Effect of Corporate Governance on Financial Performance of Commercial Banks in Kenya

Abstract

According to the agency theory, managers have selfish interest and will only work towards maximizing shareholder’s returns if there exist efficient corporate governance structures that are likely to monitor and punish wrong doing. Numerous studies have supported that corporate governance is likely to improve business performance. Some scholars have argued that firms that handle corporate governance issues well exhibit cost advantages over those that do not. A lack of corporate governance structure denies the companies robust and harmonized decisions and is reflected in their performance. The study’s intent was determining how corporate governance has on performance Kenyan banks. The study selected 42 commercial banks as the population. The independent variable was corporate governance with three measures; board independence, diversity, ownership concentration. The control variables were liquidity and capital adequacy. Financial performance was selected to be the dependent variable which was the variable to be examined. Secondary data from 2015 to 2019 was obtained annually. A descriptive cross-sectional design together with multiple regression model was utilized in the analysis. The SPSS version 23 was the software selected in analyzing the variables. Findings showed an R-square value of 0.664 which could be explained as 66.4 percent changes in financial performance the banks could be attributed to the independent variables while 33.6 percent resulted from factors outside the scope of the study. The findings also showed a strong correlation between independent variables with an efficiency of (R=0.815). ANOVA variable showed an F statistic which was substantial at 5% level with a p=0.000. The model was hence appropriate in exploring the relation between the variables. The findings also showed that board independence, liquidity and capital adequacy had positive substantial values for the study and board diversity and ownership concentration were insignificant to financial performance. The recommendation from the study was that measures should be instituted that will enhance board independence, liquidity and capital adequacy since they are significant to the performance of Kenyan banks.