CEO characteristics, board independence and financial performance of firms listed in the Nairobi Securities Exchange

Abstract

Firms listed in Nairobi Securities Exchange are expected to be financially stable in order to build investors’ confidence and contribute to economic growth. In this regard, numerous and growing challenges which businesses face, particularly in the area of operations, cost-cutting and production efficiency are usually determined by CEO characteristics which is beneficial for firm performance very relevant. Fifteen of the sixty five listed firms that traded on the stock exchange reported losses, two less than in the 2015 financial year, while 25 of the listed firms, or 39%, recorded falling after-tax profits in the year 2016. Firms that experience continuous and better Financial Performance will have a higher probability of surviving in the market. In this case the main objective of the study was to investigate the moderating effect of board independence on the relationship between CEO characteristics and financial performance of firms listed in the Nairobi securities exchange. The specific objectives of the study were to determine the effect of CEO duality, CEO tenure, CEO gender, CEO age on the financial performance of firms listed in the Nairobi securities exchange and to examine moderating effect of board independence on the relationship between CEO duality, CEO tenure, CEO Gender, CEO age and financial performance of firms listed in the Nairobi securities exchange. Agency theory, upper Echelons theory and resource Dependency Theory were used. The study adopted both explanatory and longitudinal research designs and all the 65 firms listed in the NSE were targeted. Inclusion exclusion criteria was used to sample out firms. Firms listed consistently and has adequate information met inclusion criteria for the period 2016 to 2020 while those with inconsistent, inadequate, delisted or suspended due to lack of regulatory compliance was excluded. Data was collected from 58 firms who met the criteria. Document review guide was used to extract and compile the required secondary data for analysis from the Financial Statements. The data collected was analyzed using Statistical Package for the Social Sciences. A total of 7 firms which were not participating on the study were picked for pilot study. Study findings were presented in figures and tables. Financial performance of the firms was analyzed for a period of 5 years. The study used hierarchical regression model to establish whether board independence moderates the relationship between CEO characteristics and financial performance; CEO tenure has a significant effect on the financial performance of listed firms in NSE (β2= -1.50 (t = - 4.89, p< 0.05); the gender of the CEO has a significant effect on the financial performance of listed firms in NSE (β3= 8.8570; t = -2.12, p< 0.05); it was further determined that age of CEO has a significant effect on the financial performance of listed firms in NSE (β4= 0.6018; t = 3.99, p< 0.05). The results show an insignificant moderating effect of board independence on the relationship between CEO duality and financial performance (R2∆=0.00 β= -0.02; ρ˃0.05). The results indicate a positive and significant moderating effect of board independence on the relationship between CEO tenure and financial performance (R2∆=0.07, β= 0.02; ρ<0.05). Besides, board independence has a positive and significant moderating effect on the relationship between CEO gender and financial performance (R2∆=0.05 β= -0.06;ρ<0.05). Finally, board independence has a positive and significant moderating effect on the relationship between CEO age and financial performance. The study concludes that; CEO age, tenure, gender, significantly influences Financial Performance of firms listed in the Nairobi Securities Exchange while CEO duality does not influence. The Study recommended that it is instrumental for firms to appoint their CEOs based on the duration they have served the company or they have been in the mentioned industry. With this in place, firms will be able to appoint CEOs that are conversant with the dealings of the firm and those with wealth of experience.