Influence of Corporate Governance Practices on the Financial Performance of Aviation Industry in Kenya

Abstract

The international airline line of business has continued to grow drastically, but with elusive returns and profitability. This has to a larger extent been driven by low-cost carriers that are now available in any country. Air transport in the East Africa Region has experienced significant changes in the past few years. Civil Liberalization policies have also been gradually introduced accompanied by restricted privatization of the hitherto state-owned carriers. However, some of the main airlines are currently in deep disarray after being run down and cannot even pay salaries in good time due to poor governance practices emanating from bad financial decisions, uncontrolled outsourcing, collusion and other unethical behavior. It is against the above backdrop that this research presents an investigation into the influence corporate governance has had particularly on the growth of the aviation industry in Kenya. This study targets a population of 447 Management staff selected from 6 Aviation airlines operating in Kenya and out of which, a sample size of 173 respondents was picked for the study. This comprised of 1 mainstream, 3 middle and 2 low performing Airlines in Kenya. Random sampling design was used to present a fair representation of the entire population under consideration. The sample size was deemed small enough for easy manageability of the study. The data collected was both qualitative and quantitative in nature. The data was then analyzed by use of Statistical Package for Social Sciences (SPSS) computer package besides regression analysis. This study found out that the organizations board members had established effective policies and internal control mechanisms that ensure accountability, transparency, responsibility and integrity, organizations always gave shareholders their rights to make crucial decisions affecting the company to maximize performance and the board size had a significant influence on company performance and there was always separation of power between the board and CEO. The study concludes that good corporate governance promotes an organization’s chances of accessing capital for investment and meeting its obligations as and when they fall due, aviation industry in Kenya not only respected the rights of shareholders but also facilitates the effective exercise of those rights. The current boards have established audit committees so as to safeguard integrity of the financial reporting thus ensuring there is accountability in board size and composition. This was achieved by segregating the roles of the board chairman from the chief executive. The optimal consideration of both the inside and outside directors by proportion of external directors, participation of outside directors, and number of nonexecutive directors, executive remuneration and number of board directors influenced the financial performance of the organization. The study recommends that firms should maintain small board membership otherwise an increase would lead to decrease in the performance. Aviation industry should therefore adopt good governance practices to enhance their financial performance