The relationship between corporate governance practices and financial performance of savings and credit co-operative societies in Nairobi County

Abstract

Corporate governance is considered to have significant implications for the growth prospects of an economy. Good corporate governance practices are regarded as important in reducing risk for investors, attracting investment capital and improving the performance of companies. Corporate governance as a mechanism helps to align management's goals with those of the stakeholders that are to increase firm performance. The purpose of this study was to establish the relationship between corporate governance practices and financial performance of SACCOs in Nairobi County, as a result of the adoption three corporate governance practices (board size, board composition and CEO duality) in the period 2010-2012. The study was based on a theoretical framework that focused on three contrasting and competing theories of corporate governance namely: agency theory, stewardship theory and stakeholder theory. The conceptual framework underpinning this study described how the corporate governance practices of SACCOs in Nairobi County impacted on financial performance of the entities. In this framework, corporate governance practices variables were board size, board composition and CEO duality. Board composition refers to a majority of non-executive directors on the board; board size the number of directors in board; CEO duality refers to the separation of the position of chairman and CEO. Financial performance was assessed by Return on asset defined as the amount of net income as a percentage of total assets/Earnings before tax divided by total assets of the Company. The study employed a descriptive survey design to assess the relationship between corporate governance practices and financial performance of deposit taking SACCOs in Nairobi County from the period 2010-2012. The study considered a population of 123 licensed deposit taking SACCOs in Kenya. A simple random sampling technique was used to select a sample of 34 Deposit Taking SACCOs out of 45 deposit taking SACCOs operating in Nairobi County. Correlation analysis, multi regression analysis and the t-test analysis technique was adopted to estimate the relationship between the corporate governance practice and financial performance of deposit taking SACCOs. Findings proved that there is no significant relationship between the proxies of corporate governance practices in the study i.e. board size, board composition and CEO duality and financial performance of deposit taking SACCOs in Nairobi County. The researcher found that the sampled SACCOs tended to favour inside board members over outside members. The prevalence of inside board members was twice as much as for outside board members which was contrary to the notion of the Agency Theory. The researcher also found that the sampled SACCOs tended to favour a l-tier type of leadership where the position of the of the CEO and that of the Chairman of the Board are held by one and the same person which is contrary to the Agency Theory. In conclusion therefore, it was found that there exists an insignificant negative relationship between corporate governance practices and financial performance of SACCOs as revealed by the results. Financial performance is greatly or to a larger extent affected not only by the proxies of the corporate governance practices mentioned in the study but by a mix of various internal corporate governance and external governance practices. The study recommends that, corporate governance practices should be reviewed in a systematic way to frame the best practices in the current Kenyan context.