Effect of Corporate Governance on Financial Performance of Kenyan Commercial Banks Listed in the Nairobi Securities Exchange

Abstract

The research examined the impact of CG on financial performance of commercial banks listed at NSE. The research was based on descriptive research design. The study targeted eleven commercial banks with shares at the NSE. The per annum panel data was retrieved from end year financial statements of banks the study focuses on. The secondary data used was from 2012 to 2021.The estimation model was subjected to diagnostic tests for robustness. Before parameters are estimated, it is critical that certain assumptions are not violated so as to generate reliable estimates. The study specially examined assumptions including normality, linearity, collinearity, homoscedasticity, stationarity, autocorrelation among others. The sourced data on data collection sheets was transferred to excel sheets before being exported to STATA version 15. Descriptive statistics measures of dispersal and central tendency aided in examining the general distribution of variables. The study employed panel correlated standard errors model as the inferential statistics tool. The overall p-values associated with the three models used in the study showed that CG variables (board gender diversity, board independence, board experience, board ownership and board size) and bank size majorly affected financial performance (ROA, ROE and P/B) of banks studied. The regression model showed that effect of board size on ROA and ROE was direct but weak. However, board size inversely and weakly affected P/B. Further, board gender diversity inversely affected performance measured by ROA, ROE and P/B. However, only board gender diversity had a strong effect on ROA. Board independence strongly and directly affected financial performance (ROA, ROE and P/B) of the banks studied. Board experience had a direct but weak effect on financial performance. Further, there was a direct and major impact of board ownership on financial performance (ROA and ROE). However, the effect of board ownership on P/B was inverse and statistically significant. Finally, the results revealed a direct impact of bank size on financial performance (ROA and ROE). However, bank size effect on ROE was weak. Further, bank size impact on P/B was inverse and weak. The research suggests to shareholders and directors of listed commercial banks having smaller board sizes to increase the number of directors in their boards. The shareholders and directors of listed commercial banks to ensure that they have the right gender diversity in their boards. Shareholders and directors of listed commercial banks to have more independent and nonexecutive directors in their boards. The study also suggests to shareholders and directors of listed commercial banks to allow their executive directors especially the CEO to serve more time on the boards. Further, shareholders and directors of listed commercial banks in Kenya to encourage directors especially the executive directors to acquire shares of the banks. Finally, shareholders and directors of the banks studied to ensure they have adequate assets to enable them exploit emerging investment opportunities.