The Relationship Between Board Structure and Financial Performance of Commercial Banks in Kenya

Abstract

There is no specific optimal board structure that applies to all banks; every board considers whether its size, diversity and demographics make it effective. The objective of the study was to investigate the relationship between board structure and financial performance of commercial banks in Kenya. Data was collected from the 42 commercial banks which were operational in Kenya for three years - 2011, 2012 and 2013. ROA was used in this study to measure financial performance. Data was collected in relation to various elements of board structure, specifically: board size, director independence, board meetings, compensation committee, nomination committee, audit committee, gender diversity and foreign directors. Control variables used in this study were: bank age, ownership structure and peer group. Data was analyzed using descriptive and inferential statistics. Correlation analysis shows strong positive relationship between ROA and age of a bank and bank size – CBK has classified banks as either small or medium or large size. The study found existence of weak positive relationship between ROA and size of the board, existence of a nomination committee and the proportion of female directors. The study found negligible relationship between ROA and the number of board meetings, existence of a compensation committee, the size of the audit committee, the proportion of foreign directors and bank ownership structure. The analyses showed that board structure elements account for 45% of the financial performance of commercial banks. Of all the variables under study, compensation committee, nomination committee, audit committee size, proportion of foreign directors and bank's peer group were found to be significant predictors of bank financial performance. The other variables – board size, director independence, board meetings, audit committee independence, audit committee meetings, gender diversity, bank age and ownership structure – were found to be insignificant predictors of ROA. This study makes the following recommendations: policy makers should consider making it mandatory for banks to establish nomination committees; policy makers should set up higher capital requirements for banks; boards should consider establishing ad hoc, rather than permanent, compensation committees; boards should ensure they have lean sizes of audit committees; and foreign owned banks should consider recruiting more local than foreign directors.