The Relationship Between Agency Costs and Operational Efficiency of Non-governmental Organizations in Kenya

Abstract

Even though NGOs are dedicated to doing well, the fact that they are non-commercial entities implies that most of them lack the bottom line and so there is need for organization leadership, accountability, performance and results. The interest of the shareholder of wealth maximization and stock value addition does not exist in an NGO setup thus checks on excessive compensation may be lacking. The absence of competition for market share and the lack of measure of business success, profit for commercial entities, may also lead to compromise on efficiency. The society has over the past few years been concerned on the management of NGOs and use of community as 'rubber stamp' to mobilize finances and other resources that end up benefiting the management alone. Some NGOs have been deregistered for non-compliance while others appear but do not stay operational for long. This study sought to examine the association between agency costs and operational efficiency of NGO’s in Kenya. The population for the study was all the 150 NGO’s operating in Kenya. The sample for the study was 15 NGO’s and the researcher managed to get data from 12 of them giving a response of 80 percent which was considered adequate for the study. The independent variables for the study were agency costs as measured by asset utilization ratio liquidity as measured by current ratio, firm size as measured by natural logarithm of total assets and debt structure as measured by long term debt divided by (shareholders equity + long term debt). Operational efficiency was the dependent variable and was measured by revenue turnover. Secondary data was collected for a period of 10 years (January 2007 to December 2016) on an annual basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the association between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0.119 which means that about 11.9 percent of the variation in operational efficiency of NGO’s in Kenya can be explained by the four selected independent variables while 88.1 percent in the variation of operational efficiency of NGO’s in Kenya was associated with other factors not covered in this research. The study also found that the independent variables had a weak correlation with operational efficiency of NGO’s in Kenya (R=0.344). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the association between the selected variables. The findings further revealed that liquidity and debt structure produced negative and statistically significant values for this study. Agency costs and firm size were found to be statistically insignificant determinant of operational efficiency of NGO’s in Kenya. This study recommends that a comprehensive assessment of NGO’s immediate liquidity position should be undertaken to ensure the company is operating at sufficient levels of liquidity that will lead to improved operational efficiency of firms. This is because a firm’s liquidity position is of high importance since it influences the firm’s current operations.