Board Diversity and Financial Perfomance of Kenyan Commercial Banks

Abstract

Board composition is a major determinant of an organization’s financial performance. In the previous two decades, policy makers, scholars and professionals have engaged in discourse about role of boards as a major component of corporate governance. A section of scholars have highlighted how board directors’ attributes can have significant impact on company performance due to their varying orientations. Accordingly, the typical attributes used to categorize the various board members includes age, education gender, and the individual’s corporate experience. Board members chosen subjectively rather than by merit can fail to be objective with the interests of the organization. The objective of the study was to establish the impacts of having a company board that has embraced diversity and its short and long term impact on company’s profitability with a focus on Kenyan commercial banks. It also aimed at reviewing the increasing body of theoretical and empirical studies that have endeavored to examine the range of magnitude and effects of board diversity on the financial performance of commercial banks. The target population was all the 42 licensed commercial banks. Secondary sources of data were employed. Panel data was utilized, data was collected for several units of analysis over a varying time periods. The research employed inferential statistics, which included correlation analysis and panel multiple linear regression equation with the technique of estimation being Ordinary Least Squares (OLS) so as to establish the relationship of board diversity and financial performance of commercial banks. The study findings were that board diversity significantly influences financial performance and it can be utilized to significantly predict financial performance. Further findings were that average board experience had both a significant positive association and relationship with financial performance. An additional finding is that directors’ age has a significant positive association with financial performance but has an insignificant relationship with financial performance. The final finding was that both gender diversity and educational qualification neither had a significant association nor relationship with financial performance. Policy recommendations are made to the National Treasury and CBK to direct commercial banks, and by extension other financial institutions, to implement corporate governance principles that ensure appropriate board diversity and adhere to a corporate governance code. Recommendations are also made to commercial bank practitioners, and by extension other financial institutions practitioners and consultants to enhance board diversity in order to augment the financial institutions’ financial performance and to mainly focus on the board diversity aspect that entails average board experience in order to enhance financial performance.