Effects of Board Diversity on Financial Performance of Commercial Banks in Kenya

Abstract

Composition of any firms’ board plays a key role in determining the firm financial performance. Findings suggest that there is a substantial influence of different boards’ qualities on firm financial performance. No sufficient exploitation study has been carried out on the impact of board diversity on the financial performance of commercial banks in Kenya. This study thus looked to close the gap by determining the effect of board diversity on the financial performance of commercial banks in Kenya. This study considered causal research design. The objective populace for this study was all the 42 commercial banks in Kenya for 5 years. The data pertaining to age, gender and education levels of the board members was collected from audited annual reports of the listed commercial banks. Information on financial performance was promptly accessible in secondary sources that incorporated financial information from financial statements of the commercial banks. These included the Nairobi Securities Exchange (NSE) annual publications, the NSE Handbook (2009), the banks’ annual reports, and the Central Bank of Kenya website. Regression analysis was applied to evaluate the link between the top managements’ diversity and banks financial performance. This study clearly proved to be that directors’ age, average period of experience, gender and education level has a positive relationship with the banks financial performance. The study conclusions brought it out plainly that diversity could be a vital corporate governance element in other business sides rather than to boardrooms. Whatever measure could be put to use to enhance individuals selected as directors in terms of their age, average period of experience, gender and education level may positively influence the performance of commercial banks. The study also concluded that there is a gender issue in the board composition in many banks. These findings could resemble as the greater part of the boards are male lead and the couple of women existing on the board might not have any effect on the bank strategies. Commercial Banks should therefore have a satisfactory and diverse board size designed so as to ensure diversity of experience without yielding freedom, similarity, honesty and availability of individuals to go to meetings. The board size ought not to be excessively vast and ought to be comprised of qualified experts who are familiar with the oversight function. The number of non-executive and independent directors needs to be selected with a lot care since they affect financial performance commercial banks. The board needs to consist of well-educated and experienced professionals since they are actively involved in modeling the decisions of financial institutions. Last but not least, commercial banks who value return on assets should have their board members serving for a shorter term and have more board members experienced in banking. Banks focusing on improving return on assets should reduce the board size and increase the ratio of female members in the board.