Academic journal article Academy of Strategic Management Journal

Corporate Governance and Performance of Financial Institutions in Kenya

Academic journal article Academy of Strategic Management Journal

Corporate Governance and Performance of Financial Institutions in Kenya

Article excerpt

INTRODUCTION

Over the last few decades, the business environment has evolved, registering innumerable developments. These key developments include how organizations are directed and controlled, the ownership and financing structure, aligning organization's strategies with environmental forces and stakeholder's engagement (Shleifer & Vishny, 1997; Dewji & Miller, 2013; Capital Markets Authority (CMA), 2015). Despite these advancements, organizations are still faced with challenges such as the separation of ownership and control (Jensen & Meckling, 1976; Shapiro, 2005). This separation leads to emergence of governance issues where the three main corporation's stakeholders interplay. These are shareholders, directors and management, creating the structure of corporate governance. Thus, corporate governance is a key driving force in a firm's performance. Corporate governance has been perceived from various dimensions. Dewji & Miller (2013) classified corporate governance components into internal and external aspects. Internal factors are under firm's control and include board composition, management remuneration structure, ownership concentration and debt level, while external components include market for corporate control, labor market and the regulatory framework. Other dimensions of corporate governance studied include board committees, skills and diversity (Narwal & Jindal, 2015; Van Ness et al., 2010).

The emergence of corporate scandals, stronger demand for accountability, transparency and performance in the global arena has placed corporate governance at the center of strategic management debate (Van der Walt et al., 2006). However, despite the role played by corporate governance in influencing firm performance, inconclusive empirical support has been recorded. This has led to immense interest for research both from scholars and practitioners (Shleifer & Vishny, 1997). However, the research findings have been diverse and inconsistent. According to Organization for Economic Cooperation and Development (OECD) (2004) corporate governance provides the structure through which objectives of a company are set and means for attaining those objectives, leading to higher performance. Similar accolades have been recorded by scholars, associating adoption of good governance to enhanced performance (Brown & Caylor 2004; Grove, Patelli, Victoravich & Xu, 2011). On the contrary, corporate governance has been linked with negative firm performance. For instance, Adams & Mehran (2011) reported no connection between corporate governance and corporation's performance. Further, Narwal & Jindal (2015) found corporate governance to have no significant influence on organizational performance. These inconsistencies have created greater impetus to further interrogate how these two variables interrelate.

Corporate governance is manifested through various dimensions. These include code of corporate governance, board independence, skills, size, committees experience and board diversity (Dewji & Miller, 2013; Narwal & Jindal, 2015). Whereas these components have been viewed as important in determining firm's level of adoption of corporate governance, minimal empirical support has been recorded. Besides, divergent findings have been recorded on how each of these dimensions contributes to firm performance (Letting et al., 2012; Adams & Mehran, 2011; Kiel & Nicholson, 2003). It is against this backdrop that this study sought to address the missing links on how these variables interact. The study sought to establish the influence of corporate governance on performance in Kenya's financial institutions as well as determine the independent influence of the various dimensions of corporate governance on performance of the institutions. The corporate governance dimensions that were considered in the study include code of corporate governance, board skills, independence, committees, board size and board diversity. …

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