Effect of Corporate Governance on Financial Perfomance of Insurance Companies in Kenya

Abstract

This study looked at the relationship between corporate governance and financial performance of insurance companies in Kenya. Good corporate governance enhances ethical behavior of those that yield corporate power. Specifically, this study examined Board diversity, Board meetings, Board committee, Board size, and Board independence and their relationship with financial performance, as measured by return on assets, of insurance companies in Kenya. The study comprised of all 43 insurance companies licensed by the Insurance Regulatory Authority during the period 2012 to 2015. The study employed multiple linear regression analysis. The data collected was from secondary sources as it was obtained from the firm’s financial reports. The data was cleaned for completeness, coded and analyzed by the use of Statistical Package for Social Sciences (SPSS) for analysis. The results also found that there exists a weak negative correlation between return on assets and board size with return on assets and board diversity was found to be strongly positive. The board frequency of meetings was found to have a minimal significant influence on the insurance company’s financial performance with board diversity, board committee and board committee found to be statistically significant. The overall multiple linear regression models was tested using ANOVA and the resulting F-stat indicated that the model was significant at 95% significance level.The study recommends that stakeholders in Kenyan insurance industry should take into account the board diversity, board committees and board meetings when forming board of directors as they are significant determinants of financial performance. That is the board should be organized in a way that will help the insurance companies improve their overall performance. According to this study board independence and board size should not be prioritized as they are insignificant when it comes to determining listed firms’ financial performance.The variables considered in the study explained 52% and 66% of the variation in firm financial performance across the four study years implying that there are other important factors not included in the model and therefore the study recommends that the management should put in to consideration such factors in order to enhance the effectiveness of corporate governance index. The study also recommends that policy makers should set an index on corporate governance to act as a reference for all insurance companies so that the efficiency of corporate governance can be enhanced