Board Characteristics, Chief Executive Officer traits and financial risk taking: A study of private firms in Nairobi, Kenya

Abstract

The private sector in Kenya is one of the growing industries and contributes significantly to the economy. Firms in the private sector face intense competition which may in turn jeopardize their existence and being driven out of operations. In this regard, it is inevitable for firms to take financial risks in order to survive and remain competitive in an unpredictable business environment. Although, corporate governance scholars’ content that boards play a crucial role in risk taking, there is a dearth of empirical knowledge in the private sector. Few researches have explored the association between board characteristics and financial risk taking, the role of CEO traits as a moderator remains understudied. The General objective of the study was to determine the moderating effect of CEO narcissism and CEO Polychronicity on the relationship between board characteristics and financial risk taking among private firms in Nairobi, Kenya. Thus, the specific objectives were to establish the effect of board member expertise, motivation, diversity and independence on financial risk taking as well as CEO narcissism and CEO Polychronicity as moderators in the relationship. Prospect theory, human capital theory, upper echelons theory, and resource dependence theory guided the study. Explanatory research design and a positivist philosophical approach were used in the study. The sample size of 402 CEOs was drawn from a population of 1130 private firms in Nairobi County, Kenya using Taro Yamane sampling formula. Stratified sampling technique was used to strata firm, while simple random sampling was used to get the respondents. The survey data was collected using structured questionnaires. Hierarchical regression model was used to test hypotheses. The regression results indicated that board member’s expertise had β = 0.132, ρ <.05, board member’s motivation β = 0.504, ρ <.05 and board member diversity β = 0.209, ρ <.05 had a positive and significant effect on financial risk taking. The board member’s independence had negative and significant relationship with financial risk taking with β = -0.089, ρ <.05. The findings on moderation shows that CEO narcissism positively and significantly moderated the relationship between board member’s expertise β = 0.508, ρ <.05 and board member’s independence β = 0.993, ρ <.05 and negatively moderated the relationship between board member’s motivation β = -0.332, ρ <.05 and board member diversity β = 0.582, ρ <.05 on financial risk taking. CEO Polychronicity positively moderated the relationship between board member’s expertise β = 0.695, ρ <.05 and board member independence β = 0.194, ρ <.05 and negatively on board member’s diversity β = .0.766, ρ <.05 and board member motivation β = -0.981, ρ <.05 on financial risk taking. The study suggests that board members who are experts, motivated and diverse are more likely to influence organizations' risk-taking decisions whereas independent board members tend to limit the possibility of a company taking financial risks. Moreover, narcissistic and polychronic CEOs are endowed with unique personalities that can help persuade boards to take financial risks. Prospect, resource dependency, human capital, and upper echelons theorist hypotheses are supported by the findings. The study concluded that for privately owned companies to take financial risks in Kenya, board members ought to be experts, motivated and diverse. Furthermore, the study recommends that private-sector firms should take financial risk to remain competitive and incorporate board members’ with expertise, motivated, diverse and independent to facilitate firm risk taking. Firms should consider hiring CEOs who are narcissist and polychronic to enhance risk taking. The study adds to our understanding of how corporate boards contributes to risk taking in private firms and how CEO traits influences this association notably in Kenya.