Board structure, board compensation and firm profitability: Evidence from the banking industry

Abstract

This study examined the relationship between Board characteristics and Board compensation in determining firm profitability in the Banking industry in Kenya. Prior research elsewhere suggests that Board structure and Board compensation are some of the main measures aligning the interest of shareholders and management to ensure sustained value creation to equity holders. Using a sample of 30 Banks for the period 1999-2003, this study sought to explore this argument. Board size (SIZE), proportion of Non-Executive Directors (PROP NED), CEO Duality (DUAL) and Board Total Compensation (TC) where used to proxy corporate Governance while. ROA, ROE and Profit before tax (PROFiT) were used to proxy bank profitability. Board compensation and firm size were found to be positively and significantly related to Bank profitability. The relationship between Board size and proportion of Non-Executive Directors were found to be negative and statistically insignificant. The negative relationship indicated that Board structure had not contributed to the reduction of agency costs in the Banking industry in Kenya.