Effect of Corporate Governance Practices on Financial Performance of Sugar Firms in Kenya
Njagi, Silas Nyaga
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Due to the recent global high profile corporate failures across the world, corporate governance has become the center of the agenda for both business leaders and regulators all over the world today. This is because corporate governance which is hitherto seen as the foundation for good corporate performance had received lack-luster attention from corporate bodies globally for a considerable length of time. The governance structure of any corporate entity affects the firm's ability to respond to external factors that have some bearing on its performance. In this regard, it has been noted that well governed firms largely perform better and that good corporate governance is of essence to firms. While many academicians have stated that sound corporate governance practices will reduce the risk of corporate failure. The key question faced by investors is whether an investment in sound corporate governance practices by a company results in an increase in shareholder value. The purpose of this study was to establish how corporate governance practices employed by sugar companies in Kenya affect their financial performance. The specific objectives included establishing the relationships between board size and the financial performance, independent directors and the financial performance, ownership structure and the financial performance, corporate disclosure and the financial performance and audit committee and the financial performance. The study was causal and censured all the seven sugar firms that were operational between 2005 and 2011. Seven years data for each of the seven sugar firms was extracted from their annual reports and financial statements all totaling to forty nine firm years. Data was then analyzed using profitability measures with the aid of statistical package for social science (SPSS). The study confirmed consistent results on the effects of the corporate governance variables selected on the companies' financial performance as measured by the ROE, ROA, NOI, Net Profit after tax and Net Profit margin. In particular, the study confirmed that financial performance of companies improve with increase in financial literacy of the Board Audit Committee, independence of the Board Members as well as the increase in the disclosure of the corporate governance practices at any given point in time. The study also confirmed that the financial performance of the sugar companies was not directly affected by the size of the Board and the company's ownership structure. Finally the study recommends in part that sugar firms should closely monitor and emphasize on financial literacy of audit committee, independence of the directors and corporate disclosure to be able to report positive financial performance.