Relationship between selected aspects of corporate governance and financial performance of commercial banks in Kenya

Abstract

The main objective of this study was to determine the relationship between selected aspects of corporate governance and financial performance of commercial banks in Kenya. Specifically, this study examined board size, board composition, board Education Level, and boards Compensation and how they affect the financial performance of commercial banks in Kenya. This study adopted a cross-sectional research design. The population of the study comprised of all the 43 commercial banks licensed by Central Bank of Kenya that were in operational between Jan 2009 and Dec 2013. Secondary data was obtained from the audited financial reports of the Central Bank of Kenya for the period from 2009 to 2013. A multiple regression model was adopted to determine the relationship between the two variables. The study used one measure of performance which was return on assets (ROA) , as the dependent variable and four measures of governance, namely the board size, board composition, board Education Level, and boards Compensation, as the key independent variables. The main findings were that, a large board size tends to impact performance negatively while Board composition, board compensation and board educational level was found to positively affect financial performance of commercial banks in Kenya because they tend to enhance the performance of the banks. In conclusion Commercial banks operating in Kenya, like any other form of business organization, in today's dynamic financial landscape should focus on proper governance aspects and principles not only to boost and enhance their financial performances but also act as path for gaining a better public image, thus recognized by the society in which the bank operates as socially receptive commercial banks which may augment the bank operations and survival. The study therefore recommends that for commercial banks in Kenya to register high performance they need to check the size of their board of directors and also increase the number of independent directors.