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Influence of Board Effectiveness on Financial Performance in the Banking Industry in Kenya

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dc.contributor.author Waithaka, Wambui
dc.date.accessioned 2015-05-16T08:44:01Z
dc.date.available 2015-05-16T08:44:01Z
dc.date.issued 2014-04
dc.identifier.uri http://erepo.usiu.ac.ke/11732/204
dc.description A Project Report Submitted to the Chandaria School of Business in Partial Fulfilment of the Requirement for the Degree of Masters in Business Administration (MBA) en_US
dc.description.abstract The purpose of this study was to examine the influence of board effectiveness on corporate financial performance in the banking industry. The study sought to answer the following research questions; how technical expertise of corporate boards, how director compensation, director ownership and board independence influence financial performance of banks. This study was important to banks, regulators, customers, employees, creditors and academicians. The main benefit of the study was identification of the usefulness of corporate governance regulation through linking of corporate governance practices to financial performance of banks. The study used descriptive and explanatory research designs. A sample of 39 banks from a population of 43 banks was studied. The study used interviews and financial statements were reviewed to answer the research questions. Board members were interviewed using interview guides while financial statements review was done using a secondary data guide. The study used descriptive statistics and inferential statistics such as linear regression and correlation to answer the research questions. Statistical Package for the Social Sciences was the tool used to analyse the data collected through descriptive and inferential statistics. The analysed data was presented using tables. The findings of the study indicated that technical expertise of most boards was high with 76% of directors being university graduates, 68% of the boards with 4 or more levels of expertise and 68% of directors with more than 15 years experience. There was a significant relationship between expertise and financial performance; experience in years and financial performance. However, there was no significant relationship between education qualifications and financial performance. The results indicated that the average compensation per director was KShs 6,626,830 per annum. In 95% of banks, directors had insignificant shareholding while in 81% of the banks; directors did not hold any shares in their capacity as directors. There was a linear relationship between shareholding held by directors, director compensation and financial performance. The results also show that there was a significant relationship between average compensation per director and financial performance; number of directors with shareholding and financial performance. However, there was no significant relationship between director shareholding and financial performance. The results indicated that all banks had 4 or more non-executive directors and 1 or more executive directors. 73% of banks had 6 or more non-executive directors while 54% of banks had 1 executive director. The mix between the number of executive directors and the number of non-executive directors was 1:4. There was a significant relationship between the number of executive, non-executive directors and financial performance. From the results, the researcher concluded that technical expertise of directors in the banks’ boards was high. The findings indicated that board expertise influenced financial performance since there was a significant relationship between board expertise and net profit. There was also a significant relationship between experience in years and net profit. The researcher concluded that director compensation influenced financial performance as there was a significant relationship between average director compensation and net profit. There was also a significant relationship between the number of directors with shareholding and financial performance. The range of director compensation was high while shareholding held by directors was largely insignificant. From the findings, the researcher concluded that board independence influenced financial performance. There was a significant relationship between the number of executive directors and net profit. Also there was a significant relationship between the number of non-executive directors and net profit. The results also indicated a healthy mix between the numbers of executive and non-executive directors was 1:4. Major recommendations for improvement were; banks should focus on increasing the level of expertise and experience of directors through conducting induction and evaluation of duties of the directors regularly. Banks should also consider lowering compensation paid to directors and instead encourage more directors to have insignificant shareholding in the financial institutions. Information asymmetry was identified as a huge challenge for banks and banks should work to reduce the information gap. Recommendations for further research included; assessing the impact of information provided to board members on financial performance and whether board independence and lower director compensation led to better social performance. en_US
dc.publisher United States International University - Africa en_US
dc.subject Financial Performance en_US
dc.title Influence of Board Effectiveness on Financial Performance in the Banking Industry in Kenya en_US
dc.type Thesis en_US


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