RELATIONSHIP BETWEEN BOARD OF GOVERNANCE AND FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN KENYA (A Survey of SMEs Registered under the GEM Segment at NSE)

Caroline Muga, Fredrick Mutea, Ombati Moturi

Abstract


Board of governance has become a crucial subject in corporate governance, encountering a substantial change in firms and companies of late. The lack of proper governance mechanisms has been attributed for the failure of at least 70% of firms listed at Nairobi Security Exchange (NSE). Some of the Small and Medium Enterprises under the Growth Enterprise Market Segments segment have started showing poor performance indicators. The aim of the research was to analyze the relation between board of governance and financial performance of Small and Medium Enterprises in Kenya. The research was carried on Small and Medium Enterprises registered under the Growth Enterprise Market Segments segment at Nairobi Security Exchange. This study adopted a descriptive survey research design. The population for this study was 485 chief executive officers and the managing directors, departmental manager and subordinate staff of the 11 Small and Medium Enterprises registered under Growth Enterprise Market Segments segment. Yamane (1967) formula was used to determine the sample size. Stratified random sampling was employed proportionately in selecting 218 respondents. The structured and semi-structured questionnaires were used to collect primary data. The descriptive statistics aided in data analysis. The data was analyzed using Microsoft Excel and a social science statistical software to provide quantitative results using measures of central tendency, percentages, and tabulations. A simple regression model was used to analyze quantitative data. The study concluded that the board of governance has a statistical significance on the financial performance of SMEs registered under the GEMS segment in Kenya. The further concludes that boards are usually more independent when the proportion of outside director’s increases and the number of annual board meetings impacts significantly on the entity’s financial performance. The study recommends that the firms should carefully constitute their boards. There is a need for the shareholders to provide an environment for the board of directors and management to have a strong value of ownership of the firms to realize the stakeholder objectives.

Key words: Board of Governance, Financial Performance


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