Abstract:
Studies investigating effects of board composition on financial performance have
yielded mixed results, due largely to contextual variables and varying roles of boards in different
jurisdictions. Independent members, gender diversity and board size are some of the key attributes of
boards that have been linked to financial performance of companies in industrialized countries, but
which, unfortunately have not attracted much scholarly interest in developing countries. The study,
which surveyed forty-six companies listed at the Nairobi Securities Exchange in 2011, and whose
findings are presented in this paper, was therefore, designed to inform practice of corporate
governance mainly in developing countries, but will also add to the already existing body of literature
in the industrialized economies. Using multivariate regression analysis on panel data, with Return on
Assets, Return on Equity, and Dividend Yield as performance indicators, the study found out that
independent board members had insignificant effect on financial performance, but gender diversity
did, in fact, have significant positive effect on financial performance. Board size, on the other hand,
had an inverse relationship with financial performance. These results are largely consistent with
conceptual and empirical literature on corporate governance with respect to small board size (5 to 7)
that is sufficiently diverse in terms of gender, skill, experience, industry networks, among other
important attributes. Regarding outside directors, however, the study findings appear to contradict the
long-held traditional view that outsiders confer superior performance to the board.