The Effect of Corporate Governance on Financial Performance of Insurance Companies in Kenya

Abstract

The main objective of this study was to investigate the effect of corporate governance on financial performance of insurance companies in Kenya. Specifically, the study examined the size of board, number of board sub-committees, number of board meetings, CEO duality, number of independent directors, number of dependent directors, age of the company and size of company in terms of asset value and how they affect the financial performance of insurance Companies in Kenya. The performance of firms was measured using Return on Assets (ROA). The study adopted descriptive research design. The population included all the insurance Companies which were operating as at December 2012. The study made use of secondary data which documentary information from Company annual accounts for the period 2007 to 2012 both years included was collected from 49 firms. Data was analyzed using a multiple linear regression model. The study found that a weak relationship exist between the Corporate Governance practices under study and the firms’ financial performance. The number of Board sub-committee members, number of dependent directors and the age of the company were found to affect the financial performance of insurance companies positively. The financial performance was however affected negatively by the Board size, number of Board meetings, number of independent directors and the asset value of the firms. Insurance firms should therefore put in place adequate board sub committees as well as ensure a higher number of dependent directors in order to enhance financial performance. Board size should also be reduced as much as possible since a larger size reduces the financial performance immensely.