Impact of corporate governance practices on operating performance of the unlisted financial institutions in Kenya

Abstract

The study sought to determine the impact of corporate governance practices on the operating performance of the unlisted insurance companies and banks in Kenya. The study had five objectives. The first objective sought to determine the extent of corporate governance adoption by unlisted insurance companies and banks in Kenya. The second objective sought to determine levels of adoption of foreign countries corporate governance codes by the unlisted insurance companies and banks in Kenya. The third objective sought to determine the extent of vacuum in the Kenya Corporate Governance provisions in the unlisted and private companies. The fourth objective sought to determine the impact of corporate governance practices on the corporate investment decisions of the unlisted insurance companies and banks in Kenya. In the fifth objective the study sought to determine the impact of corporate governance practices on the corporate performance of the unlisted insurance companies and banks in Kenya. To achieve the objectives a descriptive research design was adopted. The study conducted a census of all unlisted insurance companies and banks operating in Kenya. Primary data was collected from senior managers in these firms using a structured questionnaire which aided in construction of corporate governance indices used in the analysis. The study used descriptive statistics, ANOVA and pooled multivariate regression analysis. The findings were presented in figures, tables and were beefed up by a narrative explanation. The study found that none of the unlisted firms had achieved 100% compliance with the governance mechanisms. The study found that firm with the lowest corporate governance index had an index of 30% while the highest had 96%. The study further found that mean index was 68% with a deviation of 14% indicating that most of the firms had just above average compliance rates with the governance mechanisms. The study found that the unlisted firm had adopted most of the corporate governance requirements of the CMA as these are regulatory requirements in Kenya while some firms had also adopted the foreign ones. The study also found that governance did not significantly influence corporate investment decisions as the relationship was positive but insignificant at 5%. The study found that the effect on firm value as well as the effect on firm performance, corporate governance index did not have a significant effect on either Tobin’s Q or on ROA. The study makes a number of recommendations. First, unlisted firms should strive to adopt more corporate governance codes as the level of adoption is still relatively low compared to their listed peers. It is therefore important that the boards of financial institutions adopt stringent corporate governance mechanisms. The study also recommends that the Central Bank of Kenya and the Insurance Regulatory Authority should find other ways of ensuring that the firms conform to the minimum requirements of the governance codes in Kenya arising from regulatory lapse. More stringent regulations should be adopted to ensure strict adherence to the guidelines. In as much as corporate governance was not found to influence firm performance, the study recommends that firms keep adopting more of the governance guidelines as this has been found to positively impact on firm performance.