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

Abstract

This main objective of this research paper was to investigate the effects of corporate governance practices on the fmancial performance of insurance companies in Kenya. Specifically, this study examined board size, board composition, board meeting frequency, Insider shareholding, CEO duality and leverage and how they affect the financial performance of insurance Companies in Kenya. Finn financial performance was measured using Return on Assets (ROA).The study comprised of 45 insurance companies licensed by Insurance Regulatory Authority during the period of study 2008 to 2012. No sampling was employed and the whole population was considered. The primary data was collected through the administration of questionnaires to the staff in these licensed insurance firms the questionnaires were randomly dropped to the insurance company. Secondary data was collected using documented information from the company's annual accounts for the period 2008 to 2012. The type of data was quantitative in nature which was analyzed using the Pearson Correlation and the regression analysis to fmd out whether there was any effect of the corporate governance variables on the firm's financial performance. Board size was found to negatively affect the financial performance of insurance companies as the operations of the companies had to be slowed or halted as the staff had to await fmal decision because board members took a longer period to agree on major decisions. There was a positive relationship between board composition and firm financial performance. However, the most critical aspect of board composition was the experience, skills and expertise of the board members as opposed to whether they were executive or non executive directors. Similarly, leverage was found to positively affect financial performance of insurance firms. On CEO duality, the study found that separation of the role of CEO and Chairman positively influenced the financial performance of insurance firms. In terms of recommendations this study not only contributes to the literature around corporate governance practices and fmancial performance but insurance companies need to review their corporate governance structure with the view of improving their financial performance in future. The board size, leverage and non-executive directorship should be monitored so as to ensure effectiveness in operations leading to improved financial performance, in order to implement good corporate governance. Managers need to know that they should be concerned about the interrelationships between corporate governance and firm performance. The study findings strongly confirm this correlation and therefore; insurance companies that adopt and implement good corporate governance have higher advantage of increasing their performance. More so, this will ensure that interests of the firm and shareholders are served.