Critical Analysis of Corporate Governance Strategies on Financial Performance of Commercial Banks, Kenya.

Abstract

Effective Corporate Governance is a critical component of value addition in virtually all aspects of corporate performance. Annual financial reports by the Central Bank of Kenya for the period 2010-2019 showed a declining trend in the general performance of Commercial Banks in Kenya, during which Returns on Assets (ROA) declined from 4.51% to 3.84% and Returns on Equity (ROE) from 29.4% to 25.6%. The Study sought to critically analyze Influence of Corporate Governance Strategies on Financial Performance of Commercial Banks in Kenya. The Study investigated; Corporate Governance Structure, Strategic Leadership, Board Composition and Accountability System. Explanatory Research Design was used to guide the conduct of the Study. A sample population of 112 managers drawn from 8 out of the 9 large banks were selected as respondents, for the period 2010-2019. The Study was guided by four theories; Agency Theory, Stewardship Theory, Stakeholder Theory and Financial Intermediation Theory. Data collection was done by use of a close-ended and open-ended questionnaire in which 85 (76%) of the 112 questionnaires were returned. Secondary data were collected from published Annual Financial Reports of Commercial Banks, by the CBK for the period 2010-2019. Content Validity of the research instrument was tested by subject matter experts comprising of the researcher’s supervisors and defense panelists from and outside Mount Kenya University. Reliability of the research instrument was tested using the Cronbach’s Alpha test, which gave an alpha value of 0.8, well within the acceptable range of α ≥ 0.7. Data analyses were done by use of both Descriptive and Inferential statistics. Descriptive data analysis consisted of summarizing the data into tables and describing characteristics of the data set using means and standard deviations. Inferential analysis was done by use of a multiple regression analysis program in a SSPS-26 Software, which gave an Adjusted R2 equal to .765 indicating that Corporate Governance Strategies correlated well with Financial Performance of Commercial Banks. The analyzed data were presented using, graphs, pie chart and tables. The findings showed that there was a significant positive correlation between Corporate Governance Structure, Strategic Leadership, and Accountability System with Financial Performance of Commercial Banks in Kenya while Board Composition was partially significant. Financial Performance was measured by use of profitability ratios, ROA and ROE. The Moderating variable comprised of Government controls and regulations and were analyzed by use of inferential statistics. The result showed that the adjusted R2 dropped from .765 to .608 indicating a decline of .157 (15.7%), which was the influence of the Moderating variable on the strength of the correlation between independent variables and the dependent variable. The conclusion of the study was that Corporate Governance Strategies influenced financial performance of commercial banks in Kenya, with Strategic Leadership producing the greatest influence, with an Adjusted R2 of .812 (81.2%). The study recommended that Commercial Banks in Kenya entrench Strategic Leadership in their corporate governance practices, minimize conflicts of interest between shareholders and corporate level managers, and promote inclusivity in the management process in order to maximize financial performance of commercial bank