Effect of Corporate Governance Attributes on Financial Performance of Tier-two Commercial Banks in Kenya

Abstract

Corporate governance dysfunctions have been linked to failures of several financial institutions. The managerial problems triggered the 2008-2010 global financial crisis that led to devastating effects on the economy for several years. In Kenya, Chase and Imperial Banks collapsed because the managed failed to implement appropriate liquidity control and risk management structures. The study aimed at exploring the correlation between the selected corporate governance mechanisms (board size, composition, CEO’s tenure and liquidity) and financial performance of tier two commercial banks in Kenya between 2017 and 2019. Census method was utilized to collect data on the corporate governance styles and financial performance of all tier-two banks in Kenya. Kolmogorov-Smirnov’s normality tests and Durbin-Watson’s autocorrelation tests were further administered to derive the multiple correlation model for predicting the relationships between the studied corporate governance practices and the bank’s ROA. Durbin Watson’s test result was 1.835 and all the variables had a weak correlation of below 0.05. Consequently, the studied corporate governance mechanisms hardly affect the ROA of the tier-two banks. The tier-two banks should restructure their corporate governance practices accordingly and embrace lean board sizes, comprehensive liquidity control procedures and appoint high performing CEO’s and provide ample time for the executives to deliver their mandates.