How Corporate Governance Affects Bank Performance
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Date
2012Author
Ochieng, Simplicious O
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
Effective corporate governance practices are essential to achieving and maintaining
public trust and confidence in the banking system and also critical to bank performance.
Good corporate governance should facilitate efficient, effective and entrepreneurial
management that can deliver shareholder value over the long term. Corporate governance
of banks is important since commercial banking operations are not as transparent as other
firms. The opaqueness of bank’s balance sheets and income statement makes it very
costly for depositors to constrain managerial discretion and they cannot know the true
value of the bank’s loan portfolio as such information is incommunicable and very costly
to reveal.
This project looks at how corporate governance affects bank performance, since good
corporate governance shall ensure that strategic goals and corporate values are in place
and communicated throughout the bank. Sound corporate governance therefore creates an
enabling environment that rewards banking efficiency, mitigates financial risks, and
increases systematic stability. A good working relationship between the board of
directors, management and other stakeholders in any given bank would result in
increased efficiency, throughput and profits. Companies with better corporate governance
have better operating performance than those companies with poor corporate governance.
It is also believed that good corporate governance helps to generate investor goodwill and
confidence.
The researcher identified basically two different models of the firm concerning the
impact of corporate governance on performance, the shareholder model and the
stakeholder model. The shareholder model describes the formal system of accountability
of senior management to shareholders while the stakeholder model describing the
network of formal and informal relations involve the corporation.
This study was to establish if there was a relationship between corporate governance
practices and commercial bank performance in Kenya. The population of the study was
the 45 banks licensed by the Central Bank of Kenya as at the end of 2010. The study
adopted a census study approach because of the small population and the banks are easily
assessable. Secondary data was collected from the published financial reports. Two
methods of data analysis were employed, the descriptive analysis which provides some
averages of relevant variables and the regression analysis to establish a relationship
between the corporate governance variables (independent variables) and firm
performance (the dependent variable) over the period of study.
From the study the researcher concludes that the Board should be involved in the
selection and appointment of senior executives, the board should also put systems in
place for identifying, monitoring and managing the organization’s risk profile. Given the
increasing complexity of business today, there is need for the financial reports to include
more comprehensive information as investors rely on information they receive from
companies in making their investment decisions. Failures in corporate governance
practices have aggravated incidences where management manipulates financial reports
for different purposes hence making it difficult for the stakeholder to build confidence in
them. By examining the existing relationships between the directors, management,
shareholders, and the other stakeholders, the study recommends that existing boards
setbacks need to be addressed in order to improve the corporate governance in banking
institutions in Kenya.
The researcher concludes that corporate governance practices (directors’ effectiveness,
management effectiveness, shareholder protection, disclosure and transparency) have a positive relationship with bank performance. Amongst other success factors to overall
bank performance, this study attributes 20.7% of these to corporate governance practices.
Therefore banks should embrace adequate corporate governance practices in order to
increase financial performance.
Publisher
University of Nairobi