Influence Of Corporate Governance On Performance Of Commercial Banks In Kenya

Abstract

Corporate governance comprises of policies, practices and rules that guide decisions and operations in an organization to ensure that the interests of shareholders and other stakeholders are served responsibly and effectively. Emerging issues in corporate governance continue to fuel new debate on its effect on firm performance. The general objective of this study was to establish the influence of corporate governance on performance of commercial banks in Kenya. The specific objectives of the study were to establish the effect of board competence, board accountability, compensation decision-making and risk management on the performance of commercial banks in Kenya. This study was anchored on agency theory, stewardship theory and performance theory. The study adopted descriptive research design and the target population was 40 commercial banks that were licensed by central bank of Kenya by December 2019. The study will used structured questionnaire to collect primary data. Data was analysed using descriptive statistics, correlation analysis and multiple regression analysis with the aid of statistical package for social sciences. The study established that board competence had a statistically and significant positive effect on performance of the commercial banks (β = 0.264, t = 2.308, p = 0.027). Board accountability did not have a significant effect on performance of commercial banks (β = -0.128, t = -1.105, p = 0.277) while compensation decision-making had a significant positive influence on performance of commercial banks in Kenya (β = 0.454, t = 4.778, p < 0.05). Besides, risk management had a statistically significant and positive effect on performance of commercial banks in Kenya (β = 0.404, t = 3.211, p = 0.003). Based on the conclusions from the study, the following recommendations are made. First, shareholders of commercial banks should ensure that the board members they elect to oversee running of the commercial banks are competent. The critical factors that these shareholders should consider when electing board members include professional and education qualifications, technical capabilities and experience in the banking industry. On board accountability, regulatory authorities such as NSE and CMA should ensure that boards of commercial banks adhere to honest, clear and open reporting on issues touching on the banks. The study recommends to shareholders to ensure that the elected board put in place effective compensation philosophy that is performance and risk based. Lastly, the study recommends to regulatory authorities to ensure that boards play oversight roles towards operational, market and financial risks that the commercial banks face.