Effect of Board Composition on Financial Performance of Commercial Banks in Kenya.
Muiruri, Samwel Mwiruri
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Many organizations around the world were currently facing corporate governance issues and challenges including poor risk management, corporate fraud and unreliable financial reporting. This is despite having corporate board of directors who are mandated to oversee ethical running of the business. The link between the composition of corporate board members and the financial performance of firms has attracted the attention of scholars around the world. However, some of the studies have conflicting findings and hence there is need to do a further study to establish how board members’ composition affect corporate performance in the Kenyan context. The purpose of the study was to investigate the effect of board composition on corporate financial performance of banks in Kenya. Despite tight regulatory framework, effective bank’s boards management continued to weaken in Kenya. This had resulted into closure of two commercial banks and placement of one under receivership by the regulator over the preceding 24 months. The study had the objectives of establishing the effect of board gender diversity, board members’ nationality, board members’ technical expertise, board members’ independence and board members’ age on financial performance of banks in Kenya. The study was based on the stewardship, agency, stakeholder and group diversity theories. The study applied a descriptive research design. The study targeted all the 42 commercial banks in Kenya. Secondary data from commercial banks that had data for five years (2011-2015) was used. This data was collected from the published financial statements of the banks, the companies’ websites, the Nairobi Securities Exchange (NSE) and the Central Bank of Kenya (CBK) bank supervision reports. The current study employed panel ordinary least squares regression in analysis and use Stata statistical software version 14. The study results indicated that gender diversity and board nationality diversity had a significant negative effect on financial performance of the commercial banks. The study findings also indicated that board technical diversity had a significant positive effect on financial performance of commercial banks in Kenya. However, board independence and board age diversity did not have a significant effect on performance of commercial banks. The recommendations made from these findings is that when selecting boards members, shareholders should consider having a board that is composed of members from different professions. Moreover, boards should have good representation of female directors to effectively lead and enable the firms to implement its strategies. Similarly, commercial banks should ensure that the diversity of the nationalities of the board members is controlled to ensure harmony.