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

Abstract

Corporate governance affects the development and functioning of capital markets and exerts a strong influence on resource allocation. In an era of increasing capital mobility and globalization, it has also become an important framework condition affecting the industrial competitiveness and economies of member countries. Despite tight regulatory framework, Corporate Governance continues to weaken in Kenya. Many companies have been characterized by scandals. Directors have acted illegally or in bad faith towards their shareholders. Because Kenya offers great opportunity for investors, this makes it unique in the region and attractive for more investment flows. The purpose of this study is to determine the effect of corporate governance on financial performance of insurance companies in Kenya. This study adopted a descriptive research design and all 49 insurance Companies registered in Kenya were investigated. Secondary data was used where both quantitative and qualitative data was analysed. Statistical Package for Social Sciences (SPSS) version 20.0 was used to analyse the data. Moreover, multiple linear regression analysis was used to determine the relationship among the variables. Further, normality of the variable was examined using the skewness and kurtosis. The findings of the study show that corporate governance has influence on the financial performance of insurance companies in Kenya. Whereas financial performance of insurance companies in Kenya are significantly influenced by board composition (the ratio of outside directors to total number of directors) and leverage (ratio of total liability to total assets), the performance is not significantly influenced by board size and the number of members in the risk committee.. vi The study established that, generally, a weak, negative but statistically significant correlation between financial performance (ROA) of insurance companies in Kenya and corporate governance (board composition, board size, risk committee and leverage) as indicated by a small R Square of 0.33 , p values 0.001 and high F value of 5.408. The study findings shows governance mix influence on the financial performance of insurance companies in Kenya. Insurance companies should review their policies regarding Corporate governance particularly practices influencing board size and the number of members in the risk committee, majority of the members of a committee in insurance companies in Kenya be independent.