Relationship between Corporate Governance and Performance of Commercial Banks in Kenya

Abstract

Global events concerning poor performance and eventual collapse of high profile companies have awakened need to strengthen corporate governance in both developed and developing countries. Corporate governance issues have attracted public interest in the banking sector both locally and internationally after waves of corporate rip-offs and failures that almost led to loss of confidence in this important sector. Owing to this, Central bank of Kenya issued the first prudential guidelines on corporate governance for banking institutions in the year 2000 that came in force in 2001.These were superseded by the 2006 and 2013 guidelines respectively. To achieve the general objective of the study, a survey was conducted on 43 commercial banks that were operational. The researcher made use of return on assets, return on equity and Tobin’s q ratio as key variables that defined banks performance; whereas bank size was adopted as a control variable. Corporate governance mechanisms were measured using selected internal corporate monitoring mechanisms and ownership monitoring mechanisms. Data on general information and corporate governance mechanisms was collected using a questionnaire. Whereas, data on banks performance, internal corporate monitoring mechanisms, ownership monitoring mechanisms and bank size were collected from secondary sources. Data analysis was primarily done using descriptive and inferential statistics. Under descriptive statistics; mean, maximum, minimum and standard deviations were used and under inferential statistics: partial correlation analysis and hierarchical multiple regression analysis within the panel data framework were used. The findings of the study indicated that board independence was not significant in the relationship between corporate governance and performance of commercial banks when all the three performance measures were used (ROA, ROE and TBQ ratio). Board size was found to have a negative and significant relationship with ROE, a positive and significant relationship with TBQ ratio and no significant relationship with ROA. Under ownership monitoring mechanisms, institutional and block ownership were found to have a negative and significant relationship with ROE. However they were not found to have any significant effect when TBQ ratio was adopted as a performance measure. It was further revealed that bank size had a positive and significant effect in the relationship between corporate governance and performance of commercial banks when all the three performance measures were used. The findings further indicated that of the three performance measures: ROA, ROE and TBQ ratio, ROE was the best measure of performance in studies of corporate governance mechanisms as they relate to performance in the Kenyan banking sector. From these findings, some policy implications are suggested as follows: commercial banks in Kenya should desist from higher levels of block ownership in order to improve their performance, the regulator should have a seat in the boards of commercial banks so as to improve their effectiveness, the board size of commercial banks in Kenya should be pegged on the bank’s capital tier and institutional shareholders should engage in business with commercial banks in which they own shares at an arm’s length with close supervision of the regulator.