Earliest Governance Crises Was The Bursting

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02 Nov 2017

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One of the earliest governance crises was the bursting of the South Sea Bubble of 1720-21, which dramatically changed business habits and regulations in the UK. The UK rapidly enacted corporate statutes to protect the public from such abuses as the bubble scandal. The main elements included: shareholders’ rights to information, and the ability to appoint and remove directors and auditors (Iskander and Chamlou, 2000).

In the late 1980s financial scandals leading to the collapse of several prominent companies came to light in the UK. There was a strong private response alongside the public regulatory response. The corporate sector responded to the loss of confidence in financial reporting by setting up the Cadbury Committee in 1990 to develop a code of best practice (Iskander and Chamlou, 2000). In 1991, several large UK corporations collapsed, including Robert Maxwell MMC, BCCI and Polly Peck. As a result, one of the greatest proponents of active corporate governance, Sir Adrian Cadbury, chaired a commission and the Cadbury Report published by that commission in 1992 was to have considerable influence, not just in the UK but in many other countries around the world that adopted similar corporate governance codes of practice (Clarke, 2004).

Solomon and Solomon (2004) stated that the Cadbury Report focused on the board of directors as the most important corporate governance mechanism, requiring constant monitoring and assessment. The accounting and auditing functions were also shown to play an essential role in good corporate governance, emphasising the importance of corporate transparency with shareholders and other stakeholders. Finally, Cadbury’s focus on the importance of institutional investors as the largest and most influential group of shareholders has had a lasting impact.

Further UK reforms of corporate governance followed the Cadbury Code (1992). The Greenbury Report (1995) proposed guidelines for director remuneration, the Hampel Report (1998) focused on disclosure and best practice, the Combined Code (1998) outlined a mandatory disclosure framework, and the Turnbull Report (1999) offered advice on compliance with mandatory disclosure (in Kiel, Kiel-Chisholm, and Nicholson, 2004).

Kiel, Kiel-Chisholm, and Nicholson (2004) described the value of the UK stock market decrease with its subsequent impact on banks and pension funds that caused a rash of inquiries and reports. These reports include the Tyson Report on the Recruitment and Development of Non-Executive Directors; Review of the Role and Effectiveness of Non-Executive Directors (the "Higgs Review’); Audit Committee Combined Code Guidance (the "Smith Report"); and, Internal Control: Guidance for Directors on the Combined Code (the "Turnbull Report") (in Kiel, Kiel-Chisholm, and Nicholson, 2004).

According to Jones and Pollitt (2004) who compared the conduct of and influences on the investigations leading to the Higgs Review and the Cadbury Report (1992), the major recommendation of the Cadbury Report (1992) was the raising of the importance of non-executive directors on the board. The major recommendation of the Higgs Review is the strengthening of the channels of communication between shareholders and the board via the senior independent directors.

Dahya, McConnell and Travlos (2002) investigated the presumption that an important oversight role of boards of directors is the hiring and firing of top corporate management. They presume that corporate performance is a reliable proxy for the effectiveness of top management. They also investigated the relationship between top management turnover and corporate failure before and after the Cadbury Report (1992) recommendations. They selected a sample of 460 UK industrial companies listed on the London Stock Exchange (LSE) as of December 1988. For each company, they collected data on management turnover, board composition, and corporate performance for up to seven years before and four years after the issuance of the Cadbury Report (1992). They found an increase in the sensitivity of management turnover to corporate performance following the adoption of the Cadbury Report. Importantly, they found that the increase in sensitivity of turnover to performance is due to an increase in outside board members. These results are consistent with and support the argument that the Cadbury recommendations have improved the quality of board oversight in the UK. Franks, Mayer and Renneboog (2001) studied a sample of poorly performing firms in the UK and found that boards dominated by outside directors actually impede the disciplining of poorly performing management.

Dahya and McConnell (2002) investigated the effect of the Combined Code in the UK on appointment of new CEOs. They reported that a firm’s board is more likely to appoint an outside CEO after the firm has increased the representation of outside directors to comply with the Code. Dahya and McConnell (2002) also reported that appointment of an outside CEO is good news for shareholders.

2.4.3 Australia

The Australian corporate governance framework is characterised by a mix of legal regulations largely contained in the Corporations Act 2001 and common law principles and self-regulation most notably set out in the Australian Stock Exchange (ASX) Listing Rules, which require disclosure of corporate governance practices. Studies of the Australian corporate governance regime indicated that the share market plays an important role and that share ownership tends to be relatively widely dispersed. Shareholders are generally prepared to be mobile in their investments and the market therefore plays an important role and directors have a strong incentive to act in the interests of shareholders and to enhance shareholder value (Keong, 2002).

In Australia there have been two recent major corporate collapses, HIH Insurance and OneTel. The Australian government tried to appear undisturbed by these events, insisting that the more robust and long-standing disclosure requirements in the Australian market made any further unanticipated corporate failure unlikely. However, a further round of the Australian Corporate Law Economic Reform Program (CLERP 9) in 2002 quickly published a new series of requirements for companies registered in Australia (Clarke, 2004). Suchard, Singh, and Barr (2001) found that the incidence of top management turnover in Australia is positively related to the presence of non-executive directors on the board. Corporate governance is a major focus of the changes which introduced three elements to achieve good corporate governance in Australia. First, the CLERP 9 Bill, incorporated into the Corporations Act, provides further black-letter law concerning auditors, the use of accounting standards and the requirements of regulatory authorities such as the Australian Prudential Regulation Authority (APRA). Second, ‘Standards Australia’ released guidance on corporate governance, ‘Good Governance Principles’ (AS 8000-2003). This standard includes comment on board structure, director independence and the skills and experience represented on the board. Third, the ASX created the ASX Corporate Governance Council in August 2002. The Council comprised representatives from a wide range of organisations with an interest in corporate governance (Kiel et al., 2004).

In 2003, The Council released the Principles of Good Corporate Governance and Best Practice Recommendations (ASX guidelines). The ASX guidelines were aimed at encouraging boards to think about and debate how effective corporate governance could be brought to their organisations. On 31 March 2004, the Implementation Review Group (IRG) was established to monitor the progress of companies in implementing the principles and recommendations (Kiel et al., 2004).

2.4.4 Corporate Governance in Nigeria

First, as Nigeria is a former colony of Britain, it must be noted that the Nigerian law is based on a British defined common law, precedents and local statute. The laws in England further operate as a persuasive authority to complement the Nigerian law where there is a lacuna in the latter (Insol, 2008). The main legal framework for corporate governance in Nigeria is the Companies and Allied Matters Act of 1990 (CAMA). CAMA became law on the 2 January 1990. The CAMA provisions, which specifically relate to corporate governance. They include the laws which pertain to the following: directors’ duties, disclosure requirements, insider dealings, minority investor protection and executive compensation.

The Nigerian company law has historically been strongly influenced by the United Kingdom, where shareholders have, albeit in principle, enjoyed many of the same legal rights as shareholders in the dominant Anglo-Saxon economies (Ahunwan, 2002). What is lacking in Nigeria, however, is an effective judicial system to enforce these rights, which has traditionally increased the costs of contracting as well as making business activities much more risky ventures (La Porta, 1998; Ahunwan, 2002). It is even more important to note that the CAMA has not undergone an extensive review since 1990, two decades later. Thus there are increasing concerns with regards to the ability of the Act to tackle specific corporate governance issues that have risen since it became law. Furthermore, a caveat of the CAMA is its deterrent capacity. The penalties for offenders/law breakers do not serve as a deterrent. These generally range from N25 (ten British pence) to about N500 (£2). Apparently these are no penalties; CAMA is long due for review. However, specific initiatives have been deployed by key regulators in recent times to confront some of the statutory impediments to good corporate governance in Nigeria

A number of independent organisations have been mandated to pursue the improvement of better corporate governance in Nigeria; in the public sector, the most important one is the Corporate Affairs Commission (CAC) who works collaboratively with the Securities and Exchange Commission (SEC), whose chairs and chief executive officers are appointed by the president of the country (AfDB (African Development Bank), 2009). The CAC is a government monitoring body, which regulates the formation, management and winding up of companies in Nigeria. The CAC is the body which administers CAMA and has primary responsibilities for corporate governance. The CAC’s vision is to be a world class companies’ registry. It was established as an autonomous body to replace the erstwhile Company Registry, when the latter was found to be inefficient.

To what extent has the CAC being effective in its statutory obligations? According to the ROSC (2004), the CAC has neither an effective mechanism nor capacity to monitor and enforce requirements for accounting and financial reporting. The ROSC country report concludes that there is no capacity at the CAC to effectively fulfil its functions. Okike (2007) also argues that if the CAC is to fulfil its role of adequately promoting good corporate governance, its monitoring capacity will have to be strengthened with more realistic sanctions being applied to errant companies. She further noted that this will undoubtedly necessitate a review of existing legislation. Also, in furthering the effectiveness of the regulatory powers of the CAC, the commission will also have to strengthen its human capital in terms of the knowledge, expertise and multi-disciplinary resourcefulness of its core work force.

The SEC Code came to being in October 2003, representing the first code of corporate governance in Nigeria. It was revised in 2009. The development of the SEC Code is connected to global inclinations towards corporate governance regulation. Given that emerging markets are characteristic of very rapid and dynamic economic developments, corporate governance codes may require frequent revisions to reflect new economic conditions. As a result, on September 30, 2009, the SEC published a revised version of the code, following consultations with key regulatory bodies, to further position itself to address the compliance challenges contained in the 2003 Code. Survey results indeed suggest that the 2003 SEC Code was intentionally designed to be less rigid, as there was the need to encourage companies to comply with the Code in the first instance, given that it is the first of its kind. Accordingly, unlike the 2003 code, the 2009 code states that its provisions are intended to be enforceable, in order to promote the highest standards of transparency, accountability and good corporate governance in public companies, without unduly inhibiting enterprise and innovation. It is also important to note that the SEC Code was drafted with numerous inputs from the codes of conduct of other jurisdictions. Whilst it is perfectly in order to learn from other countries, adopting corporate governance guidelines which are best suited to more advanced and less "corrupt" economies will constitute significant misfits (Okike, 2007).

2.4.5 Corporate Governance in Kenya

Kenya forms a good case study for discussing the relationship between law and corporate governance, as on the face of it Kenya appears to have all the elements that are necessary to achieve good corporate governance. Kenya’s market regulation matches that in developed countries as it has legislation that governs the market, a regulatory agency in the form of the Capital Market Authority which oversees the stock exchange and, like most developing countries, it has adopted a corporate governance code in the form of the Sample Code of Best Practice of Corporate Governance in Kenya 2002, which was developed by the Centre for Corporate Governance, an affiliate of the Commonwealth Association for Corporate Governance (CACG) (http://www.ccg.or.ke). Kenya’s corporate governance code is enforced by the Capital Markets Authority through the CMA Guidelines, which are the result of a combination of ideas from corporate governance codes from different jurisdictions. This is particularly evident in s.1.3 of the CMA Guidelines which states that: "These guidelines have been developed taking into account the work which has been undertaken extensively by several jurisdictions through many task forces and committees including but not limited to the United Kingdom, Malaysia, South Africa, Organization for Economic Cooperation and Development and the Commonwealth Association for Corporate Governance" (OECD, 2004)

A deeper examination, however, reveals a country which is struggling in its efforts to adopt good corporate governance owing to the absence of a strong legal system.

The statutory law governing corporate governance in public listed companies in Kenya is embodied in the Companies Act 1962 c.486 (the Companies Act). Kenya, a former British colony, adopted the Companies Act almost in entirety from England’s Companies Act 1948 upon attainment of independence in 1963. The Companies Act deals with directors’ duties and shareholder protection among other matters pertaining to corporate governance in Kenya. Other regulations that govern Kenya’s corporate governance are the Capital Markets Authority Act 2002, the Nairobi Stock Exchange (NSE) Regulations and the Penal Code c.63.

Directors’ duties in Kenya are governed by Kenya’s common law of companies. Traditionally, directors’ duties in common law are divided into the duty of care and skill and the duty of loyalty. The duty of care and skill represents the courts’ attempt to regulate the entrepreneurial side of directors’ activities. The duty of loyalty, on the other hand, mainly encompasses the duty of good faith, the no conflicts rule and the rule against managerial opportunism. The duty of good faith requires that directors exercise their powers in the best interests of the company (Smith and Fawcett, 2009). This means that in carrying out the business of the company, which involves dealing with the assets of the company, directors have a duty to preserve these assets. Therefore all decisions taken on behalf of the company must be taken solely for the benefit of the company and not with a view to seeking a collateral advantage for directors. The "no conflicts rule" requires directors not to put themselves in a position where their duties and interest conflict, for instance turning down the business offer of a third party with the intention of secretly taking up the same offer themselves and benefiting in a private capacity. The rule against managerial opportunism requires directors to see business opportunities coming to the company as the property of the company and requires them to be treated as such. For instance, the taking of business contracts in the director’s name instead of the company’s name thereby creates an opportunity for self-interested behaviour. The directors’ duty of loyalty has to be well protected by robust laws, if the directors’ duty of care and skill that facilitates entrepreneurship is to be effective and in turn if good corporate governance is to be possible. This is because whether a director performs his duty with the required care and skill to a great extent depends on where the director’s loyalty lies. The disloyalty of directors often manifests itself in managerial misbehaviour which takes the form of misappropriation of company assets. Misappropriation of assets by company directors is dealt with both directly through *I.C.C.L.R. 215 company law such as the legislation on director liability and criminal law such as the law of theft, and indirectly through securities legislation which uses disclosure as a regulatory mechanism to prevent managerial opportunistic behaviour such as insider dealing. Standards of directors’ behaviour are enforced through both criminal and civil sanctions as charges against a director who misappropriates property can be brought under both civil and criminal law. To enforce a director’s duty of loyalty and therefore secure their duty of care and skill, criminal sanctions are the key to providing the necessary standard of deterrence under which directors can be expected to refrain from misappropriation of company assets. However, an examination of Kenya’s companies legislation reveals a comprehensive legal framework that is difficult to enforce owing to underlying weaknesses in the drafting of legislation governing director liability. Director liability is dealt with under s.45 of the Companies Act (Civil Case No.1643 of 1999).

2.5 Theoretical Framework

The need to anchor the concept and practice of corporate governance within the framework of certain theories cannot be overemphasised.

These include among others: Agency theory, Ethical theory, Stakeholders theory and Corporate Social Responsibilities theory.

2.5.1 Agency Theory

Agency theory suggests that the firm can be viewed as a nexus of contracts (loosely defined) between resource holders. An agency relationship arises wherever one or more individuals, called principals, hire one or more other individuals called agents, to perform some service and then delegate decision- making authority to agents (Bamberg and Klaus 1987). The scholars both opine that, the primary agency relationships in business are those (1) between stockholders and managers and (2) between debt holders and stockholders. These relationships are not necessarily harmonious; indeed agency theory is concerned with so-called agency conflict, or conflicts of interest between among other things, corporate governance and business ethics. Agency theory which in the formal sense originated in the early 1970s actually emerged as a dominant model in the financial economics literature and is widely discussed in business ethic texts.

From the Ethicists point of view, "it is pointed out that the classical version of agency theory assumes that agents (that is, managers) should always act in principals (owners’) interests. However, if taken either (a) the principals interest are always morally acceptable ones or (b) manages should act unethically in order to fulfil their "contract" in the agency relationship. Clearly, these stances do not conform to any practicable model of business ethics (Bowie and Freeman 1992). In view of the above vis-à-vis the practice of corporate governance, it clearly shows that huge responsibility is placed on the neck of the agents by the principals. To fulfil the ultimate goal of the agency theory by the so-called agents, the need to apply corporate governance is such that it is inevitable to the whole process and operations of the corporate organisations. The recent Kenyan experience of failed enterprises such as CMC is a reflection of poor understanding and application of agency theory which led to bad practice of corporate governance.

2.5.2 Ethical Theory

Ethical theory as it were, is a build-up on the concept of ethics in general. The term ethics comes from the Greek ethos meaning something like morals. It is defined as the systematic reflection on what is moral. By this simple submission, morality is the whole of opinions, decisions and actions with which people express what they think is good or right.

Hence, one of the major cardinal thrusts of ethical theory is utilitarianism. It implies, as widely cited from the popular work of Jeremy Bentham (1748-1832) by Schofield (2006) that ethical theory sometimes focuses not on actions but majorly on consequences. The name utilitarianism is derived from the Latin "Utilis" meaning "useful" Therefore, in utilitarianism, the consequence of actions are measured against values. These values can be happiness, welfare, high productivity, expansion etc. By way of emphasis, the cardinal point in this theory is that, it is essential to give the greatest happiness to the greatest number of people.

So, for a successful practice of corporate governance in Kenya and beyond, practical application of utilitarianism is a core requirement. The utility of the shareholders and other stakeholders should be paramount in the minds of the corporate managers. The agents should make all efforts to ensure that principals have satisfactory values with regards to their investment. The actions of the agents will be adjudged morally right in the process of running the corporations on behalf of the owners if the latter’s interest is well represented whereas it will be adjudged wrong if their actions inflict pain on the interest of the principals.

2.5.3 Stakeholder Theory

Stakeholder theory is a further development on the concept of stakeholder and its relationship to any business corporation. Freeman (1984) offers a traditional definition of a stakeholder thus, "any group or individual who can affect or is affected by the achievement of the organisation’s objectives" Therefore, the general idea of stakeholder theory is a redefinition of the organisation. That is, what the organisation should be and how it should be conceptualised.

The theory as noted by Friedman (2006) states that the organsiation itself should be thought of as grouping of stakeholders and the purpose of the oraganisation should be to manage their interests, needs and viewpoints. This stakeholder management is thought to be fulfilled by the managers of a firm. The managers should on the one hand manage the corporation for the benefit of its stakeholders in order to ensure their rights and participation in decision making and on the other hand, the management must act as the stockholder’s agent to ensure the survival of the firm to safeguard the long term stakes of each group.

Dabiri (2012) equally observes that stakeholders theory takes account of a wider group of constituents rather than focusing on shareholders. Where there is an emphasis on stakeholders, the governance structure of the company may provide for some direct representation of the stakeholders groups. According to Friedman (2006), the main groups of stakeholders are: customers, employees, local communities, suppliers and distributors, shareholders, the media, general public, business partners, future generations, past generations (past founders) academics, competitors, NGOs, trade unions, competitors, regulators and governments.

For good practice of corporate governance in order to achieve the overall corporate objectives, managers of business corporations need to understand, appreciate and conscientiously apply the propositions of stakeholders theory. For every individual or groups that have stake in the organisation, effort must be made by the so-called agents to preserve and protect their interests for the survival of the corporations.

2.5.4 Corporate Social Responsibility (CSR)

For any successful business corporations, corporate social responsibility has long been identified as a core factor. It is also believed that corporate governance cannot be effective without effective corporate social responsibility. Jimi (2008) observes that presently, CSR is a family of concepts dealing with corporate philanthropy, corporate citizenship, community relations, community advocacy, corporate governance, accountability and transparency, corporate competence, corporate ethics, employee relations, human rights and so on.

By conception, Wikipedia Free Encyclopedia defines Corporate Social Responsibility as a concept that organisations (but not only) corporations have on obligation to seek the interest of customers, employees, shareholders, communities and ecological considerations in all aspects of their operations.

According to the World Business Council for Sustainable Development (1999), CRS is defined as "the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the work force and their families as well as the local community and society at large" (cited by Odunlami 2008). Cited by Jimi (2008), Moir (2004) defines Corporate Social Responsibility as the capability of business (or any, organisation) to pay more attention to its relationship with society and multiple stakeholders, rather than focus narrowly on maximising shareholder value".

The above submissions underscore the relevance of the contention made by Oso (2008) that, "it appears all major companies have come to accept Corporate Social Responsibility (CSR) as an important component of business philosophy. Their acceptance, to be seen as being good and socially responsibility corporate citizens, is a big shift in paradigm. The shift has more or less being forced on them by changing social values from the 1960s, particularly the ‘intrusion’ of the people into the political arena". In summary, business corporations in general survives where good corporate governance is practised whereas the survival of corporate governance is tied to the effective application of Corporate Social Responsibility

2.6 Empirical Review

There are numerous studies examining the various facets of corporate governance practices in SMEs. Jensen and Meckling (1976) did an empirical study on the relationship between managerial ownership and the performance of SMEs; they found out that managerial ownership affects the SME performance positively because the alignment of the interests of directors and shareholders reduced the costs of agency.

Daily and Dollinger (1992) examined the relation between the ownership structure and the growth of the sales of 186 industrial SMEs. The enterprises in the survey are classified in to two classes, those controlled by the family owner and those that are professionally controlled (the director have no part of the capital). The results don’t reveal any differences that are statistically considerable in the evolution of the sales between the two groups.

Liang and Li (1999), did a study on 228 private SMEs in Shanghai and China, and examined the relation between the structure of board and the performance of enterprise. They found out that the presence of outside directors is associate positively with an elevated output of funded capitals, though most of the enterprises display a board dominated by the internal people to the organization as well as the fact that the high technology adoption has a tendency to increase the performance.

Bennett and Robson (2004) looked at the role of the board of directors in SMEs and found out that size of board has an important influence on the strategy of innovation.

O'Regan et al., (2005) examined the relationship between the ownership structure and the financial performance of SMEs, in a sample of 207 SMEs of electronics and mechanics in Britain, the enterprises with director owners are more competitive that the SMEs that are professionally controlled.

Bennedsen et al., (2008) examined the board size and firm performance of SMEs in the context of Denmark. They found a strong positive correlation between family size and board size which is driven by firms where the CEO’s relatives serve on the board. They also found that a small adverse board size effect driven by the minority of small and medium-sized firms are characterized by having comparatively large boards of six or more members.

Wu et al., (2007) examined the effects of concentrated ownership and owner management on small business debt financing. Using the survey data from Canada, they found a significant effect from the small business owner’s view but insignificant from the commercial lenders perspective. Saini and Budhwar (2008) examined the role of human resources in Indian SMEs. McConaughy et al., (2001) found that in the United States firms controlled by founding family have greater values which are operated more efficiently and are carried less debt than other firms. Ehrahardt and Nowak (2003) on German data found a non-linear relationship between concentration of voting rights and the stock performance of a firm.

Aaboen et al., (2006) studied Corporate Governance and Performance of Small High-Tech Firms in Sweden. Their study reveals that the small high-tech firms are likely to have a strong link with banking institutions consequently most of the firm’s capital supply is from banks, and that there is strong ownership links between banks and industry. The background of the founder does seem to have had an effect on the problem of financing and ownership issues. Voordecekers et al., (2007) examined the board composition in SMEs in the context of Belgium. By using a multinomial logit model, they reveal that board composition in family firms is a reflection of the family characteristics and objectives.

Bartholomeusz and Tanewski (2006) in Australia noted that family firms utilize substantially different corporate governance structures from nonfamily firms and that these differences lead to performance differentials. Voordeckers et al., (2007) examined the determinants of board composition of Belgian small and medium sized enterprises and noted that family-related contingency variable is far more important than CEO related control variables. Danielson and Scott (2007) examined if agency conflict and potential agency conflict influence the investment decision of SMEs and noted that underinvestment concerns are more prevalent in growing firms, those with concentrated ownership and control structures; overinvestment concerns increase as firms adopt less-concentrated ownership and control structures.

Joseph et al., (2009) examined the three criteria’s that the SMEs must in place: the directives of clear governance, the diversification and the technological innovation; the three elements become harder when the quality of the governance is bad, and when it is superior, they improve the functions of the enterprise and the well-being of the family.

Oswald et al (2009) investigated the influence of large stake family control on performance. From a sample of 2,631 privately held and publicly traded family business in USA they found a significant negative relationship between percent of family control and sales growth as well as a strong inverse relationship between percent of family controlling the top management team and all measures of financial performance.

Niskanen and Niskanen (2010) investigated the impact of managerial ownership on loan availability and credit terms. They found that an increase in managerial ownership decreases loan availability; an increase in managerial ownership initially increases interest rates, the effect is reversed at higher levels of ownership. The earlier studies can be criticized on the premise that most of the earlier studies have been conducted within the context of developed economies, where there are many institutional similarities. This study extends the earlier studies in the context of a less developed economy such as the case of Kenya and also evaluates the corporate governance practices by Kenyan SMEs.

2.7 Conceptual Framework

The study will be guided by the following conceptual framework:

Independent Variables Dependents Variables

Transparency and Shareholder Rights

Board of Governors

Performance and Growth

Control Environment

Family Governance

Stakeholders Relations

Figure 2. Conceptual Framework

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

This chapter outlines the methods that will be used for the study and adopts the following structure: research design, population and sample, population description, data collection methods, research procedures and data analysis and methods.

3.1 Research Design

A research design is defined as an overall plan for research undertaking (Saunders, Lewis & Thornhill, 2009). This study will adopt a descriptive survey design which according to Churchill (1991) is appropriate where the study seeks to describe the characteristics of certain groups, estimate the proportion of people who have certain characteristics and make predictions. The study aims at establishing the corporate governance practices employed by SMEs in Kenya. Khan, (1993) recommends descriptive survey design for its ability to produce statistical information about aspects of education that interest policy makers and researchers.

Descriptive survey research designs are used in preliminary and exploratory studies to allow researchers to gather information and summarize, present and interpret data for the purpose of clarification (Orodho, 2003). According to Mugenda and Mugenda (1999) the purpose of descriptive research is to determine and report the way things are and it helps in establishing the current status of the population under study. Borg and Gall (1996) note that descriptive survey research is intended to produce statistical information about aspects of a study that interest policy makers. Gay (1992) says that surveys are self-report study that requires the collection of quantifiable information from the sample. They are useful for describing, explaining or exploring the existing status of two or more variables (Mugenda and Mugenda, 1999).

3.2 Study Population

Target population for in statistics is the specific population about which information is desired. According to Ngechu (2004), a population is a well-defined or set of people, services, elements, events, group of things or households that are being investigated. The study will be carried out in Nairobi. The population will target the 100 SMEs selected in a survey by KPMG East Africa and Nation Media Group.

3.4 Sampling

Naoum (2007) defines a sample size as finite part of a statistical population whose properties are studied to gain information about the whole. Orodho (2003), Kombo and Tromp (2006) define sampling as selecting a given number of subjects from a defined population as representative of that population. Any statements made about the sample should also be true of the population. It is however agreed that the larger the sample the smaller the sampling error (Mugenda and Mugenda, 2003). Where there are no estimates available for the proposition in the target population, Mugenda and Mugenda (2003) proposes that 50% of the total population should be used.

The survey method will be used in this study. A sample of 50 customers will be randomly selected across various departments of the SMEs. The respondents from the SMEs will be individuals knowledgeable with the questions at hand, literate and middle or top level management.

3.5 Data Collection Instruments

Primary as well as secondary data will be collected. Secondary data will be obtained from relevant literature review from dissertations/thesis, journals, magazines and the internet. Primary data will be collected using questionnaires. The data collection process will take less than a week.

3.5.1 Questionnaire

A structured questionnaire will be used to collect primary data. The questionnaires are preferred in this study because respondents of the study are assumed to be literate and quite able to answer questions asked adequately. Kothari (2004) terms the questionnaire as the most appropriate instrument due to its ability to collect a large amount of information in a reasonably quick span of time. It guarantees confidentiality of the source of information through anonymity while ensuring standardization (Churchill, 1991). It is for the above reasons that the questionnaire will be chosen as an appropriate instrument for this study. According to Mugenda and Mugenda (2003), questionnaires are commonly used to obtain important information about a population under study. Each item is developed to address specific themes of the study.

Secondary information will be collected from motor vehicle reports, business magazines, journals and other relevant materials on the SME sector.

3.6 Data Collection Procedure

The researcher will obtain an introductory letter from the University to collect data from the SMEs then personally deliver the questionnaires to the respondents and had them filled in his presence. The researcher will use trained and qualified research assistants to assist with the questionnaire distribution.

3.7 Data Analysis

The process of data analysis will involve several stages namely; data clean up and explanation. Data clean up involves editing, coding, and tabulation in order to detect any anomalies in the responses and assign specific numerical values to the responses for further analysis. Completed questionnaires will be edited for completeness and consistency. The data will then be coded and checked for any errors and omissions (Kothari, 2004). Frequency tables, percentages and means will be used to present the findings. Responses in the questionnaires will be tabulated, coded and processed by use of a computer Statistical Package for Social Science (SPSS) version 17.0 programme to analyze the data.

The responses from the open-ended questions will be listed to obtain proportions appropriately; the response will then be reported by descriptive narrative. Descriptive statistics such as mean and standard deviation will be used.



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