The Effect of Corporate Governance Practices on the Financial Performance of the Insurance Companies in Kenya

Abstract

The study examined the effects of corporate governance on the financial performance of insurance companies in Kenya. The study aimed at establishing the effects of corporate governance practices and policies on financial Performance of the insurance companies in Kenya. A cross sectional and analytical research design was used in this study. The population was 49 insurance companies operating in Kenya. The entire population was evaluated. Secondary data was used in the study which was gathered from the company’s annual reports, financial statements and from the IRA periodical reports. The period under study was from 2011 to 2015. Statistical Package for Social Scientists (SPSS) and excel were used. Spearman Correlation Coefficient and Multiple Regression Analysis to determine the magnitude of the relationship and prediction of financial performance respectively were applied. This study independent variable was corporate governance which examined the board size, board composition, board sub-committees and CEO duality and how they affect the financial performance of insurance companies in Kenya. The firm performance was measured using the Return on Assets. This study adopted a descriptive research design to investigate the relationship between corporate governance and financial performance of insurance companies in Kenya. The study found that all measures of corporate governance are not significant predictors of financial performance of insurance companies in Kenya. There was a positive relationship between board composition and firm financial performance. The study recommends that the regulator should draw minimal requirements for corporate governance in the insurance industry to serve as guideline for the insurance firms; this will improve the financial performance of these firms. Insurance companies need to review their corporate governance structure with the view of improving their financial performance in future. The board size, leverage and non-executive directorship should be monitored so as to ensure effectiveness in operations leading to improved financial performance, in order to implement good corporate governance. Managers need to know that they should be concerned about the interrelationships between corporate governance and firm performance. The study findings strongly confirm this correlation and therefore; insurance companies that adopt and implement good corporate governance have higher advantage of increasing their performance. More so, this will ensure that interests of the firm and shareholders are served.