The Relationship Between Agency Costs and Financial Performance of Saccos With Fossa in Githunguri District

Abstract

The “Management Board System” used in the governance of SACCOs makes them have a peculiar kind of leadership in which both the Boards of Directors and the hired management participate in the operational day to day activities of the SACCOs. The directors closely monitor the hired professionals to ensure that their actions are in line with the welfare of the members. The end result is high agency costs in terms of directors’ allowances and other payments. This study aimed at finding out the impact of this close supervision of the agents (managers) by the principals (directors) on the financial performance of SACCOs. A descriptive research methodology was used. Four SACCOs with FOSA in Githunguri district were targeted and three of the four were included in the study. Data was obtained from the audited financial statements of the SACCOs for the years 2007 to 2011. All expenses relating to the directors were used as proxy for agency costs and return on assets (ROA) used to measure financial performance. The data was analyzed for both correlation and regression and the results tested at 5% level of significance. The study results did not show any significant relationship between the financial performance of the SACCOs and agency costs when only agency costs were used as the independent variable. After both size and expenditure on marketing were added into the model however, a significant relationship was observed. From the findings of this study, it can be concluded that agency costs alone do not have a significant impact on the financial performance of SACCOs but that interplay between a combination of factors within the SACCOs determine their ultimate financial performance.