Impact of Corporate Governance on Financial Performance of Selected SMEs in Lusaka District

Abstract

This study examined the impact of corporate governance practices on the financial performance of Small and Medium Enterprises (SMEs) in Lusaka District, Zambia. The research focused on three key governance variables, namely board composition, transparency practices, and risk management, and how they influence financial performance indicators such as profitability, liquidity, and financial stability. A quantitative research design was adopted, guided by a positivist research philosophy. Structured questionnaires were administered to a sample of 398 SME respondents, of whom 314 returned completed questionnaires, yielding a response rate of 78.89%. Reliability analysis confirmed strong internal consistency across all constructs (Cronbach's alpha range: 0.841 to 0.891). Data were analysed using SPSS through Spearman rank-order correlation and ordinal logistic regression, following confirmation that the data violated the assumption of normality as established by Kolmogorov-Smirnov and Shapiro-Wilk tests. The findings revealed that board composition, transparency practices, and risk management all have positive and statistically significant effects on SME financial performance. Board composition emerged as the most influential determinant (Exp(B) = 108.271, p < 0.001), followed by risk management (Exp(B) = 34.478, p < 0.001) and transparency practices (Exp(B) = 34.288, p < 0.001). Spearman correlations corroborated these findings, with board composition recording the strongest bivariate association with financial performance (rs = 0.712). The model demonstrated excellent fit (Omnibus LR Chi-Square = 682.669, p < 0.001), confirming the collective significance of the independent variables. The study concludes that SME financial performance is driven by the combined effect of governance structures, transparency, and risk management practices. It recommends the adoption of flexible governance frameworks, simplified reporting systems, and capacity-building initiatives. The study contributes empirical evidence on corporate governance within the Zambian SME context and offers practical insights for policymakers and business practitioners. Keywords: Corporate Governance, Financial Performance, Board Composition, Transparency, Risk Management, SMEs, Ordinal Logistic Regression, Spearman Correlation