity
Return on Equity is the measure that is used in measuring a company’s success in generating profits
for shareholders. ROE shows how well shareholder funds are managed and used to generate return
(Dabor et al., 2015). ROE is calculated by dividing net earnings by total equity (Okoth and
Coşkun, 2016).
1.7.6 Net Profit Margin
It refers to the ratio of net profit after taxes and total selling revenue (Husna and Desiyanti, 2016).
1.8 Chapter Summary
Chapter one detailed the foundation for the research and provided an elaborate introduction into
the study. It also identified the purpose for further investigation into the relationship between
corporate governance practices and profitability. In addition, it also presented the significance of
the study to both internal and external stakeholders, provided the scope in which the study was to
be undertaken and lastly defined the most pertinent terms used.
Chapter two covers the literature review of the study, chapter three details the research
methodology to be used in the study, chapter four presents the results and findings and lastly
chapter five discusses the discussion, conclusions and recommendations of the study.
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CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Introduction
This chapter presents a review of literature on the effects of corporate governance practices on the
profitability of commercial firms listed on the Nairobi Securities Exchange (NSE) based on the
research questions of evaluating how the board of directors’ qualifications affect the profitability
of these firms, investigating how operational and ethical controls influence the profitability of
these firms and evaluating how risk governance practices affect the profitability of these firms.
2.2 Board Directors’ Qualifications and Return on Assets
It is common practice for nearly all large companies to be managed by an elected group of
individuals responsible for overseeing that the shareholders’ investment is managed appropriately.
These individuals are appointed by the shareholders of these companies to govern these companies
on their behalf often subject to periodic re-election by the shareholders (ACCA, 2012). These
elected individuals are accordingly referred to as the board of directors.
It's is imperative that the board of directors are chosen wisely and that the board is adequately
organized with individuals with the necessary qualifications, skills and experiences who are
therefore able to steer the company towards its intended objectives. Accordingly, the size of the
board is a significant issue. It’s pertinent that the size of the board corresponds to the size of the
company that it manages and consequently a balance should be struck to ensure that the board is
adequately staffed (Jan and Sangmi, 2016). In addition, Banele, Tapera, and Shynet (2017) advise
that it is best practice for companies to have more non-executive directors than executive directors.
This is attributed to the reasoning that a board with more non-executive directors is more
independent and consequently more observant of managerial actions which in turn assists to curb
their level of self-interest.
Furthermore, board diversity is also a relevant matter to take into consideration. Diversity can be
looked at in terms of age, nationality, gender, industry knowledge, technical expertise, race etc.
García Martín and Herrero (2018) define diversity of boards as a mix of characteristics, various
attributes and skill levels. Diversity of boards is crucial to effective management of a board as
decision making is enhanced as there is a pool of knowledge and ideas to provide better advice.
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Therefore, a greater number of diverse individuals provides access to a wealth of information,
multiple talents and abilities (Adams and Ferreira, 2009). It’s recommended by the New Zealand
Securities Commission (2004) that boards have committees in place such as the audit committee
to oversee the financial reporting process as well as the remuneration committee to ensure that
directors are adequately compensated to discharge their duties effectively. The benefit of these
committees according to Fauzi and Locke (2012) is that they ensure that financial procedures are
carried out effectively and that directors are fairly and transparently compensated thus alleviating
the issue of self-interests.
According to Mettler-Toledo (2015), the board should be composed of individuals who are
successful, demonstrate qualities such as honesty and integrity and reliability, have a general
understanding of the company’s business and have the ability to lead the company successfully.
The following are qualifications that directors should be able to satisfy and that inherently have an
effect on profitability;
2.2.1 Board Expertise
For board members to discharge their duties effectively, it’s important that that they possess the
required knowledge and skills. These skills and knowledge are a pre requisite for a board that is
striving to build a sound corporate culture and conscience values for excellence (Nwonyuku,
2016). A study by Lehn et al.(2009) postulated that a direct and significant relationship between a
board with knowledgeable and skilled directors and return on assets is evident as duties and
responsibilities are conducted efficiently hence maximizing returns. García Martín and Herrero (
2018) also confirmed following their study on the effect of board director’s composition on
financial performance of a company focusing on three basic aspects of boards that a director’s
skills and knowledge are positively and significantly related to a company’s ROA. This is because
the company has access to knowledgeable, skilled and experienced directors who are the best at
what they do and they’re consequently better at exploiting the market opportunities presented to
them. Earlier studies by scholars such as Van-Ness et al. (2010) discovered a negative relationship
between board skills and knowledge and firm financial performance following their additional
analysis in a Sarbanes- Oxley environment. Hillman and Dalziel (2003) postulated that the
combined expertise and knowledge of board members is an invaluable asset and a proxy that is
positively associated with firm performance.
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2.2.2 Board Competence
Competence is defined as the ability to discharge board activities efficiently for which a director
received training and was inducted as prescribed by the code of corporate governance. Pfeffer
(1994) asserts that corporate governance and managerial competence are unquestionably
associated with the financial performance of a company. (Yang, 2009) investigated the relationship
between Taiwanese companies whose boards received frequent and adequate training with the
ROA of those companies and concluded that there was no significant relationship. However, a
later study was carried out by Wu (2013) averred that companies with boards that have received
adequate training are likely to have better financial performance following an analysis conducted
on board training and performance of Taiwanese companies. Accordingly, training has a
significant positive impact on ROA. A study carried out by Hassan et al. (2017) on 32 Malaysian
listed government linked companies between the period 2008-2013 concluded that an inverse and
insignificant correlation exists between a competent board and return on assets.
2.2.3 Board Social Capital
Phan (2016) defines social capital as the social network that an individual may possess due to his
or her educational background and experience. Such social networks therefore have a positive
effect on the profitability of a company. Alqudah et al. ( 2019)’s study that combined the traditional
board characteristics with a new set including social capital however disagreed with the assertion
that social capital such as political connections are positively associated with ROA and
consequently, a negative and significant association was hypothesized by the scholars. An analysis
by Kim and Cannella (2008) on the role of social capital on new director selection, board
composition and board effectiveness with the advice for seeking directors with specific types of
social capital under specific contexts argued that a positive relationship exists between external
social capital and firm performance. Similarly, an empirical study by Barroso-Castro et al., (2015)
that examined the effects of board social capital on firm performance using a sample of 103
companies listed on the Madrid Stock Exchange (MSE) found that a significant positive
association does exist between board director social capital and firm performance. The study also
advocated for the role of internal social capital as it was found to intensify the positive effects of
external social capital. An earlier study by Goerzen and Beamish (2005) conducted on a large
15
sample of 580 MNE’s found that MNE’s with extensive and diverse networks performed poorer
than those with less diverse networks therefore indicating a negative association.
2.2.4 Board Commitment
Directors should ensure that they set aside an adequate amount of time to discharge their duties
effectively therefore exhibiting unwavering commitment to the role that they have been assigned.
Commitment can be illustrated by the frequency of board meetings. Vafeas (1999) in his study
reported a significant and negative association between frequent board meetings and financial
performance. A later empirical analysis by Karamanou and Vafeas (2005) focusing on 157
Zimbabwean firms between 2001-2003 disputed Vafeas’ earlier study to find a positive association
between frequent board meetings and sound financial performance. According to Olubukunola and
Ojeka (2011), a negative correlation exists between a limited amount of time discharged by non-
executive directors and return on assets. This is attributed to the fact that they they’re indisposed
due to other responsibilities that they have in addition to their part time tenure with the company.
In addition, these non-executive directors are unlikely to be well versed in the business hence
increasing the occurrence of ill-informed decisions. This phenomenon is therefore likely to have
an effect on profitability. Rostami et al. (2016) asserted that there is a significant positive
relationship between longer board tenures and return on assets. Kiel and Nicholson (2006)
proceeded to support the assertion that the practice of a director sitting on more than five boards
signifies a directors’ wavering commitment to his role as board director having an effect on the
company’s returns. The scholars continue to posit that it’s also a disservice to the companies’
shareholders whose investment should receive adequate attention and commitment.
2.3 Operational and Ethical Controls and Return on Equity
Operational controls are an integral part of any business to ensure that business is conducted
efficiently and effectively. It’s important to note that internal controls within a business entity are
also interchangeably referred to as internal controls. AICPA (2017) define operational controls as
processes put in place to ensure that the financial reporting process is conducted in an effective
manner. Thus, the company’s plans, policies and procedures as well as physical security are all
important components of the company’s internal processes. Internal controls adopted by
companies are likely to be based on the company’s size and the nature of the business conducted
by the company. It’s also best practice for operational controls to be structured and based on the
16
level of risk associated with each operational area. The following components of operational
control have been adopted by companies seeking to achieve their intended objective of
profitability;
2.3.1 Control Environment
The control environment is an important component of the operational controls as it shapes the
way individuals within the organization conduct themselves and is therefore pertinent for
developing a company’s’ corporate culture. A study by Kinyua et al. (2015) concentrated on the
effect of the internal control environment on the financial performance of companies listed on the
NSE. Data was collected using both structured questionnaires and secondary data was obtained
from annual audited financial statements, publications and document analysis. Data was analyzed
using both descriptive and inferential statistical methods. The study found that there is a significant
and positive relationship between a sound control environment and financial performance as
measured by return on equity and concluded that the internal control environment should be
improved further to elevate the financial performance of those companies quoted at the NSE. An
earlier study by Kamau (2014) that focused on the effect of internal controls on the performance
of manufacturing firms in Kenya also cited the internal control environment as one of the variables
that greatly impacts the financial performance of a company. The results of this study also
highlighted a positive relationship between the internal control environment and financial
performance as gaged by return on equity. Obonyo (2018) identified a positive association between
an effective control environment and return on equity on concluding his study on the effect of
internal control components on the profitability of microfinance institutions in Senegal.
2.3.2 Risk Assessment
Bayyoud and Sayyad (2015) studied the impact on internal control and risk management on banks
in Palestine. This study highlighted the significance of adopting sound risk assessment,
identification and mitigation strategies in these banks. The study deduced that generally the
adoption of risk assessment has positively affected the performance of banks in Palestine. A study
carried out by Basodan et al. (2015) on the effect of internal control on the financial performance
of Saudi shareholding companies also confirmed the assertion that a positive and significant
relationship exists with risk assessment and financial performance as measured by ROE. Obonyo
(2018) also concluded that a positive relationship exists between risk assessment and return on
17
equity with risk assessment and the control environment having a significant effect on ROE than
the rest of the internal controls after studying the impact of internal control on the financial
performance of microfinance institutions in Senegal. On the contrary, a study by Mardiana and
Dianata (2018) on the effect of risk assessment on the financial performance of five Sharia banking
companies listed on the Indonesian stock exchange for the period 2011-2016 used purposive
sampling to report that a negative insignificant association existed between risk assessment and
financial performance as measured by ROA.
2.3.3 Control Activities
Findings from Asiligwa and Rennox (2017) reveal that a positive relationship does exist as a result
of implementing internal control activities following their research on the effect of internal controls
on the financial performance of commercial banks in Kenya. An earlier study by Palfi and Muresan
(2009) on 25 Romanian credit institutions on the significance of well-organized internal control
systems on financial performance revealed that the frequent meetings between all structures of
the institutions were characteristics of an effective and functioning internal audit department and
consequently a positive relationship existed between this control activity and ROE. Another study
by Ndiwa and Kwasira (2014) that focused on the African Institute of Research and Development
studies campuses only revealed that despite the institute having adequate resources, an existing
audit department and internal control strategies in place, the audit department was inadequately
staffed which played a significant role on the financial performance of the institute. A positive
relationship between internal control and financial performance was therefore established.
However, a study by Ndifon and Ejom (2014) on internal controls and financial performance that
used both descriptive and inferential methods to analyze data collected using questionnaires
revealed no significant relationship between internal control activities and financial performance.
2.3.4 Information and Communication
Hernando and Nieto (2007) using a sample of 72 Spanish commercial banks and data over a period
of 1994-2002 discovered that the adoption of e-banking systems took time to show favorable
financial performance. The study found that a positive relationship after a three-year adoption
period existed with financial profitability as measured by return on equity. Another study by Onay
et al. ( 2008) that examined the effects of internet banking on the financial performance of banks
and adopted specific and macroeconomic control variables in the study found that e-banking is
18
positively correlated with the banks ROE with a time lag of two years. A later study by Rauf and
Qiang ( 2014) on the impact of e-banking on the financial performance of Pakistani commercial
banks corroborated the findings of Hernando and Onay revealing that new technology such as e-
banking has a significant and positive impact on the ROE of the banks. Contrary to these studies,
Al-Smadi and Al-Wabel (2011) focusing on a sample of fifteen Jordanian banks while researching
on the impact of e-banking on the financial performance of these banks measured by ROE found
a negative significant impact of e-banking on the financial performance of these banks.
2.3.5 Monitoring of Controls
An empirical analysis by Ibrahim et al. (2017) on the impact of internal control systems on
financial performance, the case of five health institutions in upper west region of Ghana revealed
that the health institutions with effective monitoring activities and systems showcased a positive
relationship with the financial performance of these institutions. Similarly, another study by Umar
and Dikko (2018) on the effect of internal controls on the financial performance of commercial
banks in Nigeria that employed a survey method to obtain information from respondents and used
stratified random sampling to select respondents revealed a positive and significant relationship
between monitoring of controls and the financial performance of those banks. A study by
Kisanyanya (2018) on the internal control systems and financial performance of public institutions
of higher learning in Vihiga county, Kenya that used a sample size of 96 institutions with data
being collected using semi-structured questionnaires and analyzed using both descriptive and
multiple regression found that financial monitoring had a positive and significant effect on the
financial performance of the institutions under study as the expenditure of these institutions was
well monitored and independent internal audit departments were prevalent in these institutions.
However, an empirical research by Ng’wasa, (2017) on the link between monitoring and financial
performance in financial institutions using a sample size of 88 institutions, descriptive statistics
and regression methods to analyze data showed that no significant relationship exists between
budget monitoring and financial performance.
Ethical controls are defined as guiding rules that ensure compliance with the company’s ethical
culture and values. The purpose as to why companies develop ethical controls is to curb un
favorable behavior and practices that employees are likely to adopt in their day to day operations.
The logic behind this reasoning is that by highlighting and communicating these prohibited
19
practices and their likely consequences, justification can be made for individuals who suffer the
consequences as a result of breaking the rules (Warner, 2012). The following ethical controls have
been identified by scholars to have an effect on profitability;
2.3.6 Code of Ethical Conduct
A study by Persons (2013) investigated two research questions i.e. the characteristics of companies
that had not adopted a written code of ethics for their principal officers such as CEO’s as well as
its impact on the firms’ financial performance. The study used a sample of 94 firms with ethical
codes as well as 94 firms without ethical codes. The use of logit regression analysis for the first
question revealed that lack of a written ethics code is negatively associated with poor financial
performance. The second question analyzed using regression methods discovered that lack of a
code of ethics for principal officers could negatively impact financial performance as stakeholders
are likely to perceive the lack of an ethics code as a negative signal. Pae and Choi (2011) This
supported their hypothesis that lack of a code of ethical conduct was likely to increase the
likelihood of poor financial performance in the future. studied corporate governance, commitment
to business ethics and firm valuation and found that a positive association ethical commitment and
financial performance existed as the cost of capital for companies with as weaker commitment to
business ethics was confirmed in their study.
2.3.7 Ethics Officers
Ethics Officers are individuals within a company appointed to aid employee compliance with the
ethical code of conduct. Ethics officers are appointed to organize training programs for employees
in ethics. Such programs are used as a medium to communicate management’s expectations of the
employees in terms of adopting and adhering to ethical codes of conduct as well as practices as
well as informing them about the repercussions of non-conformity with these codes and practices
(Jalil et al., 2010). The importance of ethics officers to an organization are therefore undeniable.
The training programs instituted by ethics officers provide a major source of competitive
advantage for a company. The high standards of organizational ethics adopted as a result of these
programs enables profitability by reducing the cost of business transactions, building a mutually
respectable relationship with stakeholders and most importantly building an environment
composed of a team of accountable and successful individuals (Mcmurrian and Matulich, 2006).
McMurrian and Matulich (2016) assert that a positive correlation exists between a corporations’
20
ethical behavior and activities such as instituting ethics officers and profitability as measured by
return on equity.
2.3.8 Ethics Training Programs
Ethics Training programs may be conducted in a formal or an informal manner to address various
ethical issues that employees, management, those charged with governance may be faced with.
Michael (1994) undertook an empirical study on continuing education for board directors with a
focus on the benefits of training programs. His findings corroborated the assumption that board
education is pertinent. An ethics training program that is designed and delivered according to a set
of best practice principles, was found to positively impact a board directors’ abilities to deliver
positive performance to his or her board and thus result in positive organizational firm
performance. Caza, Barker, and Cameron (2004) discovered through an assessment that companies
that reported higher scores in their virtue assessments reported significantly higher financial results
than companies with lower scores. The scholars also conclude that firms that adopt ethical
practices such as training programs are likely to survive longer and cope with the dynamic business
environment that they operate in. Findings by Abidin et al. (2017) confirm that a positive
association between a commitment to ethics through instituting training programs and ROE exists.
2.4 Risk Governance Practices and Net Margin
According to Renn and Klinke (2013), risk governance is a notion on how to mitigate general risks
that a company my face in addition to the specific risks that it may also encounter. This concept
relates to ways in which many stakeholders in the company’s environment, public and private
manage risks. Risk governance also signifies the structures that companies should have in place as
well as the policies that should be developed and adopted to guide the activities of individuals, the
public and global community at large to prevent, control or reduce the occurrence of risks. In
today’s corporate environment, the existing risk governance standards focus largely on ensuring a
sound financial reporting process rather than on the identification, analysis and management of
risks. These standards also tend to be very detailed significant limiting their practicality and they
also focus largely on large corporations limiting their application to smaller institutions (OECD,
2014).
The following risk governance practices have been highlighted by researchers and scholars as
having a significant impact on profitability of companies;
21
2.4.1 Compliance with International Regulations
A study conducted by Al-Habaybah (2009) investigating the extent of mandatory compliance with
International Accounting Standards on the financial statements of 50 manufacturing companies
listed on the Amman stock exchange in 2006 and analyzed using multiple regression to explore
the level of compliance of these companies and specific attributes including net margin revealed
that there is a significant positive relationship between the level of mandatory compliance with
IAS’s and profitability. Another empirical investigation by Cai et al. (2009) on the impact of
asymmetric information on the three main mechanisms of corporate governance reported that firms
that had previously adopted the Sarbanes-Oxley act prior to its enactment did not experience any
changes in their performance as measured by profit margin while those whose board structures
were required to change from their pre-SOX equilibrium suffered poor financial performance. The
study therefore reported mixed results and revealed no significant correlation between net margin
and increased compliance with regulations. A study by Neag (2014) on the effects of International
Financial Reporting Standards (IFRS’s) on net income and equity using a sample of 67 Romanian
listed firms using descriptive analysis showed that the application of IFRS’s had an insignificant
effect on the net income of these firms. It also deduced that the net income and equity after the
adoption of IFRS’s was lower than that obtained while complying Romanian national standards.
2.4.2 Increased Interaction between Management and the Board
An extensive study by Puyvede et al. (2012) highlighted the importance of the interpersonal
relationship between board directors as it nurtures group development, improves the collective
welfare and fosters a sense of group cohesiveness. The study therefore discovered a positive
association between increased interaction between board members and firm performance as it
amplified the risk of infrequent interactions which could consequently result into losses and deter
companies from achieving their purpose. A study by Charas (2015) on improving corporate
performance by enhancing team dynamics at the board level used a sample data of 182 board
directors assessing variables such as board dynamics, team performance efficacy, team potency
and impact of their team activities on profitability. The findings indicated that the ability of a board
to achieve high levels of frequent interaction lowers the risk of information asymmetry thus having
a significant impact on corporate profitability. The study found that team dynamic as well as team
22
potency has a positive impact on profitability while the focus on compliance-oriented tasks was
negatively associated with profitability.
2.4.3 Financial Transparency and Disclosure of Information
An empirical study conducted by Chiang (2005) on corporate governance and corporate
performance exploring the relationship between corporate governance and indicators including
transparency and operating performance measures indicated that transparency had a significant
positive relationship with operating profit as outside investors were able to rely on the information
provided by the company to make decisions that positively influenced the companies and operating
profits was therefore one of the most important measures for evaluating financial performance.
However, an empirical investigation by Haat et al. (2008) examining the effect of corporate
governance practices on corporate transparency and performance of Malaysian listed companies
sampled 75 companies listed on the Bursa Malaysia Exchange (BME) in 2002 used hierarchical
regression to analyze the data showed that a negative relationship existed between disclosing of
information through audits and financial performance as measured by net margin.
2.4.4 Improved Risk Management Practices
Kithinji (2010) conducted a study on credit risk management and profitability of commercial banks
in Kenya to evaluate whether credit risk management practices had positively impacted these
banks financial performance for the period 2004-2008, the study revealed that no significant
relationship existed as measured by net profit. However, a study by Anguka (2012) reported
different results. The study conducted was to assess the Impact of Financial Risk Management on
the Financial performance of Commercial banks in Kenya. The target population consisted of 42
commercial banks and one mortgage company with a sample of 107 staff with the data being
analyzed using correlation analysis and regression models. The study found that most of the
commercial banks had adopted financial risk management practices to manage financial and credit
risk and also affirmed that financial risk management practices have a positive correlation with
financial performance. A study by AKI (2011) on the insurance industry in the insurance industry
annual report corroborates the findings mentioned above to reveal that a positive relationship
between mature risk management systems and financial performance as regards to net margin.
2.4.5 Implementation of Appropriate Structures
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A study by Mohamed et al.(2013) examined the impact of corporate governance on firm
performance using cross sectional data of 88 non-financial companies listed on the Egyptian stock
exchange. It examined the impact of board structure and financial performance using OLS
regression analysis. The findings indicated that the only board structure variable that has an effect
of firm financial performance is board composition therefore providing mixed results concerning
whether a positive or negative, significant or insignificant relationship exists with firm financial
performance. Adams and Ferreira (2009) studied Women in the Boardroom and their Impact on
Governance and Performance. Their study on US Firms affirmed that women board directors have
a significant impact on firm financial performance as female directors report higher attendance
records than their male counterparts and consequently gender diverse boards are likely to expense
more effort in their monitoring function therefore a positive association between gender diverse
boards and firm performance was assumed to exist. However, firms that have weak shareholder
rights, according to the study report a negative relationship between female representation on
boards and financial performance.
2.4.6 Instituting the Right People
Incheol et al. (2013) investigated whether diversity in viewpoints as captured by diversity in
political ideology can affect the financial performance of a company. Their findings were that
outside directors’ risk monitoring function is likely to be enhanced when their viewpoints differ
from those of management. The right people to sit on a board are consequently those with diverse
ideologies as such a structure is associated with better financial performance. A positive significant
relationship was therefore found to exist. Similarly, Lenard et al. (2014) studied gender diversity
on the board of directors and its relationship with risk management and financial performance.
Their study revealed that a gender diverse board impacted firm risk by contributing to a lower
variability of stock market return as well as the lower the variability of overall organizational
performance. The right people therefore as per the study is an equal number of both women and
men on the board. Kim and Lim (2010) concluded in their empirical research on the diversity of
Korean boardrooms that as age diversity is positively associated with financial performance as the
combination of productivity and knowledge creates synergies which inherently improve the risk
governance practices in a company.
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2.5 Chapter Summary
This chapter reviewed empirical literature on board of directors’ qualifications, operational and
ethical controls and risk governance practices and how they influence profitability. The
presentation was guided by the research questions. Overall, the findings of the various scholars
presented conflicting results.
The next chapter presents the discussion on research methodology that this study employed.
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CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Introduction
This chapter presents the research methodology that was employed to obtain data. The
methodology entails the research design of the study, the population and sampling design that were
used, the size of the sample, the method of data collection, the research procedures and methods
of data analysis.
3.2 Research Design
Akhtar (2016) defines a research design as the structure that a researcher takes. In summary, a
research design is a step by step process of how the research work is going to be conducted by the
researcher. The scholar further posits that a research design is not limited to any particular
technique of data collection or any particular type of data. Ahuja (2010) avers that a research
design also involves ensuring that conditions are favorable for the collection and analysis of data
in a manner that aims to ensure that the research is conducted economically and is relevant to the
purpose for which it’s being carried out . Borwankar (1995) emphasizes that a research design is
the plan, structure, strategy and investigation conceived so as to obtain responses to the search
questions and control the variances. The research design for this study included a combination of
both a cross sectional research survey as well as a causal (explanatory) research design. A cross
sectional research survey investigates a specific problem for a defined period of time (Saunders
et al., 2009). The period in question that was evaluated was 2015-2017. An explanatory research
is conducted to identify the extent and nature of cause and effect relationships. It can be conducted
to investigate the impact of specific changes on existing norms and various processes etc. The
focus of these studies is on the analysis of a specific situation or problem in order to ascertain the
relationships between variables. Causal evidence must consist of three important elements ; a
temporal sequence, a systematic variation between the two variables and lastly, any covariation
between the cause and effect must be true and not as a result of another variable (Zikmund et al.,
2012).
26
3.3 Population and Sampling Design
3.3.1 Population
A population refers to all variables of interest like people as described by the researcher (Burns
and Burns, 2008). A target population is defined by Cox (2010) as the complete set of units from
which conclusions following the research are drawn. The target population consisted of 11
commercial firms listed on the Nairobi Securities Exchange that inherently adhered to the
corporate governance best practices.
3.3.2 Sampling Design
3.3.2.1 Sampling Frame
A sampling frame is defined as a list of sampling units from which elements or units to be sampled
are selected. A sampling frame is essential for selecting the elements of the target population to be
studied (Saip, 2015). In this study, 11 actively trading commercial firms listed on the NSE
constituted the sampling frame.
3.3.2.2 Sampling Technique
Sampling techniques are methods that are applied by researchers in the quest to select an
appropriate sample since they may be limited by time or resources to analyze the entire population.
In general, sampling techniques can be divided into two; probability or random sampling or non-
probability or non-random sampling (Taherdoost, 2016). The researcher applied the convenience
sampling technique which is a method under non-probability sampling. This technique was
appropriate for the researcher because it involved selecting participants who were readily
available. Convenience sampling is a popular technique among students for selecting samples as
it’s cost effective and quite simple compared to other sampling techniques (Ackoff, 1953). The
convenience sample was representative of the population. The researcher also adopted the
purposive sampling technique as it’s suitable for specific purposes (Ajay and Micah, 2014).
3.3.2.3 Sample Size
Kothari (2009) defines a sample size as a number of items selected from a population that
constitute a sample. The study adopted a census sample as the population was taken as the sample.
The sample consisted of 11 commercial firms listed on the NSE for the period 2015-2017. These
27
commercial firms were selected because they met the requirements of the Capital Markets
Authority (CMA) to be listed on the Nairobi Securities Exchange for the period 2015-2017.
Table 3.1: Table of Commercial firms at the Nairobi Securities Exchange
Total
Express Ltd 1
Sameer Africa PLC 1
Kenya Airways Ltd 1
Nation Media Group Ltd 1
Standard Group Ltd 1
TPS Eastern Africa (Serena) Ltd 1
Scangroup Ltd 1
Uchumi Supermarket Ltd 1
Longhorn Publishers PLC 1
Deacons (East Africa) Plc 1
Nairobi Business Ventures Ltd 1
Total 11
3.4 Data Collection Methods
The study relied on secondary data to investigate the relationship between board qualifications,
operational and ethical controls and risk governance practices on the profitability of the selected
listed commercial firms in Kenya. According to Kothari (2010), secondary data refers to data
which has been collected for another purpose but is relevant to the study being undertaken.
Secondary data collection sources include; government publications, websites, internal records
which the researcher intends to use for data that may be difficult to obtain first hand (Ajayi, 2017).
The study used data from published annual reports and financial statements in order to show the
28
correlation between corporate governance practices and profitability. Pearson correlation was also
adopted to measure the degree of association between predictors and response variables. Further
analysis included the use of the regression model to determine the impact of the independent
variables on the dependent variables. The operating performance data was collected from the
firms’ published annual statements while corporate governance mechanisms were collected from
annual reports published by the firms. The study used accounting-based performance indicators as
dependent variables. Previous studies by other scholars employed the use of ROA and ROE as
indicators of financial performance (Bino and Tomar, 2012). This study will adopt the use of ROA,
ROE and net margin as indicators of financial performance.
3.5 Research Procedures
The research commenced with the researcher obtaining a research license from National
Commission for Science, Technology and Innovation (NACOSTI). The process was proceeded by
the collection of secondary data from the annual reports and financial statements of the firms using
the firms’ websites, the Capital Markets Authority (CMA) website and the Nairobi Securities
Exchange (NSE) Website. The research used data that was publicly available. The researcher used
the published financial statements of the listed firms to gather information on the profitability
indicators namely Return on Assets (ROA), Return on Equity (ROE) and net margin. The
researcher further gathered data from annual reports on the corporate governance mechanisms. For
additional information that was required, the researcher used a letter obtained from United States
International University (USIU) to collect the additional data.
3.6 Data Analysis Methods
The data for the research was collected using secondary sources and stored in a manner that
facilitates a statistical analysis. The statistical analysis was facilitated by version 26 of the SPSS
software. The purpose of the study was to determine the effects of corporate governance practices
on the profitability of commercial firms listed on the NSE, Kenya.
Firstly, descriptive statistics were used to summarize the data. Secondly, inferential statistics were
also used to analyze the data collected where a complete set of data or a sample of summarized
numerical data was analyzed with percentage and frequency used for categorical data to profile
sample characteristics and major patterns emerging from the data.
29
The study also used regression and correlation analysis to measure the strength and the direction
of the relationship between profitability (ROA, ROE and net margin) and corporate governance
practices (board director qualifications, operational and ethical controls and risk governance
practices). A multiple regression analysis was then performed to establish the magnitude of the
predictor variables on the response variable. The dependent variables were measured by ROA,
ROE and net margin.
The proposed regression model was Y1 = a + β 1X1 + β 2X2 + β 3X3 … μ
Where:
Y= Return on Equity (ROE), Return on Assets (ROA) and Net Margin
X1= Board Director Qualifications
X2=Operational and Ethical Controls
X3= Risk Governance Practices
β1, β2, β3 = Partial regression coefficient attached to variables
μ = error term
Research Hypotheses: The hypotheses formulated, after the literature review, for this research
study were as follows:
H01: There is no significant relationship between Board Director Qualifications and Return on
Assets
Ha1: There is a significant relationship Board Director Qualifications and Return on Assets
H02: There is no significant relationship between Operational and Ethical Controls and Return on
Equity
Ha2: There is a significant relationship between Operational and Ethical Controls and Return on
Equity
H03: There is no significant relationship between Risk Governance Practices and Net Margin
Ha3: There is a significant relationship between Risk Governance Practices and Net Margin
30
3.7 Chapter Summary
This chapter was a presentation of the research methodology that was adopted by the researcher.
It described the research design, population, the sampling procedure and the data collection
methods that were used in the study. The data collected was then analyzed using Microsoft excel
and SPSS statistical software. The results and finding of the analysis are presented in chapter four.
31
CHAPTER FOUR
4.0 RESULTS AND FINDINGS
4.1 Introduction
This chapter presents the study results and findings of the data collected from the commercial firms
listed on the Nairobi Securities Exchange (NSE) for the period 2015-2017 with the purpose of
explaining the effects of corporate governance practices on the profitability of these firms.
Specifically, this chapter is presented in subsections based on the research questions.
4.2 Descriptive Statistics
4.2.1 Return on Assets
Table 4. 1 shows the ROA of the 11 listed commercial firms for the period 2015 to 2017. ROA is
calculated by dividing net income by total assets. According to the table, Nation Media Group had
the highest ROA for the three-year period 2015 to 2017 with Uchumi Supermarket having the
lowest ROA for the years 2015 & 2016 and Deacons (East Africa) recording the lowest ROA in
2017. The study established that over a three-year period, the average ROA for the listed firms
decreased from -4.65% in 2015 to -11.75% in 2017. This decrease is attributable to the reduction
in the firm’s earnings during that period.
Listed Firm 2015 2016 2017
Express Ltd -13.60% -25.54% -25.10%
Sameer Africa PLC -0.42% -25.44% 0.44%
Kenya Airways Ltd -14.14% -15.88% -6.89%
Nation Media Group Ltd 17.51% 17.45% 11.58%
Standard Group Ltd -6.65% 4.51% -4.73%
TPS Eastern Africa (Serena) Ltd -1.77% 0.71% 0.68%
Scangroup Ltd 3.84% 3.41% 3.47%
Uchumi Supermarket Ltd -53.35% -56.71% -38.84%
Longhorn Publishers PLC 10.41% 5.57% 7.20%
Deacons (East Africa) Plc 4.58% -12.11% -54.19%
Nairobi Business Ventures Ltd 2.45% 2.85% -22.86%
Average ROA -4.65% -9.20% -11.75%
Table 4.2: Return on Assets (ROA)
32
4.2.2 Return on Equity (ROE)
Table 4.2 shows the ROE of the 11 commercial firms listed on the NSE for the period 2015-2017.
ROE is calculated by dividing net earnings (income) by total equity. Over the three-year period,
Nation Media Group recorded the highest ROE figures with Uchumi Supermarket recording the
lowest figures though the analysis indicates otherwise. Both Uchumi Supermarket and Kenya
Airways Ltd recorded net losses over three-year period. The shareholders reserves for these two
companies were also in deficit during that period. The study established that over the three-year
period of 2015 to 2017, the ROE of the 11 listed commercial firms decreased. This reduction is
also highly attributable to the reduction in the firms’ earnings during that period.
Listed Firm 2015 2016 2017
Express Ltd -50.02% -418.19% -134.51%
Sameer Africa PLC -0.63% -35.53% 0.71%
Kenya Airways Ltd 431.71% 73.53% 22.73%
Nation Media Group Ltd 24.82% 19.41% 16.05%
Standard Group Ltd -15.96% 9.56% -11.30%
TPS Eastern Africa (Serena) Ltd -2.90% 1.27% 1.30%
Scangroup Ltd 5.56% 5.23% 5.33%
Uchumi Supermarket Ltd 462.75% 135.25% 49.66%
Longhorn Publishers PLC 18.86% 10.98% 14.16%
Deacons (East Africa) Plc 7.52% -23.57% -254.96%
Nairobi Business Ventures Ltd 6.04% 8.87% -73.00%
Average ROE 80.71% -19.38% -8.62%
Table 4. 3: Return on Equity (ROE)
4.2.3 Net Margin
Table 4.4 provides values on the net margins of the 11 commercial listed firms for the period 2015
to 2017. Net Margin is computed by dividing the net income by the total sales revenue. Scangroup
Ltd and Longhorn publishers showed a consistent growth in net margin attributed by their increase
in earnings over the three-year period. Nation Media Group recorded the highest net margin figures
over the period 2015 to 2017 with Uchumi recording the lowest in 2015 and 2016 and Express Ltd
in 2017. The average net margin of the 11 firms also highly reduced from -7.21% in 2015 to -
31.26% in 2017.
33
Listed Firm 2015 2016 2017
Express Ltd -48.52% -154.32% -179.54%
Sameer Africa PLC -0.47% -22.63% 0.50%
Kenya Airways Ltd -22.57% -23.83% -10.05%
Nation Media Group Ltd 18.01% 14.91% 12.34%
Standard Group Ltd -6.45% 4.12% -4.53%
TPS Eastern Africa (Serena) Ltd -4.53% 1.84% 1.86%
Scangroup Ltd 2.85% 2.82% 3.39%
Uchumi Supermarket Ltd -34.51% -56.23% -64.97%
Longhorn Publishers PLC 8.45% 6.92% 9.22%
Deacons (East Africa) Plc 4.77% -11.97% -41.95%
Nairobi Business Ventures Ltd 3.70% 5.20% -70.19%
Average Net Margin -7.21% -21.20% -31.26%
Table 4.4: Net Margin
4.2.4 Board Director Qualifications
4.2.4.1 Board Expertise
The study sought to determine whether the board directors of the 11 commercial listed firms
possessed the required industry specific knowledge. Table 4.5 indicates that the number of board
directors with industry specific knowledge increased from 21% in 2015 to 25% in 2017. The table
also indicated that Kenya Airways Limited had the highest number of board directors with industry
specific knowledge over the three-year period of 2015 to 2017.
Listed Firm 2015 2016 2017
Express Ltd 40% 40% 50%
Sameer Africa PLC 17% 29% 25%
Kenya Airways Ltd 38% 54% 50%
Nation Media Group Ltd 47% 40% 44%
Standard Group Ltd 13% 13% 11%
TPS Eastern Africa (Serena) Ltd 9% 9% 10%
Scangroup Ltd 13% 13% 20%
Uchumi Supermarket Ltd 8% 10% 11%
Longhorn Publishers PLC 11% 22% 22%
Deacons (East Africa) Plc 33% 33% 29%
Nairobi Business Ventures Ltd 0% 0% 0%
Average Number of Firms 21% 24% 25%
Table 4. 5 : Board Directors with industry specific knowledge
34
4.2.4.2 Board Competence
The study sought to establish whether the board directors of the 11 commercial firms carried out
trainings of board directors as prescribed by the Capital Markets Authority (CMA) Code of
Corporate Governance. According to table 4.6, 91% of the commercial firms ensured that their
board directors received training on corporate governance over the period 2015-2017.
Listed Firm 2015 2016 2017
Express Ltd 100% 100% 100%
Sameer Africa PLC 100% 100% 100%
Kenya Airways Ltd 100% 100% 100%
Nation Media Group Ltd 100% 100% 100%
Standard Group Ltd 100% 100% 100%
TPS Eastern Africa (Serena) Ltd 100% 100% 100%
Scangroup Ltd 100% 100% 100%
Uchumi Supermarket Ltd 100% 100% 100%
Longhorn Publishers PLC 100% 100% 100%
Deacons (East Africa) Plc 100% 100% 100%
Nairobi Business Ventures Ltd 0% 0% 0%
Average Number of Firms 91% 91% 91%
Table 4. 6 : Number of firms that carried out Corporate Governance Training
4.2.4.3 Board Social Capital
The study sought to establish the social networks that the board directors of the 11 commercial
firms possessed. This was determined by measuring the number of directors that sat on multiple
boards. Table 4.7 indicated that the average number of board directors sitting on multiple boards
decreased from 52% in 2015 to 49% in 2017. Sameer Africa PLC had the highest number of board
directors sitting on multiple boards with Nairobi Business Ventures recording the lowest number
over the three-year period of 2015-2017.
35
Listed Firm 2015 2016 2017
Express Ltd 80% 80% 75%
Sameer Africa PLC 100% 86% 100%
Kenya Airways Ltd 69% 54% 50%
Nation Media Group Ltd 47% 53% 50%
Standard Group Ltd 25% 25% 22%
TPS Eastern Africa (Serena) Ltd 36% 36% 40%
Scangroup Ltd 50% 50% 50%
Uchumi Supermarket Ltd 54% 50% 56%
Longhorn Publishers PLC 56% 44% 56%
Deacons (East Africa) Plc 50% 50% 43%
Nairobi Business Ventures Ltd 0% 0% 0%
Average Number of Directors 52% 48% 49%
Table 4.7 : Directors sitting on multiple boards
4.2.4.4 Board Commitment
The study sought to determine how committed the board directors were to their duties. This was
established by measuring the frequency of board meetings that were held over the three-year period
2015-2017. Table 4.8 indicates that the average number of meetings increased steadily from 4 in
2015 to 5 in 2017. Uchumi Supermarket also led with the highest number of board meetings held
over the three-year period.
Listed Firm 2015 2016 2017
Express Ltd 4 4 4
Sameer Africa PLC 5 5 5
Kenya Airways Ltd 4 3 4
Nation Media Group Ltd 5 5 5
Standard Group Ltd 7 7 8
TPS Eastern Africa (Serena) Ltd 5 6 4
Scangroup Ltd 5 4 4
Uchumi Supermarket Ltd 0 18 10
Longhorn Publishers PLC 7 6 7
Deacons (East Africa) Plc 5 5 4
Nairobi Business Ventures Ltd 2 1 2
Average Number of Meetings 4 6 5
Table 4. 8 : Number of Board Meetings
36
4.2.5 Operational and Ethical Controls
4.2.5.1 Operational Controls
The study sought to determine whether the commercial listed firms adhered to the prescribed code
of corporate governance by ensuring that they had adequate internal controls. This was determined
by measuring the number of firms with Finance/Audit and Risk management board committees
responsible for reviewing financial information and ensuring that the system of internal controls
was effectively administered and reviewed over the three-year period 2015-2017. Table 4.9
indicates that 91% of the commercial firms had board committees responsible for overseeing the
management of the internal controls.
Listed Firm 2015 2016 2017
Express Ltd 100% 100% 100%
Sameer Africa PLC 100% 100% 100%
Kenya Airways Ltd 100% 100% 100%
Nation Media Group Ltd 100% 100% 100%
Standard Group Ltd 100% 100% 100%
TPS Eastern Africa (Serena) Ltd 100% 100% 100%
Scangroup Ltd 100% 100% 100%
Uchumi Supermarket Ltd 100% 100% 100%
Longhorn Publishers PLC 100% 100% 100%
Deacons (East Africa) Plc 100% 100% 100%
Nairobi Business Ventures Ltd 0% 0% 0%
Average Number of Firms 91% 91% 91%
Table 4.9 : Firms with Finance & Audit/ Audit Board Committees
4.2.5.2 Ethical Controls
The study investigated whether the 11 commercial firms listed on the NSE instituted ethical
controls during the period 2015-2017. For the purpose of this study, the controls included; a code
of ethical conduct, ethics officers and ethical trainings. The results as per the table below indicate
that on average, 15% of the commercial firms instituted ethical controls in their companies.
Scangroup Ltd had the highest number of ethical controls instituted among the 11 commercial
firms for the period 2015-2017.
37
Listed Firm 2015 2016 2017
Express Ltd 33% 33% 33%
Sameer Africa PLC 33% 33% 33%
Kenya Airways Ltd 33% 33% 33%
Nation Media Group Ltd 0% 0% 0%
Standard Group Ltd 0% 0% 0%
TPS Eastern Africa (Serena) Ltd 0% 0% 0%
Scangroup Ltd 67% 67% 67%
Uchumi Supermarket Ltd 0% 0% 0%
Longhorn Publishers PLC 0% 0% 0%
Deacons (East Africa) Plc 0% 0% 0%
Nairobi Business Ventures Ltd 0% 0% 0%
Average Number of Firms 15% 15% 15%
Table 4.10 : Number of firms that employed Ethical Controls
4.2.6 Risk Governance Practices
The risk/risk management committee is an independent committee of the board of directors
responsible for the oversight of the risk management policies and practices of a corporation. The
study determined whether the 11 commercial firms had such a risk oversight function during the
period 2015 to 2017. Table 4.11 indicates that 64% of the firms had a committee responsible for
risk management over the three-year period 2015-2017.
Listed Firm 2015 2016 2017
Express Ltd 100% 100% 100%
Sameer Africa PLC 100% 100% 100%
Kenya Airways Ltd 100% 100% 100%
Nation Media Group Ltd 0% 0% 0%
Standard Group Ltd 0% 0% 0%
TPS Eastern Africa (Serena) Ltd 100% 100% 100%
Scangroup Ltd 100% 100% 100%
Uchumi Supermarket Ltd 0% 0% 0%
Longhorn Publishers PLC 100% 100% 100%
Deacons (East Africa) Plc 100% 100% 100%
Nairobi Business Ventures Ltd 0% 0% 0%
Average Number of Firms 64% 64% 64% Table 4. 11 : Number of firms with Risk Committees
38
4.3 Board Directors’ Qualifications and Return on Assets
The first research question of the study constituted examining how board of directors’
qualifications affected the profitability of commercial firms listed on the NSE for the period 2015-
2017. Characteristics such as board expertise, board competence, board social capital and board
commitment were evaluated. Board expertise was determined by the number of directors with
industry specific knowledge, competence was determined by the number of trainings undertaken,
board social capital was determined by the number of directors sitting on multiple boards. The
number of directors sitting on multiple boards decreased indicating that advantage of large social
networks reduced. The number of directors with industry specific knowledge increased by 4% over
the three-year period 2015-2017 and the number of trainings remained consistent. These results
gave a mixed conclusion as to why the average ROA of these firms over the period consistently
reduced indicating that a further analysis had to be undertaken.
4.4 Operational and Ethical Controls and Return on Equity
The second research question of the study involved investigating how operational and ethical
controls influenced the profitability of commercial firms listed on the NSE, Kenya. To confirm
this relationship, the researcher sought to establish whether the 11 commercial firms instituted
operational and ethical controls over the period 2015-2017. These controls include having board
committees such as Finance & audit responsible for the oversight of the operational/internal
controls and ethical committees/trainings for ethical oversight. The majority of the 11 firms had
finance/audit committees which ensured that financial reporting was effective as the assumption
was that financial information and the operational controls were reviewed appropriately and
corrective actions were taken where necessary. Furthermore, majority of the firms lacking ethical
controls such as compliance committees indicated that ethical policies and practices were likely to
be disregarded and ethical violations were likely to go unreprimanded therefore setting a precedent
for a poor ethical climate. Therefore, the majority presence of the internal controls failed to cover
up for the general lack of ethical controls resulting in a declining return of equity over the period
2015-2017.
4.5 Risk Governance Practices and Net Margin
The third research question of the study involved determining how risk governance practices
affected the profitability of commercial firms listed on the NSE. To verify this question, the
39
researcher sought to identify whether the commercial firms adopted risk management practices or
possessed a risk management committee in charge of overseeing their risk compliance frameworks
and the governance structures that supported these firms. The results indicated that on average,
64% of the firms had such measures in place and mostly relied on their risk management
committees to oversee this function over the period 2015 to 2017. This laxity is likely responsible
for the performance during that period as the average net margin of the 11 firms significantly
reduced from -7.21% in 2015 to -31.26% in 2017. Therefore, this indicated that more investment
in risk management systems was necessary to improve the profitability of these commercial firms.
In addition to the use of descriptive analysis, a multiple regression analysis was further undertaken
to investigate the nature, magnitude and direction of the relationship between the corporate
governance practices and profitability of the NSE listed commercial firms. A correlation analysis
was also conducted to measure the strength of the linear relationship between the dependent and
independent variables.
4.6 Correlation
The Karl Pearson’s product-moment correlation was used to analyze the association between the
independent and the dependent variables. The Pearson product-moment correlation coefficient (or
Pearson correlation coefficient for short) is a measure of the strength of a linear association
between two variables and is denoted by r. These values can range from +1 to -1. A value of 0
indicates that there is no association between the two variables. A value greater than 0 indicates a
positive association, that is, as the value of one variable increases so does the value of the other
variable. A value less than 0 indicates a negative association, that is, as the value of one variable
increases the value of the other variable decreases. Pearson’s Correlation Coefficient was carried
out and the results obtained are presented in table below.
4.6.1 Board Director Qualifications and ROA
The table below shows that the coefficient of determination also called the R square is 41.0%. This
means that the combined effect of the predictor variable (i.e. qualifications of the board of
directors) explains approximately 41% of the variations in return on assets of commercial firms
listed on the Nairobi Securities Exchange. The correlation coefficient of 64.1% indicates that the
combined effect of the predictor variable has a relatively strong and positive correlation with the
ROA.
40
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
1 .641a .410 -.179 .0390533
a. Predictors: (Constant), qualifications of the board of directors
Table 4. 12 : Model Summary Board of Director Qualifications and ROA
The findings of the study showed that there is a very strong and positive correlation between board
expertise and return on assets (ROA) (Pearson correlation coefficient, r = 0. 989, Sig. = 0.094).
The results further indicated that there is a very strong and positive correlation between board
competence and ROA (Pearson correlation coefficient, r = 0. 987, Sig. = 0.103). There is a strong
and positive correlation between board social capital and ROA (Pearson correlation coefficient, r
= 0. 773, Sig. = 0.438). The results also indicated that there is a relatively strong and negative
correlation between board commitment and ROA (Pearson correlation coefficient, r = -0. 633, Sig.
= 0.438).
41
Return on
Assets
(ROA)
Board
Expertise
Board
Competenc
e
Board
Social
Capital
Board
Commitmen
t
Return on Assets
(ROA)
Pearson
Correlation
1 .989 .987 .773 -.633
Sig. (2-tailed) .094 .103 .438 .564
N 3 3 3 3 3
Board Expertise Pearson
Correlation
.989 1 .953 -.858 .740
Sig. (2-tailed) .094 .197 .344 .470
N 3 3 3 3 3
Board Competence Pearson
Correlation
.987 .953 1 -.661 .500
Sig. (2-tailed) .103 .197 .540 .667
N 3 3 3 3 3
Board Social Capital Pearson
Correlation
.773 -.858 -.661 1 -.980
Sig. (2-tailed) .438 .344 .540 .126
N 3 3 3 3 3
Board Commitment Pearson
Correlation
-.633 .740 .500 -.980 1
Sig. (2-tailed) .564 .470 .667 .126
N 3 3 3 3 3
Table 4.13 : Correlation between ROA and Board Director Qualifications
4.6.2 Operational and Ethical controls and ROE
The table shows that the coefficient of determination also called the R square is 36.5%. This means
that the combined effect of the predictor variable (i.e. operational and ethical controls) explains
approximately 36.5% of the variations in return on equity of commercial firms listed on the Nairobi
Securities Exchange. The correlation coefficient of 60.4% indicates that the combined effect of the
predictor variable has a relatively strong and positive correlation with the ROE.
42
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
1 .604a .365 .635 .3318164
a. Predictors: (Constant), operational and ethical controls
Table 4.14 : Model Summary Operational and Ethical Controls and ROE
The findings of the study showed that there is a relatively strong and positive correlation between
having a finance/audit committee and return on equity (ROE) (Pearson correlation coefficient, r =
0. 609, Sig. = 0.283). There is a positive correlation between firms with equity controls and ROE
(Pearson correlation coefficient, r = 0. 408, Sig. = 0.275). The findings of the study therefore
confirm that there is a relatively strong and positive correlation between the operational and ethical
controls and return on equity (ROE) (Pearson correlation coefficient, r = 0. 604, Sig. = 0.281).
Return on Equity
(ROE)
Firms with
Finance/Audit
Committee
Firms with
Ethical Controls
Return on Equity (ROE) Pearson Correlation 1 .609 .408
Sig. (2-tailed) .283 .275
N 3 3 3
Firms with Finance/Audit
Committee
Pearson Correlation .609 1 -.221
Sig. (2-tailed) .283 .858
N 3 3 3
Firms with Ethical Controls Pearson Correlation .408 -.221 1
Sig. (2-tailed) .275 .858
N 3 3 3
Table 4.15 : Correlation between ROE and Operational and Ethical Control Variables
Return on Equity
(ROE)
operational and
ethical controls
Return on Equity (ROE) Pearson Correlation 1 .604
Sig. (2-tailed) .281
N 3 3
operational and ethical controls Pearson Correlation .604 1
Sig. (2-tailed) .281
N 3 3
Table 4.16 : Correlation between ROE and Operational and Ethical Controls
43
4.6.3 Risk Governance Practices and Net Margin
Table 4.21 illustrates that the coefficient of determination also called the R square is 48%. This
means that the combined effect of the predictor variable (i.e. Firms with Risk Committees)
explains approximately 48% of the variations in net margin of the commercial firms listed on the
Nairobi Securities Exchange. The correlation coefficient of 69.3% indicates that the combined
effect of the predictor variable has a relatively strong and positive correlation with the net margin.
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
1 .693a .480 .595 .0768733
a. Predictors: (Constant), Firms with Risk Committees
Table 4.17 : Model Summary Risk Governance Practices and Net Margin
The study sought to find the correlation between risk governance practices (represented by the
variable; Firms with Risk Committees) and the net margin of commercial firms. The results
presented a relatively strong and positive correlation between the two variables (Net Margin vs
Firms with risk committees) (Pearson correlation coefficient, r = 0. 693, Sig. = 0.297).
Net Margin
Firms with Risk
Committees
Net Margin Pearson Correlation 1 .693
Sig. (2-tailed) .297
N 3 3
Firms with Risk Committees Pearson Correlation .693 1
Sig. (2-tailed) .297
N 3 3
Table 4.18 : Correlation between Net Margin and Risk Governance Practices
4.7 Regression
The proposed regression model was Y1 = a + β 1X1 + β 2X2 + β 3X3 … μ
Where:
Y= Return on Equity (ROE), Return on Assets (ROA) and Net Margin
X1 = Board Director Qualifications
X2 = Operational and Ethical Controls
44
X3 = Risk Governance Practices
β1, β2, β3 = Partial regression coefficient attached to variables
μ = error term
4.7.1 Board Director Qualifications and ROA
Analysis of variance (ANOVA) in the table below shows that the combined effect of the variables
of board of directors’ qualifications was statistically significant in explaining changes in ROA.
This is demonstrated by a p value of 0.037 which is less than the acceptance critical value of 0.05
Model Sum of Squares df Mean Square F Sig.
1 Regression .001 1 .001 .696 .037b
Residual .002 1 .002
Total .003 2
a. Dependent Variable: Return on Assets (ROA)
b. Predictors: (Constant), qualifications of the board of directors
Table 4.19 : ANOVA of Board Director Qualifications and ROA
The table below illustrates that constant profitability of commercial firms listed on the Nairobi
securities exchange; Kenya is at 0.682 units before the influence of factors associated with
qualifications of the board of directors. A unit increase in qualifications of the board of directors
leads to 0.391 unit increase in the return on assets (ROA) of commercial firms listed on the Nairobi
Securities Exchange. The Equation is summarized as Y = 0.682 + 0.391 X
Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig. B Std. Error Beta
1 (Constant) .682 .185 .367 .776
Qualifications of the board of
directors
.391 .111 -.641 -.834 .557
a. Dependent Variable: Return on Assets (ROA)
Table 4.20 : Regression Coefficients Board Director Qualifications and ROA
45
4.7.2 Operational and Ethical Controls and ROE
The table shows that the coefficient of determination also called the R square is 36.5%. This means
that the combined effect of the predictor variable (i.e. operational and ethical controls) explains
approximately 36.5% of the variations in return on equity of commercial firms listed on the Nairobi
Securities Exchange. The correlation coefficient of 60.4% indicates that the combined effect of the
predictor variable has a strong and positive correlation versus the ROE.
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
1 .604a .365 .635 .3318164
a. Predictors: (Constant), operational and ethical controls
Table 4.21 : Model Summary Operational and Ethical Controls and ROE
Analysis of variance (ANOVA) in the table below shows that the combined effect of variables on
operational and ethical controls was statistically significant in explaining changes in ROE. This is
demonstrated by a p value of 0.081 which is more than the acceptance critical value of 0.05
Model Sum of Squares df Mean Square F Sig.
1 Regression .494 1 .494 4.483 .081b
Residual .110 1 .110
Total .604 2
a. Dependent Variable: Average Return on Equity (ROE)
a. Predictors: (Constant), operational and ethical controls
Table 4.22 : ANOVA of Operational and Ethical Controls and ROE
The regression equation as per the table below is Y = 3.3 + 0.556 X2. This implies that a constant
profitability of commercial firms listed on the NSE is 3.3 units before the influence of factors
associated with operational and ethical controls. A unit increase in operational and ethical controls
leads to a 0.556 unit increase in the return on equity (ROE) of commercial firms listed on the
Nairobi Securities Exchange.
46
Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig. B Std. Error Beta
1 (Constant) 3.300 16326.795 2.117 .281
operational and ethical
controls
0.556 30787.189 -.904 -2.117 .281
a. Dependent Variable: Average Return on Equity (ROE)
Table 4.23 : Regression Coefficients Operational and Ethical Controls and ROE
4.7.3 Risk Governance Practices and Net Margin
Analysis of variance (ANOVA) in the table 4.22 below shows that the combined effect of risk
governance practices was not statistically significant in explaining changes in net margins. This is
demonstrated by a p value of 0.097 which is more than the acceptance critical value of 0.05
Model Sum of Squares df Mean Square F Sig.
1 Regression .023 1 .023 3.940 .097b
Residual .006 1 .006
Total .029 2
a. Dependent Variable: Net Margin
b. Predictors: (Constant), Firms with Risk Committees
Table 4.24 : ANOVA of Risk Governance Practices and Net Margin
The regression equation of Y = 2.968 + 0.154 X3 that relates to the table below implies that
constant profitability of commercial firms listed on the Nairobi securities exchange, Kenya is at
2.968 units before the influence of governance practices (represented by the variable; Firms having
Risk Committees). But a unit increase in risk governance practices leads to 0.154 unit increase in
the net margin of commercial firms listed on the Nairobi Securities Exchange.
Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig. B Std. Error Beta
1 (Constant) 2.968 10391.978 -1.985 .297
Firms with Risk Committees 0.154 16330.159 .893 1.985 .297
a. Dependent Variable: Net Margin
Table 4.25 : Regression Coefficients Risk Governance Practices and Net Margin
47
4.8 Chapter Summary
This chapter presented the results and findings of the study. The results are presented in subsections
based on the research questions. The analysis is presented in sections commencing with descriptive
statistics, correlation then regression analysis. The next chapter presents the summary, discussion,
conclusion and recommendations.
48
CHAPTER FIVE
5.0 SUMMARY, DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
This chapter presents the summary, discussion, conclusions and recommendations of the study on
the effects of corporate governance practices on the profitability of commercial firms listed on the
NSE, Kenya.
5.2 Summary
The study established that Return on Assets (ROA) figures continually decreased from -4.65% in
2015 to -11.75% in 2017. The Return on Equity (ROE) of the 11 commercial firms also fluctuated
with the year 2015 showing an inflated figure of 80.71% and a slight improvement in the 2017
value from -19.38% in 2016. The Net Margins of these firms also decreased from -7.2% in 2015
ton-31.26% in 2017. These declines are mainly as a result of reduced earnings over the three-year
period 2015-2017 and can also be attributed to the fairly poor corporate governance practices
adopted by these firms over the same period.
With regards to board director qualifications, this characteristic was gauged by variables such as
board expertise, board competence, board social capital and board commitment. Board expertise
was measured by the number of directors with industry specific knowledge. The figures steadily
increased from 21% in 2015 to 24% in 2015 and to 25% in 2017. Having board directors with
industry specific knowledge is paramount as these directors are familiar with the industry,
challenges likely to be encountered and therefore provide appropriate solutions. Board competence
was determined by the number of directors that received training. This figure remained constant
at 91% throughout the three-year period 2015-2017. Training of board directors is essential as this
activity imparts the directors with tools and skills essential in assisting them in discharging their
board duties effectively. Board Social Capital was measured by the number of directors sitting on
multiple boards. This phenomenon saw a slight decrease from 52% in 2015 to 49% in 2017. Board
directors who sit on multiple boards are likely to bring with them beneficial social networks.
The study further identified that 91% of the commercial firms employed operational controls over
the three-year period 2015-2017. All firms except Nairobi Business Ventures had finance/audit &
risk committees responsible for overseeing the system of internal controls which include: the
49
control environment, risk assessment procedures, control activities etc. It’s pertinent that the
system is frequently reviewed as these controls assist with maintaining reliable financial reporting
and maximizing effective operations. The Finance/ audit committees are therefore an important
aspect of corporate governance as they provide assurance that the control policies, procedures and
activities exist and are operating as intended. This therefore confirms their significance on the
profitability of corporations. The study also illustrated that an average of 15% of the 11 listed
commercial firms invested in ethical controls over the three-year period 2015-2017. The ethical
controls considered included: the presence of ethical officers, ethical trainings and an ethical code
of conduct. It was found that an average of 27% of the 11commercial firms at least had an ethical
code of conduct and an average of 9% of the firms had both an ethical code of conduct and
instituted ethical trainings. Therefore, the lack of ethical controls in these firms played a significant
role in the poor performance of these firms in regards to profitability.
In terms of risk governance practices, the study established whether the 11 commercial firms had
a function responsible for the oversight of risk. In most listed corporations, this role is undertaken
by a risk/risk management committee. The study therefore sought to establish the percentage of
commercial firms that had such a function during the period 2015-2017. The results of the analysis
revealed that an average of 64% of the commercial firms committed to such a function over the
period 2015 to 2017. It is also displayed that 2 out of 4 of the commercial firms without risk
management committees were the two media houses, Standard Group and Nation Media Group,
both powerhouses in their industry. The poor financial performance of the firms over this period
can therefore be attributed to the scarcity of risk governance practices.
From the regression analysis, it was revealed that in regards to board qualifications, board expertise
had the strongest positive correlation with ROA with a figure of r (0.989) followed by board
competence with r (0.987) and board social capital with r (0.773). The study showed that board
commitment negatively correlated with ROA displaying a value of r (-0.633). The coefficient of
determination for these variables was 41%. The correlation coefficient of 64.1% indicated that the
combined effect of the predictor variables had a strong and positive correlation with ROA. The
ANOVA resulted in a P value of 0.037 which was less than the acceptance critical value of 0.05.
With reference to operational and ethical controls, it was discovered that there was a relatively
strong positive correlation between having a finance/audit committee and ROE. The association
50
between ethical controls and ROE was also positive at a figure of r (0.408). The study therefore
concluded that there was a relatively strong positive correlation between operational and ethical
controls and ROE at a value of r (0.604). The coefficient of determination of 36.5% explained that
the combined effect of the predictor variable (i.e. operational and ethical controls) contributed to
approximately 36.5% of the variations in return on equity of commercial firms listed on the NSE.
The ANOVA resulted in a p value of 0.081 which was more than the acceptance critical value of
0.05. According to the analysis, a unit increase in operational and ethical controls led to a 0.556
unit increase in the return on equity (ROE) of commercial firms that were listed on the Nairobi
Securities Exchange. With regards to risk governance practices, the study disclosed a relatively
strong and positive association with net margin highlighting a value of r (0.693). The coefficient
of determination results of the analysis was 48%. The correlation coefficient of 69.3% indicated
that the combined effect of the predictor variable had a strong and positive correlation with net
margin. Analysis of variance (ANOVA) showed that the combined effect of risk governance
practices was not statistically significant in explaining changes in net margins. This was
demonstrated by a p value of 0.097 which was more than the acceptance critical value of 0.05. A
unit increase in risk governance practices led to a 0.154 unit increase in the net margin of
commercial firms that were listed on the NSE.
5.3 Discussion
5.3.1 Board of Directors’ Qualifications and Profitability
The study sought to investigate how board of director qualifications affect the profitability of
commercial firms listed on the NSE. The Correlation analysis showed that there was a significant
association between board of director qualifications and ROA. The linear regression analysis also
revealed that board of director qualifications had a positive effect on ROA. These results supported
global studies that had established a strong and positive relationship between board of director
qualifications and ROA.
These findings are similar to Lehn et al. (2009) who postulated that a direct and significant
relationship between a board with knowledgeable and skilled directors and return on assets exists
as they discovered that as a result of this expertise, duties and responsibilities were conducted
efficiently hence resulting in maximized returns. Wu (2013) also corroborated the study’s findings
51
following an analysis conducted on board training and performance of Taiwanese companies. This
study averred that companies with boards that received adequate training were likely to have better
financial performance. A very strong positive relationship was therefore found to have existed
between trainings and ROA. Similarly, an empirical study by Barroso-Castro et al. (2015) that
examined the effects of board social capital on firm performance using a sample of 103 companies
listed on the Madrid Stock Exchange (MSE) found that a significant positive association does exist
between board director social capital and firm performance. A strong negative correlation between
directors sitting on multiple board and ROA was affirmed by (Kiel & Nicholson, 2006). This was
supported by their findings that highlighted that the directors were unable to be effectively
committed if they served on multiple boards. They also concluded that this was likely to affect the
financial performance of these corporations.
5.3.2 Operational and Ethical Controls and Profitability
An analysis was conducted to determine how operational and ethical controls influence the
profitability of commercial firms listed on the NSE. The findings confirmed a relatively strong and
positive association between operational controls and ROE and a relatively strong and positive
association between ethical controls and ROE.
These results support Palfi & Muresan (2009) whose investigation of 25 Romanian credit
institutions on the significance of well-organized internal control systems on financial performance
revealed that the frequent meetings of all structures of the institution including board committees
such as finance/audit committees were indicative of rigorous control activities. A strong positive
association between having these committees and ROE was found to exist. Another study Kamau
(2014) that focused on the effect of internal controls on the performance of manufacturing firms
in Kenya also affirmed the importance of the internal control environment highlighting the audit
committee as the foundation of a sound control environment and also as one of the variables that
greatly impacts the financial performance of a company. The results of this study also highlighted
a positive relationship between the internal control environment and financial performance as
measured by ROE. Furthermore, the study supports the assertion that Michael (1994) made when
he undertook an empirical study on continuing education for board directors with a focus on the
benefits of training programs. His findings corroborated the assumption that board education in
ethics is pertinent. Ethics training programs were therefore consequently revealed to be positively
52
associated with ROE. Furthermore, Pae and Choi (2011) concluded following their research on the
correlation between corporate governance, commitment to business ethics and firm valuation and
found that a positive association between ethical commitment by adhering to an ethical code of
conduct and financial performance existed.
5.3.3 Risk Governance Practices and Profitability
An analysis was also conducted to examine how risk governance practices affect the profitability
of commercial firms listed on the NSE. A relatively strong and positive relationship was
established to exist between risk governance practices and net margin. The study findings support
previous researches that revealed a positive association between risk governance practices and
ROA.
Al-Habaybah (2009) emphasized the importance of risk management functions in ensuring
compliance with regulations while investigating the extent of mandatory compliance with
International Accounting Standards on the financial statements of 50 manufacturing companies
listed on the Amman stock exchange in 2006. Their analysis revealed that there is a significant
positive relationship between the level of mandatory compliance with IAS’s and profitability.
Anguka (2012) reported similar results. The study conducted was to assess the impact of financial
risk Management on the financial performance of Commercial banks in Kenya. The target
population consisted of 42 commercial banks and one mortgage company with a sample of 107
staff while data was analyzed using both correlation analysis and regression models. The study
found that firms with risk management functions seamlessly adopted risk management practices
to manage financial and credit risks and also confirmed the positive association between risk
governance practices and net margin. A risk management committee is also responsible for
reviewing the quality of information provided by management. This oversight function is also
positively associated with profitability as confirmed by (Chiang, 2005) during his study on
corporate governance that confirmed the importance of the risk management committee in
ensuring a transparent and effective system and ultimately profitability. A positive association was
also concluded to exist.
53
5.4 Conclusion
5.4.1 Board of Directors’ Qualifications and Profitability
The study found that board directors’ qualifications are necessary for a corporation to remain
profitable as the performance of the listed firms over the three-year period 2015-2017 was low as
measured by ROA. The study also established that a relatively strong and positive relationship
exists between board director qualifications and ROA implying that firms board directors should
be adequately qualified as this phenomenon is significant to a firms’ profitability.
5.4.2 Operational and Ethical Controls and Profitability
The study revealed that operational and ethical controls play an essential role in ensuring the
profitability of corporations. This was supported by the results that indicated that the profitability
of majority of the firms that instituted these controls although low, minimally improved over the
three-year period 2015-2017. The same is true for firms that employed ethical controls over the
same period. The study also confirmed that a relatively strong and positive association exists
between firms with audit committees responsible for overseeing operational controls and ROE. A
strong positive correlation was also discovered to exist between operational and ethical controls
and ROE.
5.4.3 Risk Governance Practices and Profitability
The results of the study indicated that though majority of the firms had a risk management
committee overseeing their risk profile, systems and processes for managing risks, the measures
undertaken by these functions were largely inadequate as the net margins of these firms continued
to decline over the three-year period 2015-2017. The correlation analysis conducted also
confirmed that a relatively strong and positive association exists between risk governance practices
and profitability.
5.5 Recommendations
5.5.1 Recommendations for Improvements
5.5.1.1 Board of Directors’ Qualifications and Profitability
The study established that board of directors’ qualifications are significant for a company to remain
profitable over time. The study recommends that in order for listed commercial firms to comply
54
with the prescribed corporate governance code, these firms should make certain that their there is
an appropriate number of board directors with industry specific knowledge, increase the number
of trainings for board directors on corporate governance, ensure that an appropriate number of
directors sit on multiple boards as these directors are likely to have beneficial social networks and
lastly meet as often as required to discuss issues pertaining to the strategic direction of the
company.
5.5.1.2 Operational and Ethical Controls and Profitability
The study confirmed the importance of operational and ethical controls on profitability. The study
recommends that these commercial firms should apply additional measures to ensure that
operational controls are operating effectively in addition to having functions such as audit
committees overseeing the processes, policies and systems in place. Furthermore, the study
strongly recommends that these listed firms invest significantly in ethical controls such as having
a functional ethical department responsible for assuring ethical compliance of both directors and
employees.
5.5.1.3 Risk Governance Practices and Profitability
The study specified the need for risk governance practices and hence their effect on profitability.
The study therefore recommends that the selection process of board directors who sit on risk
management committees should be exceedingly rigorous and transparent given the significance of
the risk management function. In addition, the study recommends substantial investment in the
risk management function in terms of time and resources as in order for a company to earn profits,
it must take risks and the responsibility to manage risks inherently lies with the board of directors.
5.5.2 Recommendations for Further Study
The study was limited to commercial firms listed on the NSE. The study recommends for further
research among non-listed commercial firms. The study was also limited to the corporate
governance variables of board director qualifications, operational and ethical controls and lastly
risk governance practices. These are areas with limited information on them. The study therefore
recommends further research on these variables.
55
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APPENDICES
APPENDIX A: National Commission for Science, Technology and Innovation (NACOSTI)
Research License
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APPENDIX B: USIU Authorization Letter
