The Role of Corporate Governance in the Performance of Banking Industry in Kenya: a Study of Kcb Bank Kenya Limited

THE ROLE OF CORPORATE GOVERNANCE IN THE PERFORMANCE OF BANKING INDUSTRY IN KENYA: A STUDY OF KCB BANK KENYA LIMITED

CHARLLOTTE LUDI OBADO

UNITED STATES INTERNATIONAL UNIVERSITY- AFRICA

SPRING 2017

THE ROLE OF CORPORATE GOVERNANCE IN THE PERFORMANCE OF BANKING INDUSTRY IN KENYA: A STUDY OF KCB BANK KENYA LIMITED

CHARLLOTTE LUDI OBADO

A RESEARCH PROJECT SUBMITTED TO CHANDARIA SCHOOL OF BUSINESS IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTERS IN BUSINESS ADMINISTRATION (MBA).

UNITED STATES INTERNATIONAL UNIVERSITY

SPRING 2017

STUDENT’S DECLARATION

I, the undersigned, declare that this is my own original work and has not been submitted to any other college, institution or university other than the United States International University in Nairobi for academic credit.

Signed ……………………… Date …………………..

Charllotte Ludi Obado (625742)

This research project proposal has been presented for examination with my approval as the appointed supervisor.

Signed ………………………. Date …………………

Prof. Peter Lewa

Signed ………………………. Date …………………

Dean, Chandaria School of Business

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©Copyright by Charllotte Ludi Obado 2017

DEDICATION

I sincerely dedicate this project to my family for their encouragement and unending support both financially and morally during my study.

ACKNOWLEDGEMENT

I would like to acknowledge my supervisor Prof. Peter Lewa for the guidance and support while developing this research study. I would also wish to acknowledge the immense wealth of knowledge and research facilities available at USIU.

ABSTRACT

The main purpose of this study was to determine the role of corporate governance in banking industry in Kenya. The specific objectives of the study were; to examine if, Shareholder’s voting rights, Audit committee’s expertise and experience, Board of Directors remuneration and Board of Directors expertise and experience affect performance of banking industry in Kenya. The expected beneficiaries of the study will be the management of KCB Bank Kenya ltd, other banks in the sector as well as other researchers.

The study used descriptive research design where a sample size of 249 employees was selected from the target population of 659 employees who were categorized into top, middle and low level management. The sample size was 37% of the target population derived using stratified random sampling. Questionnaires containing both closed-ended and open-ended questions were administered to the respondents by the researcher with the help of the human resource department. Data collected was analyzed quantitatively and qualitatively where it provided an appropriate analysis that was then used in the preparation of tables, pie charts and bar graphs.

From the study findings 84.2% of the total respondents said that Shareholder rights and responsibilities affect performance of banks while 15.8% said Shareholder rights and responsibilities does not affect. The study also showed that Audit Committee’s expertise and experience affect performance; this was represented by 92.3%. Majority of the respondent’s i.e. 69.2% stated that Board of Directors remuneration affects performance of banks while 30.8% said it does not affect. The respondents stated that Board of Directors expertise and experience affect performance of banks this was represented by 87.2% while 12.8% said it does not affect.

The study recommended that further studies on corporate governance in other financial sectors like Insurance companies and Savings and credit cooperative societies should be conducted. Further research is also recommended on on the relationship between organization’s size and Board of Directors remuneration to evaluate and assess its relationship with overall performance.

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TABLE OF CONTENTS

STUDENT’S DECLARATION ...... iii

DEDICATION ...... v

ACKNOWLEDGEMENT ...... vi

ABSTRACT ...... vii

TABLE OF CONTENTS ...... viii

LIST OF TABLES ...... x

LIST OF FIGURES ...... xi

ABBREVIATIONS AND ACRONYMS ...... xii

CHAPTER ONE ...... 1

INTRODUCTION OF THE STUDY ...... 1

1.1 Background of the study ...... 1 1.2 Statement of the problem ...... 6 1.3 Purpose of the Study ...... 8 1.4 Specific objectives of the Study ...... 8 1.5 Significance of the Study ...... 9 1.6 Geographical Scope of the Study ...... 9 1.7 Definition of Terms ...... 10 1.8 Chapter summary ...... 10 CHAPTER TWO ...... 12

LITERATURE REVIEW ...... 12

2.1 Introduction ...... 12 2.2 Corporate governance and banking performance ...... 12 2.3 Shareholders voting rights and responsibilities and Performance ...... 13 2.4 Audit Committees Expertise and Experience and performance ...... 17 2.5 Board of Directors Remuneration and performance in Banks ...... 21 2.6 Board of Directors Expertise and Experience and performance of Banks .... 24 2.7 Summary ...... 28

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CHAPTER THREE ...... 29

RESEARCH DESIGN AND METHODOLOGY ...... 29

3.1 Introduction ...... 29 3.2 Research Design ...... 29 3.3 Population and Sampling design ...... 29 3.4 Data Collection Methods and Procedures ...... 31 3.5 Research Procedure ...... 31 3.6 Data Analysis Methods ...... 32 3.7 Chapter Summary ...... 32 CHAPTER FOUR ...... 34

DATA ANALYSIS, PRESENTATION AND INTERPRETATION ...... 34

4.1 Introduction ...... 34 4.2 Presentation of Findings ...... 34 4.3 Descriptive Statistics ...... 49 4.4 Chapter Summary ...... 51 CHAPTER FIVE ...... 52

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS ...... 52

5.1 Introduction ...... 52 5.2 Summary of the Findings ...... 52 5.3 Discusion of findings ...... 53 5.4 Conclusions ...... 58 5.5 Recommendations and Areas for further studies ...... 59 REFERENCES ...... 61

APPENDIX I ...... i

Appendix 1: Introduction Letter ...... i APPENDIX II ...... ii

QUESTIONNAIRE ...... ii

LIST OF TABLES

Table 3.1 Target population ...... 29 Table 3.2 Sample size ...... 30 Table 4.1 Response rate ...... 34 Table 4.2 Distribution of respondents by gender ...... 35 Table 4.3 Age rate analysis ...... 35 Table 4.4 Distribution of respondents by level of education ...... 36 Table 4.5 Distribution of respondents by duration of Work ...... 37 Table 4.6 Respondent Category ...... 37 Table 4.7 Whether shareholder rights and responsibilities affects performance ....38 Table 4.8 Right to nominate directors and their remuneration ...... 39 Table 4.9 Right to Information on performance of the company……………..…...40 Table 4.10 Right to authorize new equity issues and dividend payout plan ...... 40 Table 4.11 Shareholder engagement through general meetings……………………..41 Table 4.12 Right to approve merger and acquisitions ...... 41 Table 4.13 Whether AC expertise and experience affects performance ...... 42 Table 4.14 AC educational and technical qualification ...... 43 Table 4.15 AC’s technical experience...... ……………………....44 Table 4.16 Whether BoD Remuneration affects performance ...... 44 Table 4.17 BoD size ...... 45 Table 4.18 BoD commitment and retention of directors…………………………….46 Table 4.19 Full disclosure of BoD Remuneration ...... 46 Table 4.20 Whether BoD R expertise and experience affects performance ...... 47 Table 4.21 BoD technical experience ...... 48 Table 4.22 BoD educational and technical qualification ...... 49 Table 4.23 Descriptive Statistics ...... 49

LIST OF FIGURES

Figure 4.1 Whether shareholder rights and responsibilities affects performance. ....39 Figure 4.2 Whether AC’s expertise and experience affects performance ...... 42 Figure 4.3 Whether BoD Remuneration affects performance ...... 44 Figure 4.4 Whether BoD expertise and experience affects performance…………..47

ABBREVIATIONS AND ACRONYMS

ABI: Association of British Insurers

AC: Audit Committee

AGM: Annual General Meeting

AMEX: American Stock Exchange

ASX: Australian Securities Exchange

BIS: Bank for International Settlement

CAR: Capital Adequacy Requirement

CBK: Central Bank of Kenya

CMA: Capital Markets Authority

CRO: Chief Risk Officer

CSIA: Corporate Secretaries International Association

EU: European Union

FDICI: Federal Deposit Insurance Corporation Improvement Act

FRC: Financial Reporting Council

NPLs Non - Performing Loans

NSE: Nairobi Stocks Exchange

UK: United Kingdom

NASDAQ: National Association of Securities Dealers Automated Quotation

NEDS: Non-Executive Directors

N and G: Nominating and Governance

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NMS: National Market System

NYSE: New York Stock Exchange

OECD: The Organisation for Economic Co-operation and Development

SRO: Self-Regulatory Organization

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CHAPTER ONE

INTRODUCTION OF THE STUDY

1.1 Background of the study OECD (2015), define Corporate Governance as the system by which business corporations are directed and controlled. They further elaborate that, corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation this includes the board, managers, shareholders and other stakeholders, and that it spells out the rules and procedures for making decisions on corporate affairs. By doing this, corporate governance also provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performance (FRC, 2011). According to Association of British Insurers good corporate governance enhances and underpins a company’s long-term sustainable performance and that it is critical to the long-term value creation and economic growth (ABI, 2012).

In an article on the Influence of the Capital Market Authority’s corporate governance guidelines on financial performance of commercial banks in Kenya, Rambo (2013) asserts that good corporate governance is indispensable for the survival and performance of corporate entities. He argues that the purpose of the Capital Markets Authority’s (CMA) guidelines on good corporate governance was to improve governance practices in the corporate sector, as well as attract and retain investors for sustained economic growth. According to the CMA Guidelines, corporate governance is the process of managing business affairs of an institution to achieve financial prosperity, accountability and improve shareholders’ long-term value (CMA, 2002). The overall objective of the CMA Guidelines is to strengthen corporate governance practices among listed companies in Kenya. In this regard, the directors of such institutions should comply with good corporate governance practices, as part of their obligations to sustain their listing at the Nairobi Stock Exchange (NSE) market. The Guidelines outline various corporate governance principles, touching on structure and functions of the board of directors; the rights and responsibilities of shareholders; auditing and accountability, as well as public disclosure (CMA, 2002).

Effective corporate governance is critical to the proper functioning of the banking sector and the economy as a whole. Banks perform a crucial role in the economy by intermediating funds from savers and depositors to activities that support enterprise and help drive economic growth. Banks’ safety and soundness are key to financial stability, and the manner in which they conduct their business, therefore, is central to economic health. Governance weaknesses in banks play a significant role in the financial system and can result in the transmission of problems across the banking sector and the economy as a whole (Basel Committee on Banking Supervision, 2012)

Good corporate governance enhances and underpins a company’s long-term sustainable performance: it is critical to long-term value creation and economic growth and as well supports the sustainable performance of companies hence to a larger extend rendering and support to the global economy. This is evident from the growth of large corporations and their prominence in global economic activity; as these companies grow, their economic footprint and the quality of their governance systems has wider economic consequences (FRC, 2011).

In the 1980s the need to ensure that there was effective corporate governance was felt in the UK following the collapse of high profile companies like Maxwell, Polly Peck, Enron, amongst others (Cheffins, 2015). The collapse of these massive companies was due to the poor standard of corporate governance that led to insufficient control in the companies preventing them from performing well. In 1992 the collapse of the Indian economy brought new realizations that, financial indiscipline and negligence of a single person may ruin a company with a hundred years of excellent reputation. There have been published scandals of well established companies collapsing due to the abuse of the shareholders’ trust which they have on their assets managers and their regulatory agencies (Krishna, 2015).

In October 2010, the Basel Committee developed Principles for enhancing corporate governance, this represented a consistent development in the Committee’s long- standing efforts to promote sound corporate governance practices for banking organizations. The 2010 principles sought to reflect key lessons from the global

financial crisis that began in 2007, and enhance how banks should govern themselves and the role of supervisors in this critical area (Basel Committee on Banking Supervision, 2012). Since 2010, the Committee and its member jurisdictions have witnessed banks strengthening their overall governance practices and supervisors enhancing their oversight processes. In general, banks exhibit a better understanding of the important elements of corporate governance such as effective board oversight, rigorous risk management, strong internal controls, compliance and other related areas. In addition, many banks have made progress in assessing collective board skills and qualifications, instituting standalone board risk committees, establishing and elevating the role of chief risk officer (CRO), and integrating discussions between board audit and risk committees (Basel Committee on Banking Supervision, 2012).

According to Kings IV report (2016) corporate governance should be integral to the running of an organization and delivering of governance outcome like ethical culture, good performance, effective control and legitimacy. This report takes into account the connectivity and interdependencies between a range of factors that affect an organization’s performance. It also promotes stakeholder inclusivity by recognizing the interdependent relationship between the organization and its stakeholders. Kings IV report (2016) asserts that the ability for an organization to create value over time depends on its ability to create value for others. The report also proposes a balanced composition of board members and independence of governing bodies as well as compliance with King IV code.

FRC (2011), confirmed that shareholders rights and responsibilities in corporate governance play a very crucial role in the performance of banking industry. More so they continue to say that to be able to influence the performance of companies, shareholders must have the right information on which to base their decisions and to be effective and that engagement between them and the board should be based on accurate and relevant information. Therefore available literature has shown a positive relationship between shareholders rights and responsibilities with performance of banks, however, it has failed to indicate to what extent shareholders rights and

responsibilities affect performance of banking industry this study will be carried out to fill the gap.

Various studies have yielded the same results indicating that, many committees are unable to perform their duly recognized key functions due to the lack of required knowledge and expertise (Dezoort, 1998). These studies have never the less, failed to indicate to what extent audit committee expertise and experience affect the performance of banking industry. To Test and confirm this relationship the following research question will be answered. “To what extent does audit committee expertise and experience affect performance of banking industry specifically Kenya?”

Literature review has shown that there exists a positive relationship between the remuneration of the Board of Directors as a whole and the performance Matolcsy and Wright (2011) conducted a study to investigate the relationship between compensation of CEO and performance of the firm. In their study, they examined the model of effective structure of compensation depending on characteristics of the firm and then tested the performance outcomes against the efficient structure of compensation. The results of their study showed that organization in which CEOs received the compensation uneven with the characteristics of firm had lower level of performance in comparison with the firms in which the compensation of CEO was consistent with the characteristics such as size of firm. However, research has failed to show the extent to which executive pay affects performance. In that aspect, this study will aim to fill that gap by aiming to establish the extent to which Board of Directors financial incentive affects the overall performance of the company.

It is well established that Board of Directors’ expertise and experiences can influence organizational performance by providing industry insights and know-how on customer and supplier needs. According to Faleye et al., (2014), such directors significantly impact positively on the firm’s value or performance because they have industry expertise and have the capacity to offer better inputs into strategic decision-making, because of their deeper understanding of the industry and because they have superior information regarding the industry through connections. However, researchers

have failed to show the extent to which Board of Directors’ expertise and experiences can influence performance of banking industry. One of the expected outcomes of this study is to fill this knowledge gap.

1.1.1 Banking Industry in Kenya According to the CBK report (2008), as cited by Mbugua et al. (2015), the Kenyan banking sector is governed by the companies Act, the Banking Act, the central bank of Kenya act and the various guidelines issued by the central bank of Kenya (CBK). The central bank of Kenya which falls under the Ministry of finance docket is responsible for formulating and implementing monitoring policy and fostering the liquidity, solvency and proper functioning of the financial system. Banks in Kenya have come together under the Kenya Bankers Association which serves as a lobby for the banking sector interests. KBA provides a forum to address issues affecting the members. The banking sector in Kenya is comprised of 45 commercial banks, two mortgage finance companies, 130 foreign exchange bureaus and 15 micro finance institutions (CBK, 2012). The companies Act, the CBK Act cap 491, the Banking Act cap 488, and Microfinance Act 2006 are the main regulators and governors of the banking industry in Kenya. The Acts are used along with prudential guidelines which are issued by the CBK.

Kamau and Were, (2013), note that, in spite of the economy performing poorly in some years and the adverse effects of the global financial crisis in 2008, the banking industry has remained largely profitable. In a span of 13 years profits have grown by close to 400% moving from 18.8 billion to 89.2 billion in 2011, making banking the most profitable sector in the economy. In terms of profit share to gross domestic product (GDP), profits before tax have increased the banks share from 0.3% of GDP in 2000 to 3% of GDP in 2011. Horizontal expansion observed over the last 13 years has led to increase in branch networks from 670 in 1997 to 1,161 in 2011. The asset and deposits base have equally grown over the years hitting the Kenya shilling trillion marks, standing at 67% and 49% of GDP respectively at the end of 2011.

Rambo (2015) notes that, the collapse of a number of locally owned commercial banks in the 1990s was closely associated with a high portfolio of non-performing loans (NPLs) – a situation that ties to poor corporate governance practices. He argues that as at December 2001, prior to the launch of the CMA Guidelines, the banking sector had registered up to kshs. 215 billion in terms of NPLs, which accounted for up to 51 percent of the sector’s net assets. Besides, the proportion of NPLs to the total loans in Kenya was at a high of 33 percent (CBK, 2012).

This incredible rise of NPLs led to the insolvency of a number of banks between 1990 and 2005, including Euro Bank Limited, Trade Bank Limited, Daima Bank Limited, Transnational Bank Limited, Trust Bank Limited, Delphis Bank Limited, among others. It also marked the period when a number of state-owned banks such as Kenya Commercial Bank Limited and the National Bank Limited experienced serious financial performance challenges. Comparing the ratio of NPLs to total loans in Kenya of 33 percent to similar African economies at the end of 2001 the CBK supervision report notes that Zimbabwe had 24 percent, Nigeria registered 11 percent and South Africa 3 percent (CBK, 2012). This trend necessitated the formulation of appropriate regulatory measures, including the CMA guidelines to safeguard the interest of investors. Basel Committee on Banking Supervision, (2012) notes that following the development of the Principles for enhancing corporate governance by the Basel Committee in October 2010, national authorities took measures to improve regulatory and supervisory oversight of corporate and risk governance in banks. These measures included developing or strengthening existing regulation or guidance, raising supervisory expectations for the risk management function, engaging more frequently with the board and management, and assessing the accuracy and usefulness of the information provided to the board. This included the revision of the Prudential and Risk Management Guidelines by CBK in November 2012 (CBK, 2013).

1.2 Statement of the problem Corporate governance is considered as the process and structure used to direct and manage business affairs of the company towards enhancing prosperity and corporate

accounting with the ultimate objective of realizing shareholder long term value while taking into account the interests of other stakeholders. In order to bring the level of governance in public listed companies in line with the international standards, CMA developed corporate governance guidelines that should be followed by all public listed companies (CMA, 2002). This is echoed by the South African Kings IV report, the report also sets out to nurture and encourage corporate governance through a set of guidelines that are critical for companies to adopt so as to achieve an international level of corporate governances (King IV report, 2016). Another report on corporate governance is the Combined Code on Corporate Governance 2003 (CCCG) under this code every company must be headed by an effective board that should collectively be responsible for the success of the company. King IV report (2016) continues to state that an effective corporate governance should not be represented as an end in itself but rather a means to achieving good performance, an ethical culture, effective control and legitimacy. These benefits can be achieved through adoption of certain principles within the King IV report, chief among them being; appointment of effective and qualified BoD. The BoD should be remunerated fairly, while at the same time shareholders should be allowed to exercise their rights and responsibility.

Smith (1996) opines that corporate governance failure and corporate collapse can happen even to the strongest company and that there is greater need to strengthen corporate governance as highlighted by a number of high profile business failures such as Guinness, Polly peck, Maxwell, Railtrack in the UK. KBA CEO Habil Olaka affirmed the structural weaknesses of corporate governance in the Kenyan banks following the placing of a third bank under receiver management in less than six months in 2016 (All Africa, 2016). Analysts have pointed out to weak supervision and outright fraud by directors and to solidify this argument Olaka, points out that there is need for increased focus on director accountability and nomination processes. The situation is similar to the speculation that prevailed during the major bank failures caused by systemic weaknesses in 1988, 1993 and 1998 that claimed more than 50 financial institutions (All Africa, 2016). Osebe and Chepkemoi (2016) also echo the same concerning the Kenyan banking industry, they acknowledge the recent corporate governance failures in the Kenyan banking sector. They note the closure of three

commercial banks in a period of nine months that sent jitters among millions of bank customers resulting into confidence crisis these banks included; Dubai Bank in August 2015, Imperial Bank in October 2015 and Chase Bank in April 2016.

According to (Chee Haat, 2008) corporate failures are brought about by manipulation of accounting figures, disregard for stock exchange rules and company laws, unethical behavior of senior management, insensitivity to stakeholders and lack of efficient leadership. On his study of the fundamental rights of the shareholders, Velasco (2006) established that shareholders right to elect directors and to sell shares were indeed fundamental. Another review by Thornton (2015) on audit committee effectiveness, describes skills such as ability to ask challenging questions, relevant financial experience and audit experience as the qualities that make audit committees effective. In his study of the corporate governance lessons of Enron in USA, Vintern (2002) affirmed that a number of issues regarding the effectiveness of contemporary accounting, auditing and corporate governance practices that needed to be addressed to ensure an effective corporate governance system. Because of the increase in the number of corporate governance failure that lead to collapse of a number of commercial banks and other companies. There is a need to relook at factors that that can ensure efficiency in corporate governance and overall performance of the company. Thus, this paper seeks to find out the role of effective corporate governance in the performance of banking industry in Kenya. This will be made possible through achievement of the specific research objective highlighted.

1.3 Purpose of the Study The purpose of this study was to determine the role of effective corporate governance in the performance of banking industry in Kenya.

1.4 Specific objectives of the Study The study was guided by the following objectives 1.4.1.1 To examine how shareholders voting rights and responsibilities influence the performance of the banking industry in Kenya.

1.4.1.2 To determine the effect of audit committees’ expertise and experience on the performance of banking industry in Kenya. 1.4.1.3 To establish how the board of directors expertise and experience has influenced the performance of banking industry in Kenya 1.4.1.4 To test effectiveness of the board of directors remuneration influence on performance of banking industry in Kenya.

1.5 Significance of the Study 1.5.1 Management of KCB Bank Limited The study findings will be useful to the management of the KCB Bank Ltd in understanding the role of effective corporate governance in their institution. It will enable them understand the importance of; shareholder rights which include voting, right to sell or transfer shares; AC’s and BoD expertise and experience and BoD remuneration on performance of the organization.

1.5.2 Banking Industry The study is important to the banking industry since knowledge is power and the knowledge by other banks on the effectiveness of corporate governance would play a significant role in the better performance of the banking industry. This will in turn help in building expert audit committees, shareholders engagement and qualified and experienced board of directors to achieve their target.

1.5.3 Other Researchers and Scholars The study will provide the background information to other researchers and scholars who may want to carry out further research on the same topic. The study will form the bases of references and guide to the researchers while carrying out their study.

1.6 Geographical Scope of the Study The study was carried out at KCB Bank Kenya Limited Head office which is located along Moi avenue road at Kencom House. The study focused on the components of effective corporate governance and the extent of their impact on performance. The target population was 659 employees who were picked from top management, middle management and clerical staff. The study was carried out for a period of three months that is from to January to March 2017.

1.7 Definition of Terms 1.7.1 Financial performance A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. A firm attains above average profitability in the long run through sustainable competitive advantage (Porter, 1998).

1.7.2 Corporate governance Corporate governance covers the broad array of systems, processes, and procedures that seek to regulate the relationship between mangers and shareholders in particular and among firm stakeholders in general (Baker, Anderson and Editors, 2010). 1.7.3 Board of Directors The board of directors of every listed company should reflect a balance between independent, non-executive directors and executive directors (Capital Markets Authority, 2002). 1.7.4 BoD’s Remuneration Board of Director Remuneration or compensation is defined as being composed of the financial compensation and other non-financial awards received by an executive from their firm for their service to the organization. 1.7.5 Shareholder rights and responsibilities Shareholder Rights and Responsibilities are controls granted by the company through the company’s Act to the shareholders of a company to exert control on their ownership of the company in which they have shares. These rights give them the power to influence the performance of companies. For example, the right to vote out directors, right to determine director’s pay and right to sell or transfer shares.

1.8 Chapter summary This chapter presents an introduction to the study. It provides information on the background of the study, statement of the problem, objectives of the study, research questions, significance of the study, the scope of the study definition of terms.

Literature review will be covered in chapter two detailing previous study works related to corporate governance in general and the those touching on the purpose of this study in particular. Chapter three includes the research design and methodology with the results and findings provided in chapter four. Finally, the discussions, conclusions and recommendations are provided in chapter five.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction This chapter discusses the literature review of the study. Literature review helps in identifying the relevant researches addressing the research problem.

2.2 Corporate governance and banking performance Corporate governance has been defined as the exercise of ethical and effective leadership by the governing body towards the achievement of ethical culture, good performance, effective control and Legitimacy, Kings IV report (2016). A sound corporate governance structure contributes to the growth and performance of financial institutions, it plays an important role in careful management and the allocation of resources for productive uses (Levine, 2005). First, it ensures that the depositors, debt holders, and shareholders of capital in financial institution get a return on their investment, without the managers stealing the capital. Second, it prevents managers of financial institutions from investing in bad projects, Luc Laevan et al., (2013). A Good corporate governance structure supports the sustainable performance of companies and in doing so supports the global economy.

Echoing the same view is Osebe and Chepkemoi (2016). They assert that a good corporate governance requires boards and senior management to fulfill their fiduciary responsibilities. As indicated in King IV report (2016) boards and senior managers need to effectively communicate a company’s strategic business direction and risk appetite while assuring transparent and effective organization, risk assessment and mitigation, and sufficient capital support. Banks adopting the corporate governance guidelines benefit greatly since a good corporate governance complements the traditional supervision of banking institutions. It also protects the interests of depositors and other investors in commercial banks, builds and maintains public confidence in the banking sector, and ultimately contributes to its integrity and credibility (Osebe and Chepkemoi, 2016).

Several measures aimed at improving corporate governance have been suggested. These include increasing the overall investor confidence through governance issues like shareholder rights and increased transparency through higher levels of information disclosure (Tsamenyi et al., 2007). On the disclosure requirements for the Banking sector, in Kenya, Osebe and Chepkemoi (2016) basing their argument on the prudential guidelines on corporate governance by CBK (2013) assert that information should be adequately transparent to shareholders, depositors and other stakeholders and market participants.

2.3 Shareholders voting rights and responsibilities and Performance Musango (2016) defines Shareholder as a person who subscribes to the company‘s constitution; a person having the right to attend and participate at general meetings of the company; or a person entitled to receive such benefits as dividends from the company if and when declared. Most importantly for her study and my study too, a shareholder is a person holding shares in a company; in principle therefore, members are proprietors, owners, investors, with each share they hold in a company representing a unit of ownership in that business known as the company.

Principle number 6 of the South African Kings Report (IV) advocates for stakeholder inclusivity by stating that the governing body of any company should adopt a stakeholder-inclusive approach when executing its governance role and responsibilities. This approach ensures that there is an equilibrium between the needs, interests and expectations of material stakeholder and the organization over time (King IV Report, 2016). FRC notes that the focus of governance was previously on the “supply side” that is, it was mainly the role of directors to determine the course of the organization. However, policymakers now recognize that the “demand side”, and the need to promote and remove obstacles to shareholder engagement. Today, shareholder rights and responsibilities play a crucial role in holding boards to account (FRC, 2011).

Shareholders of a company exercise the following rights and responsibilities; the rights to choose members of the board of directors, approve mergers and acquisitions, authorize new equity issues, and amend the firm’s articles of organization. Therefore,

giving them ultimate power over important corporate decisions. Wright and Sylla (2009), point out to shareholder activism as another technique shareholders use to bring about change. They define shareholder activism as the efforts by investors to use their voting power as a catalyst for corporate change. Most activists have relatively short time horizons, since they generally seek to pressure firms into immediate governance reforms but not seeking full operating control.

2.3.1 Right to nominate directors and their remuneration Traditionally the running of the company and strategic corporate decision making has been left to the board of directors and senior management. This has been made possible due to the presence of a well-settled principle in corporate law that requires major corporate decisions to be made, or at least to be initiated, by the board of directors. That is to say that shareholders are not in any way involved in such milestone decisions. This only means that they can change the course of the company only by replacing the board with a new board. Often, because, shareholders feel that their interests as investors and proprietors of the company are not best represented in good faith by the men and women selected to sit in the board of directors (Osebe and Chepkemoi, 2016).

The SEC emphasizes on the need for organizations to enhance shareholder’s participation in the nomination and voting of directors as well on their compensation package (Bainbridge, 2006). Echoing the same view is Yermack (2010), he asserts that shareholder voting rights and responsibility is regarded as an effective means for shareholders to communicate with the board of directors. In line with the Kings IV report shareholders are provided with an opportunity to pass separate, non-binding advisory votes on remuneration policy. It is through a clear protest voting by shareholder that boards are seen to take action (Kings IV report, 2016).

2.3.2 Right to Information on performance of the company In Nigeria it has been made known that shareholders are majorly faced with the problem of lack of knowledge and even in situations where they do know their rights, there is a passive nature of lack of experience as to the best method possible in the situations (Iyaniwura S. and Iyaniwura , 2014). That is to say shareholders not only need to be made aware of their rights but they also need to be constantly informed about the

performance of the company and what they as shareholders with rights and responsibilities need to do about the performance of the company. To be able to influence the performance of companies, investors must have the right information on how to base their decisions in order to be effective. Engagement between them and the board should be based on accurate and relevant information. Without confidence in information, capital markets would not exist (FRC, 2011).

Tsamenyi et al. (2007) suggested measures such as increasing overall investor confidence through governance issues like shareholder rights and increased transparency through higher levels of information disclosure. Osebe and Chepkemoi (2016) pose a question on disclosure requirements for the Banking sector in Kenya, arguing whether they are adequately transparent to their shareholders, depositors and other stakeholders and market participants. They further pose and attempt to answer the question whether all banks honestly disclose critical information that is related to their risk profile such as levels of nonperforming loans (NPLs). It is therefore noted that shareholders have the right to information to assess how the organization is performing be it socially or financially.

2.3.3 Right to authorize new equity issues and dividend payout plan Shareholders also exercise their right of voting to ratify dividend payout and executive compensation. In order to allocate profits between dividends, compensation for the directors and statutory auditors, and other uses, companies must have the approval of their shareholders. However, the amount of dividend payable will depend on the size, maturity, and profitability of a company (Share, 2016). Gillan and Stark (2001) presented the following data indicating that shareholder voting rights against authorizing equity issues and dividend payout was paramount in corporate governance. Their results indicated that the average shareholder vote against authorizing shares for equity compensation plans rose from approximately 3% in 1988 to approximately 19% by 1996, a period when stock option compensation grew very rapidly and many institutional investors adopted voting policies designed to limit their exposure to future share dilution.

2.3.4 Shareholder engagement through general meetings It is vital for successful and long-term oriented companies to engage shareholders; this came out as one aspect during a debate on corporate governance in 2014 (FRC, 2015). It is therefore not surprising that policymakers and regulators increasingly introduce rules, regulations and best practices to stimulate the dialogue between a company’s management and its shareholders. The regulatory provisions vary from the implementation of a stewardship code to mandatory voting rules and more powerful shareholder rights at general meetings. These stewardship codes aim to enhance institutional investors’ commitment and involvement in a company’s strategy setting processes. If the sole focus is on the regulatory environment, this may lead to disappointing results because it does not assure that the investors’ engagement will eventually lead to more growth and value creation (McCahery and Vermeulen, 2014).

There are good reasons for a company to implement shareholder relations’ strategies as well as establish a more frequent and timely dialogue with its stakeholders. A greater focus on making it easier for firms to disclose vital information to its stakeholder will result in better coordination of the branding and strategy dimensions of the firm. (McCahery et al., 2014) indicate that when shareholders attend investor conferences it helps in stimulating a more widespread interest in a firm. Stakeholder conferences are generally considered to be attractive for companies that seek to generate trading volume and or boost the stock price performance. These conferences also help in disseminating information about a company’s organization and governance structure, which, if communicated well, could then be considered to be a competitive advantage for companies, thereby increasing the economic moat.

2.3.5 Right to approve mergers and acquisitions Bebchuk (2005) opines that organizations need to give shareholders more voting rights so as to intervene in takeover decisions. Shareholder right to approve or disapprove mergers and acquisition gives them an opportunity to monitor managerial decisions. Hsieh and Wang (2008) echoes the same argument adding that if shareholders’ rights and responsibilities serve as an effective corporate governance mechanism, then they

could mitigate manager-shareholder conflicts of interest by preventing management from engaging in value-destroying acquisitions.

White (2013), adds that, it is not just the mere interactions with investors or shareholders, but the interactive discussion between executive management, investors and also the board of directors about the introduction of new products, product innovations and or entering new markets that may prove to have a significant effect on the economic moat of companies. McCahery et al. (2014), projects three potential benefits for companies, according to them, first the most important aspect of engagement may be connecting with leading institutional investors across the globe to explain and discuss growth strategies as well as invite them for their input. These discussions will assist the CEO in making better decisions and avoiding tunnel vision. Second, a similar focus is on identifying opportunities and getting a better sense of their peers and competitors that often attract the same investors. And thirdly, pro- active engagement will help the coordinator in identifying expertise gaps on the board and executive teams

2.4 Audit Committees Expertise and Experience and performance According to CAMA 1990, an audit committee is a committee of shareholders and non- executive directors charged with the responsibility of liaising between the external auditors and the BOD on one hand, and between management and the external auditors on the other hand. Audit Committees are the most important recent development in the corporate governance structure and are expected to contribute significantly in this respect. Shamusdden (2003) opines that members of the committee should possess qualities such as integrity, dedication, and a thorough understanding of the business of the company.

Literature review on corporate governance by Kipkoech and Rono, (2016) emphasizes the need for audit committees to be made of members who are independent, as well those who possess financial expertise. A remark that is shared with Abbott et al., (2004), they assert that having audit committees with expert knowledge and experience will impact positively on the firm’s financial health. Studies indicate that audit quality is an

important element of efficient equity markets. This is because AC’s enhance the credibility of financial information, and directly support better corporate governance practices through transparent financial reporting (CheeHaat et al., 2008). Yasin and Nelson (2012) adds that collapse of corporates and the highly publicized scandals such as Enron, Global Crossing, Tyco and World Com have revealed the problems related to the quality of financial reporting and auditing function.

Modum et al. (2013) affirm that the composition of the Audit Committee (AC) and the manner in which they exercise their governance and oversight responsibilities have a major impact on the overall internal control mechanism of a company. Expectedly, the independence of the AC from management, the level of accounting knowledge possessed by members, the experience and status of the members, the extent of their involvement and scrutiny of management activities, the appropriateness of their actions like the degree to which they raise and pursue difficult questions with management; all these determine the efficiency and effectiveness of this committee. As an intermediary between the management and the external auditors, it is equally expected that an effective audit committee can enhance the independence and professional minimize skepticism of an external auditor.

2.4.1 Audit committee educational and technical qualities According to Cascarino and Van Esch (2005), developed economies including Kenya disclosed that they had many audit committee members who did not possess the necessary skills, knowledge and experience to act as audit committee members and perform their duties optimally. Njunga (2000), agrees with this argument, he pointed out that previous research had revealed the existence of management challenge. Njunga adds that, there was apparent lack of available non-executive directors (NEDs) who had the required business acumen and accounting background, and who are willing to serve on audit committees.

A report by BRC (1999) recommended all the major U.S. stock exchanges to implement the requirement that their member firms must have financially literate audit committee members. Securities and Exchange Commission (SEC) also emphasizes that financial expertise in audit committees would enhance the effectiveness of the audit committee in carrying out its financial oversight responsibilities. Similar recommendations

recognizing the significance of accounting, financial knowledge and expertise of audit committee members in order to enhance efficacy of the audit committees, can be found in the other popular literature of corporate governance guidelines (Hundal, 2013).

The former chair of the Securities Exchange Commission (SEC), Arthur Levitt, pointed out the importance of an AC in a financial reporting process, he describes a qualified, committed, independent, and tough-minded AC as the one that does well to protect the rights of the shareholders as well as keeping the BOD in check and thus ensuring an effective corporate governance. The AC with these characteristics represents the most reliable guardians of the public interest; nevertheless, to insist on the expertise of AC there were stories abound of ACs’ members who lacked the expertise in the basic principles of financial reporting as well as the mandate to ask probing questions (Levitt, 1998). Therefore, having an AC that is transparent, accountable and of high integrity is not enough for an efficient corporate governance to positively affect performance but, having an AC with members with expert knowledge in auditing and risk will give corporate governance of one company a competitive edge to another.

Having an audit and financial expert in audit committees has been proven to be very crucial in the corporate governance and more so in the financial performance of companies. It is evident that companies are more confident releasing their financial results because of inclusion of financial expert in their audit committees. In their study Agrawal and Chadha (2005) found that the probability of restatement of financial statement by firms was significantly lower when their audit committee had financial experts. Much of creative accounting could therefore be minimized by the presence of a credible audit committee composed by financial experts (Modum et al. (2013).

A study by Davidson, Xie and Xu (2004) set out to determine the relationship between audit committee financial expertise and earnings in a post by Sarbanes Oxley. The results of their study showed a positive abnormal stock price reaction to the appointment of a financial expert to the audit committee, however, they established that this relation was stronger for the appointment of financial expert with an auditing background. This result solidifies the argument that accounting financial experts are effective monitors of the financial reporting process (Carcello et al., 2008).

Another research was carried out by DeFond et al. (2005) to determine how the market reacts to appointment of expert Audit committee. They also found similar results to other researches, strongly indicating that the market reacts positively to the appointment of accounting and financial experts to the audit committee. This relationship holds true in only one direction since the market does not significantly react to the appointment of non-experts to the audit committee even if they are experienced (Hundal, 2013).

2.4.2 Audit Committee technical experience The level of experience affects the audit committee functioning. This argument is supported by a Research done by Dezoort (1998) as cited by Hundal (2013), he explored various kinds of advantages that experienced ACs had over their inexperienced colleagues. And in conclusion he noted that, experience enhances the judgment power of the audit committee members. That is experienced audit committee members possess relevant technical knowledge due to previous training and performance. He also notes that audit committee members with auditing experience show the consistency levels that are comparable to those of auditors. Similarly, he points out that experienced members are able to make more effective usage of the cues that they get while checking the financial statements, whereas, their lesser experienced colleagues may not identify or utilize relevant cues. More so he noted that the experienced members of audit committees had high degrees of self-insight, meaning that those committee members, owing to their oversight experience, were better equipped to identify the specialized cues systematically; understand, interpret and communicate such specific cues in their judgment processes or policies.

Thornton (2015) notes that one AC member from AIM company emphasizes on the need for experience in AC. He argued that members of the AC should bring with them skills to the AC since the committee’s role is today multi skilled and is rarely ideal for members who do not share most of the relevant skills and experience.

2.5 Board of Directors Remuneration and performance in Banks The ultimate value the board creates for the company is directly linked to the compensation pay that the board receives. This is affirmed by Lipman and Hall (2008), who asserts that what you get from the board is what you pay for. The same argument is supported by Miyienda, Oirere and Miyogo (2012), who imply that the quality of the board and consequent value that the board creates for the corporate is a function of its compensation in the form of the basic pay, pension, in kind benefits as well as performance-related compensation such as bonus and share options.

Busale (2011) in his study describes executive compensation or executive pay as being composed of the financial compensation and other non-financial rewards received by an executive from their firm for their service to the organization. He adds that for the Kenyan banks, the most prevalent form of executive pay is salary, bonuses and issue of stock. According to Busale (2011) the relationship between executive pay and financial performance should ideally be positively correlated with an increase in the financial performance.

Executive compensation, both financial and non-financial, have been under the microscope of research institutes and think tanks, especially after the recent economic crisis and the activism that followed and called for lessening CEOs’ compensation including the amount of money paid. The goal of the study is to establish what kind of relationship exists between CEO remuneration and Banks size and performance. Economic theory of executive pay in the academic world has tried to suggest an optimal design that aligns the interests of managers/executives with those of shareholders and wider stakeholders (Dr. Kutum, 2015).

In Kenya, corporate governance Guidelines are issued under Section 33(4) of the Banking Act (2013), which empowers the Central Bank of Kenya to issue guidelines to be adhered to by institutions in order to maintain a stable and efficient banking and financial system. Corporate governance guidelines are contained in the Prudential Guidelines for Institutions licensed under the Banking act (herein after called Prudential Guidelines). According to Prudential Guidelines (2013), good corporate governance

should provide proper incentives for the board and management to pursue objectives that are in the interests of the institution and its shareholders.

Grounding their study on the agency theory Ruparelia and Njuguna (2016) postulated that board remuneration positively affected financial performance. They obtained secondary data from audited financial statements for the 11 years ending 2013 and measured Board remuneration by director annual fees, while financial performance was measured using the proxies; return on assets (ROA), return on equity (ROE), dividend yield (DY), and earnings per share (EPS). There have been empirical studies done to determine the relationship between BoD Monthly pay and overall performance of the company. Gore, Matsunaga and Yeung (2004), confirm that several studies done document that there is a high correlation between the annual incentive pay that the top executives in each firm receive performance. That is to say the top management of the company take home a hefty pay at the end of the year when a company has done well that year.

2.5.1 BoD compensation and company size According to Doucouliagos et al., (2006 the BoD pay is determined by the size of the bank and the composition of the Board. In their study on the Australian banking sector, Doucouliagos et al., (2006), found out that the directors’ pay in the Australian banking sector was mainly driven by the size of the bank, the composition of the board and lags in pay. Specifically, from their finding, they established that larger banks provided a higher pay on average to directors, while those banks with a larger proportion of outside directors paid less. Bizjak, Lemmon and Naveen (2008), reported that firms normally benchmark their pay based on their peer groups. Therefore, through this benchmarking, banks are able to determine the levels of executive salary, bonus or option rewards based on the industry and size. Size of the firm is the most important determinant (Murphy 1999). This can be seen to be applicable for the Kenyan banking industry with CEOs and directors of the largest banks in Kenya earning higher pay than other smaller banks (Busale, 2011).

Busale (2011), opines that a number of studies conducted have shown that company size and changes in size are much more significant determinants of executive pay than

measures of shareholder value. He adds that several empirical studies have provided evidence for a positive and significant relationship between firm size and compensation. A research by Conyon and Murphy (2000) on managerial compensation resulted in direct relationship between company size and compensation and this accrued to executives in that as the size of the company increases so does compensation especially the cash compensation which includes salary and bonuses of the directors, therefore the director would ensure that a company performs well and expands as this would in turn lead to an increase in their remuneration.

2.5.2 BoD pay and commitment and retention of directors Miyienda Oirere and Miyogo (2012) acknowledge that in order therefore to attract, and retain experienced and well-connected persons to the board, organizations must provide an attractive package to its directors. However, Ruparelia and Njuguna (2016), note that hefty payments to BoD has not always yielded fruit because directors have in the past awarded themselves large salaries despite poor profits. Thus, there has been development of governance guidelines starting with the Greenbury Report of 1995 which focused on establishing a balance between salary and performance as a way of restoring shareholder confidence (Ruparelia and Njuguna, 2016).

In their study, Conyon and Leech (1994) as cited in Aduda (2011) examined the determinants of top director’s salary and bonus with a sample of 294 large UK listed firms between 1983 and 1986. The results of their study found a positive correlation between the director’s remuneration and the overall performance of the company. From the studies above it is safe to say that companies make these hefty payments to their top management so as to motivate them and keep them, within the company longer. Taking care of the BoD financially therefore translates to overall good performance for the company.

In his paper Yatim (2015) examined the association between directors’ remuneration, firm performance, and corporate governance structures. The results showed that directors’ remuneration was positively and significantly related to firm performance. He explains that incentive systems have been shown to play a key role in influencing risk taking behaviors of managers in the recent years.

2.5.3 Full disclosure of BoD pay and performance in annual general meeting Capital markets act (cap 485A) clearly outlines that there should be full disclosure of the consolidated total remuneration of the directors to the shareholders in the annual report. The report is expected to specify the following categories: total remuneration for executive directors; total fees for non-executive and independent directors (CMA, 2002). For more than a decade, executive remuneration has attracted unfavorable attention from regulators and media, who have focused on the large amounts received by executives, both in absolute terms and in comparison, with the pay received by lower level employees.

Since May 2003, listed companies on the ASX have been required to make full disclosure about the remuneration packages of newly appointed CEOs (FRC, 2011). Such disclosure now includes information about the components of the pay package which might govern the actions of the CEO and drive levels of performance. While in the United Kingdom, the Directors’ Remuneration Report Regulations were introduced in 2002 to further strengthen the powers of shareholders in relation to directors’ pay. The regulations increase the amount of information shareholders are given on directors’ remuneration, certain disclosures, as well as performance graphs. Shareholders also may vote in an advisory capacity to approve the directors’ remuneration report. The Combined Code on Corporate Governance also recommends that boards establish a remuneration committee to help the board design remuneration packages aligning to their interests with those of shareholders (FRC, 2006).

2.6 Board of Directors Expertise and Experience and performance of Banks Fama and Jensen (1983) as cited in Adam (2016) opine that the board of directors have the ultimate responsibility for the economic, efficient and effective allocation and use of corporate resources. Therefore, the board of directors is at the apex of the system of governance in the modern corporation. In order to perform their duties diligently such as ratification of strategic initiatives board of directors need to have sound financial information and professional judgment (Armstrong et al., 2010).

In ensuring that the value of shareholders is maximized, Adams and Ferreira (2007) report that the board provides two key functions. These include: number one, the monitoring and control of principal-agent incentive conflicts; and number two, providing advice to the CEO and other board-level directors on how to maximize firm value. These two functions are an integral part of the duties of board-level financial experts and must be exercised diligently. Trautman (2013) asserts that in the US each board has the same fundamental needs for director talent. He adds that each candidate should possess the following necessary core personal attributes: high standards of ethical behavior, availability, outstanding achievement in the individual’s personal and professional life, strong interpersonal and communication skills, independence, and soundness of judgment.

Charitou A. et al., (2013), deduce from the empirical findings that firms today recruit directors to their boards based on their level of expertise and experience. These empirical studies indicated that firms that excelled in quality had larger boards. They also noted that, that the likelihood of firms attaining quality excellence was positively related to the number of outside directors who are experts in the main objective of the business operations. This is consistent with Markarian and Parbonetti (2007) who found that complex firms with increased advising requirements had larger boards that included outside experts who enhanced the firm’s ability to handle complexity.

Houston-based energy search specialist Preng (2011) founder and president of Preng and Associates as cited by Trautman (2013), believes that boards today are doing a good job of determining the skills required to meet their fiduciary duty. According to Preng, the primary characteristics that was currently desired in director candidates were independence, conviction, the ability to act as a team player, and financial and business acumen. “Most boards look to recruit someone who understands their business, and former CEOs are preferable,” says Preng. Boards also look for candidates who have skills and expertise in strategy and risk management.

2.6.1 BoD technical experience

According to Charitou, et al. (2016), directors who have previous experience from being executives or directors in other companies of the same industry, or of upstream or downstream industries can provide useful resources in the form of insights and know- how pertaining to the firm’s products and services. Faleye et al., (2014) solidifies the argument that directors with industry expertise have the capacity to offer better inputs into strategic decision-making, because of their deeper understanding of the industry and because they have superior information regarding the industry through connections.

The experienced directors can provide industry insights and know-how on customer and supplier needs. According to the previous studies, such directors significantly impact positively on the firm’s value or performance, especially in cases with severe information gaps, experienced directors contribute in handling industry shocks and shorten cash conversion cycles. Due to the customer-oriented nature of quality management programs and due to the information intensiveness of QM strategy, these characteristics are expected to be important. Boards therefore often require that a new director bring particular expertise such as international experience or accounting skills so that the person can serve on the audit committee or executive committee or any other committee (Dass et al., 2014).

2.6.2 BoD educational and technical qualification Companies hire directors based on specific qualities that is needed. Adams (2016), asserts that firm specific expertise are necessary to assess managerial competence and also to evaluate the strategic desirability of initiatives regardless of performance. He adds that managers are the main sources of firm-specific information, and since outside directors do not possess this knowledge, this information is brought into the boardroom by including executive (“inside”) directors on the board (Fama and Jensen, 1983 cited in Adams, 2016). Thus, because they have access to inside information, inside directors are in a better position to perform an oversight function based on a system of strategic control, and evaluate top management (Markarian and Parbonetti, 2007). Furthermore, executive directors have an enhanced understanding of the firm’s strategy. This makes them more emotionally attached to the strategy than outside directors are (Chatterjee, 2009).

Mbugua (2011), points out that members on board who possess professional or occupational expertise are very instrumental in institutions. On his analysis of the effect of the level of education on financial performance of Indonesian listed companies, Darmadi (2013), found out that educational qualifications of board members and CEO affected the ROA of the respective firms. The study indicated that CEOs holding degrees from prestigious domestic universities performed significantly better than those without such qualifications. This echoed Hsu’s (2010), point of view whose study showed that the quality of the board in terms of expertise and educational background was positively correlated to the firm’s performance.

Accordingly, accounting and finance expertise on the board is expected to be directly associated with 'high-quality' financial reporting and a heightened degree of investor confidence in the firm as a 'going concern' (DeFond et al., 2005). Custódio and Metzger (2014) also argue that as financial sophisticates, senior finance-expert directors are able to communicate more effectively with capital markets than their non-financial counterparts. In this regard, Custódio and Metzger (2014) find that financially expert Chief Executive Officers (CEOs) tend to be associated with positive NPV projects, greater (informed) risk-taking, and a lower dispersion rate in analysts' forecast earnings.

In 2014 Trinity fund managers limited listed among others lack of expertise in board members, ineffective board, proximity of independent directors to the investment manager that is brother or stepfather and lack of risk oversight as factors that contributed to a poorly performing board of directors in the company. As a consequence, it was deemed that the decisions that were made were not based on the best interests of the shareholders (Laing, 2016). Arguden (2009) opines that a competitive strategy requires an understanding of not only the players of the industry in which a company competes, but also its suppliers, customers, potential substitutes, and new entrants, as well as the shifting trends in technology and in the regulatory environment. Therefore, having people with diverse stakeholder experiences helps improve board decision making.

Today the most widely researched area of directors’ expertise is financial expertise and its relationship with corporate financial decisions, financial performance, and the firm’s access to funding (Charitou et al., 2016). Several studies have also looked into other types of expertise in more specific contexts; for instance, Hillman et al. (2000), in their study on appointment of directors on the board of US airline. They established that there was a greater likelihood of certain types of “support specialists” namely directors with legal and financial expertise - to be appointed on the board of US airline firms during regulation - than during deregulation.

Markarian and Parbonetti, (2007), add that, directors with expertise in the firm’s main object of business operations could help the firm strengthen its competitive advantage. They agree with Hilman et al (2000) study by stating that complex firms benefit from a board that includes “support specialists”. These support specialists are in a position to incorporate knowledge and provide companies with expertise, and knowledge that support strategy formulation and advise the management. These directors can also contribute to capability building that is, they can help a firm to internally build resources and competencies that lead to competitive advantage.

2.7 Summary Literature review on the impact of shareholder rights and responsibilities affirms that shareholders’ rights and responsibilities play a crucial role in holding boards to account, and therefore shareholders need rights which they must exercise responsibly. Policymakers now recognize the need to promote and remove obstacles to shareholder engagement. It is necessary also to emphasize the essential value of an Audit committee and BoD’s expertise and experience on corporate governance. Research has shown that these two have a positive impact on the performance of financial institutions. Literature review on BoD’s Remuneration have shown that the way BoDs are compensated positively influences the organizations performance.

CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY

3.1 Introduction This chapter focuses on the research technique that was used to collect data. It covers the research design, target population, sample selection and size data collection and data analysis.

3.2 Research Design Descriptive research design was used in the study. Descriptive research seeks to establish factors associated with certain occurrences, outcomes, conditions or types of behavior. Descriptive research is a scientific method of investigation in which data is collected and analyzed in order to describe the current conditions, terms or relationships concerning a problem. A descriptive study is carefully designed to ensure complete description of the situation, making sure that there is minimum bias in the collection of data and to reduce errors in interpreting the data collected (Kothari, 2004).

3.3 Population and Sampling design 3.3.1 Target Population

Target population is defined by Kothari (2004) as a universal set of the study of all members of real or hypothetical set of people, events or objects to which an investigator wishes to generalize the result. The target population of the study was 659 employees from the three levels of management. These included the top, middle and low-level management staff. Table 3.1 Target Population

Category Target Population Percentage Top level management 46 7 Middle level management 92 14 Low level management 521 79

Total 659 100 Source: Author (2017) 3.3.2 Sampling Design

3.3.2.1 Sampling frame The sampling frame consisted of the 659 employees and was obtained from KCB Bank Kenya Limited Human resource department.

3.3.2.2 Sampling Technique

According to Kothari (2004), a sample is that part of the population which has been selected for observation and analysis. Therefore, sampling is the process of getting a representative number of the subject. The state of population under study was identified and the researcher used stratified random sampling method to represent the issue under study. According to Mugenda and Mugenda (1999) these are participants or groups consisting of individuals with a variety of opinions, backgrounds and actions relative to a topic. The reason for using this was to enable the researcher's source of information from the different groups to be helpful for the study. The sample size was 249 employees amounting to 37% of the target population.

3.3.2.3 Sample Size

To derive the sample size for the study, Yamane’s (1967) formula was used: n = N / [1+N (e)2] Where; n is the sample size, N is the population sample and e is the sampling error tolerance. Applying an error tolerance of 5% and a population sample frame of 659 employees, the sample size was 249 respondents.

Using the percentage population distribution of each category, we obtain the sample distribution from each category. This ensured that the information collected from the sample depicted those of the entire population. Table 3.2 Sample Size 1

Category Target Population Sample Size Percentage

Top Management 46 17 7

Middle Management 92 35 14

Low level management 521 197 79

Total 659 249 100 Source: Author (2017)

3.4 Data Collection Methods and Procedures 3.4.1 Primary Data Primary data was the main source of data for the study, Kothari (2004) describes primary data as first-hand information collected, compiled and published for some purpose. This data was collected from the respondents by the researcher in form of questionnaires that they were required to fill. Since it was collected from the original source for specified purposes, it involved collection of data from the respondents from their own observations and experiences. A combination of closed ended questionnaires and open ended questionnaires was used to collect data.

3.5 Research Procedure 3.5.1. Reliability and Validity of the Instruments Reliability is a measure of the degree to which a measuring instrument yields consistent result or data after repeated trials (Mugenda and Mugenda, 2003). Validity is the degree by which logistical and empirical measures are accurate (Gerald, 2010). It is a measure of the degree to which a measuring instrument depicts true differences among items being measured (Kothari, 2005). Reliability and Validity of the research instrument was ascertained using a pretest.

A pre-test or pilot study was done on respondents who eventually were not included in the final study. The questionnaires were corrected before the final circulation. Saunders et al (2009) notes that pilot studies help the researcher in identifying questions that can make the respondents feel uncomfortable and uneasy. Such questions can then be removed, paraphrased or replaced in the final survey instrument design. According to Mugenda and Mugenda (2003) a pre-test sample should be between 1% and 10% depending on the sample size. The findings from the pilot study were used to refine the

questionnaire for final administration. A sample of 25 respondents, which is 10% of the sample size, was used in the pilot study.

3.5.2 Administration of Questionnaires Questionnaires were hand-delivered and collected after a few days. The types of questions used included both open and closed ended. Closed ended questions were used to ensure that the given answers are relevant. The researcher phrased the questions clearly in order to make clear dimensions along which respondents were analyzed. In open ended questions, space was provided for relevant explanation by the respondents, thus giving them freedom to express their feelings. This method was considered effective to the study in that; it created confidentiality. The presence of the researcher was not required as the questionnaires were self-administered.

3.6 Data Analysis Methods According to Kothari (2004), data analysis procedure includes the process of packaging the collected information putting it in order and structuring its main components in a way that the findings can be easily and effectively communicated. After the fieldwork, before analysis, all questionnaires were adequately checked for reliability and verification. Editing, coding and tabulation was carried out. The data was analyzed using quantitative and qualitative techniques where quantitative analysis was done using frequency distribution and use of measures of central tendency. It was presented by use of diagrams such as frequency tables and charts while qualitative analysis was presented through content analysis and evaluation of text material.

3.7 Chapter Summary This research was grounded on a descriptive research design where quantitative and qualitative analysis of data was done. The target population comprised of 659 employees of the KCB Bank Kenya Limited. Primary data collection technique applying the use of questionnaires was used to collect data on the research questions. Stratified random sampling technique was used to generate a sample size of 249 respondents from the 659 employees in KCB Bank Kenya Limited. All the data

collected were analyzed using qualitative and quantitative technique. The next chapter presents data findings, analysis, presentation and interpretation.

CHAPTER FOUR DATA ANALYSIS, PRESENTATION AND INTERPRETATION

4.1 Introduction In this chapter, the researcher undertook to analyze and discuss the data collected from the respondents in relation to research objectives and questions. It contains the response rate, qualitative and quantitative analysis.

4.2 Presentation of Findings 4.2.1 Response Rate

The information obtained from the study was reliable because of the high response rate despite the fact corporate governance is a sensitive issue in the industry. According to Mugenda and Mugenda (1999) a 50% response rate is adequate, 60% good and above 70% is rated very well. Based on this assertion; the response rate was at 77% which in this case was very good. The results obtained are presented on table 4.1

Table 4.1 Response rate.

Category Questionnaires Percentage (%)

Response 191 77

Non-Response 58 23

Total 249 100

Source: Author (2017)

According to Table 4.1 above, showing data analysis on response rate, 77% of the total respondents participated effectively while 23% did not participate. Based on the analysis the response was high and this indicated that the study was successful.

4.2.2 Distribution of respondents by gender The study sought to establish how respondents were distributed in terms of gender and further enabled the classification of employees in terms of male and female. The study confirmed that KCB Bank Kenya misses slightly in adhering to the employment law

that required a third or more of staff to be Female this is mainly pushed by the deficiency in the senior managerial levels. The results obtained are presented on table 4.2 Table 4.2: Distribution of respondents by gender

Gender Frequency Percentage (%)

Male 132 69.1%

Female 59 30.9%

Total 191 100.0

Source: Author (2017)

According to Table above the total number of male who responded was 132 represented by 69.1% while the number of females who responded was 59 represented by 30.9%. KCB Bank Kenya Limited has therefore not adhered to one third gender rule of employment, which should be at least 33.33%

4.2.3 Age rate analysis

Table 4.3 Age rate analysis

Age Bracket Frequency Percentage (%)

24 – 30 years 49 25.7%

31 – 40 years 88 46.1%

41 – 50 years 39 20.4%

51 years and above 15 7.9%

Total 191 100.0

Source: Author (2017)

Table 4.3 indicates the data analysis on age rate of the respondents. According to

analysis 25.7% were at the age of 24 - 30 years, 46.1% at the age of 31-40 years, 20.4% at the age of 41-50 years and 7.9% were 51 years and above. From the study analysis majority of the respondents (the median age bracket) were aged between 31-40 years. Cumulatively, the population under 40 years of age is 71.7%, an indicator that quite a sizable majority of the workforce at KCB is youthful considering the retirement age is 60 years, there is a sustainable workforce. This is backed by the 2014-2016 KCB sustainability report which shows that in 2016, only 35 of the permanent staff representing 0.6% left the organization due to retirement, (KCB,2016).

4.2.4 Distribution of respondents by level of education

Table 4.4 Distribution of respondents by level of education

Education level Frequency Percentage (%)

Diploma 33 17.3%

Degree 116 60.7%

Masters 42 22.0%

Total 191 100.0

Source: Author (2017)

Table 4.4 above indicates the level of education analysis which indicates that 17.3% of the total respondents had diploma level of education while 60.7% had degree level education and masters level were represented by 22.0%. From the analysis, it can be concluded that the organization majorly recruits staff who have completed their university education. The aggregate of this being 82.7%, a considerably high level of well-educated staff with the ability to make critical judgement in this research.

4.2.5 Distribution of respondents by duration of years worked

The respondents were asked to indicate the number of years that they have been working within the bank. As indicated by numerous literature, experience by the key stakeholders was considered useful in perfecting the discipline of corporate governance. Although the literature touched on senior management, the board and board

committees, the same can be inferred to carry the same weight for the staff who took part in this survey, to gauge their ability to form a sense of judgement on those who carry out corporate governance. The results were analyzed and presented in table 4.5 below.

Table 4.5 Distribution of employees by number of years worked

Age Bracket Frequency Percentage (%)

5 years and below 19 9.9%

6 – 15 years 74 38.7%

16 years and Above 98 51.3%

Total 191 100.0

Source: Author (2017)

From the Table 4.5 above majority of employees who have worked with the bank for more than 16 years is depicted by 51.3% while 38.7% have worked for a period of between 6 -15 years. This leaves only 9.9% of the employees have worked for less than 5 years. This was a good scenario for the study since a more experienced sample in terms of number of years worked took part in the study thereby making findings more reliable and accurate based on their years of experience.

4.2.6 Respondent Category

Table 4.6 Respondent category

Education level Frequency Percentage (%)

Top Management 14 7.3%

Middle Management 44 23.0%

Low level Management 133 69.6%

Total 191 100.0

Source: Author (2017)

Table 4.6 shows the response on respondent’s job category or cadre. According to the analysis 7.3% of the total respondents were from the top management, 23.0% from middle management and 69.6% were low level management. The reason for this stratification was to ensure that all the three levels of management were given a chance to express their opinion on the effect of corporate governance on bank’s performance.

4.2.7 Shareholder Rights and Responsibilities

The shareholding right is an inclusivity that is advocated for in all executions of governance as it ensures that all the needs and expectations from the organization and stakeholders are at least met. Table 4.7 and Figure 4.1 below are meant to show the level which shareholders rights and responsibilities affects performance of banking industry in Kenya. From the analysis, 84.3% of the total respondents stated shareholders rights and responsibilities affects performance of banking industry in Kenya while 15.8% said it does not affect. Majority of the respondents stated that shareholders needed to be engaged in strategic decisions that would impact KCB Bank Kenya Limited financials as well as on those issues that would affects its reputation in the market. This meant that exercising voting rights and engagement responsibilities was crucial to the performance of KCB Bank Kenya limited.

Table 4.7 Shareholder Rights and Responsibilities affect performance

Category Frequency Percentage (%) Yes 161 84.3%

No 30 15.7%

Total 191 100.0 Source: Author (2017)

Figure 4.1 Whether Shareholder Rights and Responsibilities affect performance

15.7%

Yes

No 84.3%

Source: Author (2017)

4.2.7.1 Extent to which shareholders’ rights and responsibilities affect performance of KCB Bank Kenya Limited

In this question, the questionnaire tried to gauge the extent in which the shareholder rights and responsibilities affect the performance. Several questions were applied in an effort to gauge this and it was done in a rating form, ranging from very low rate to very high rate. The data is subsequently analyzed and presented in percentage form.

Table 4.8 Shareholder nomination for directors and remuneration

Indicators/ Rating Very Lo Mod High Very Low w erate High

Shareholder nomination for directors and 0.0 0.0 23.1 46.2 30.7 remuneration Source: (2017)

From Table 4.8 above on the extent to which Shareholder right to nominate directors and decide on their remuneration affect performance. Majority of respondents that is 46.2% indicated that shareholder right in nomination for directors and remuneration affected performance at a large extent and that it was an important factor in determining the performance of KCB Bank Kenya Ltd, 30.7% of the respondents indicated that it affected at a very large extent while 23.1% confirmed that it affected but at a moderate

extent. None of the respondents rated this either very low or low with the cumulative rating for high and very high totaling 76.9%. Table 4.9 Right to Information on performance of the company

Indicators/ Rating Very Lo Mod High Very Low w erate High

Right to Information on performance of the company 0.0 0.0 24.7 39.1 36.2

Source: Author (2017)

Table 4.9 above shows the results on how different people feel on the right of information on the performance of the company. As per the table majority of respondents represented by 39.1% indicated that shareholder right to information on performance of the company affected performance at a high extent. 36.2% of the respondents indicated that it affected at a very high extent while 24.7% confirmed that it affected but at a moderate extent. Very low and low attracted no respondents.

Table 4.10 Right to authorize new equity issues and dividend payout plan

Indicators/Rating Very Lo Mod High Very Low w erate High

Right to authorize new equity issues and dividend 0.0 0.0 35.6 52.3 12.1 payout plan

Source: Author (2017)

From Table 4.10 above on the extent to which shareholder right to authorize new equity issues and dividend payout plan affect performance. Majority of respondents represented by 52.3% indicated that shareholder right to authorize new equity issues and dividend payout plan affected performance at a high extent. While 35.6% of the respondents indicated that it affected at moderately extent and 12.1% confirmed that it affected at a very high extent. Very low and low ratings attracted no respondents.

Table 4.11 Shareholder engagement through general meetings

Indicators/ Rating Very Lo Mod High Very Low w erate High

Shareholder engagement through general meetings 0.0 0.0 26.3 63.1 10.6

Source: Author (2017)

From Table 4.11 above on the extent to which shareholder engagement through general meetings affect performance. Majority of respondents represented by 63.1% indicated that shareholder engagement through general meetings affected performance to a high extent. While 26.3% of the respondents indicated that it affected at a moderate extent and 10.6% confirmed that it affected at a very high extent. There were no respondents in the low and very low rating in this question.

Table 4.12 Shareholder right to approve mergers and acquisitions

Indicators/ Rating Very Low Mod High Very Low erate High

Right to approve mergers and acquisitions 0.0 0.0 14.1 24.1 61.7

Source: Author (2017)

From Table 4.12 above on the extent to which shareholder right to approve mergers and acquisitions affect performance. Majority of respondents represented by 61.7% indicated that shareholder right to approve mergers and acquisitions affected performance at a very high extent. 24.1% of the respondents indicated that it affected at a moderate extent while 14.1% confirmed that it affected but at a moderate extent, while 0% of the respondents confirmed that it affected performance to a very low or low extent.

4.2.7 Whether Audit Committee’s expertise and experience affect performance.

The study sought to establish whether Audit committee expertise and experience affected performance of banking industry in Kenya. The respondents were asked to indicate how they rate the effect of audit committee expertise and experience on performance.

Table 4.13 Whether Audit Committee’s expertise and experience affect performance

Variable Measure Frequency Percentage%

Audit Committee’s Yes 176 92.1 Expertise and Experience No 15 7.9

Total 191 100.0

Source: Author (2017)

Figure 4.2 Whether Audit Committee’s expertise and experience affect performance

7.9%

Yes No 92.1%

Source: Author (2017)

In both table 4.13 and figure 4.2 above the majority of the respondents felt that the Audit committee expertise and experience affected the performance of banking industry

this was represented by 92.1% of the response, while 7.9% viewed that audit committee expertise and experience has no effect.

4.2.7.2 Extent to which Audit Committee’s expertise and experience affect performance affect performance of KCB Bank Kenya Limited

Table 4.14 Audit committee educational and technical qualification

Indicators/ Rating Low Moderat High Very Very e High Low Audit committee educational and technical 0.0 0.0 17.0 50.2 32.8 qualities

Source: Author (2017)

Audit committee expertise and experience is a major concern in corporate governance in Kenya as many companies experiencing challenges due to a weak corporate governance structure cite expertise and experience as highly needed for effective corporate governance. This question sought to establish the extent to which Audit committee educational and technical qualities affected performance of banking industry in Kenya. The results obtained are presented on table 4.14 above.

From table 4.14 on the extent to which audit committee educational and technical qualities affected performance of banking industry in Kenya. Majority of respondents represented by 50.2% indicated that audit committee educational and technical qualification affected performance at a high extent, 32.8% of the respondents indicated that it affected at a very high extent, 17.0% indicated that it affected but at a moderate extent, while 0% once again indicated very low or low extent.

Table 4.15 Audit committee technical experience Indicators/ Rating Very Low Mod High Very Low erate High

Audit Committee technical experience 0.0 0.0 11.1 18.6 70.3

Source: Author (2017)

From table 4.15 on the extent to which audit committee technical experience affected performance of banking industry in Kenya. Majority of respondents represented by 70.3% indicated that audit committee technical experience affected performance at a very high extent, 18.6% of the respondents indicated that it affected at a high extent while 11.1% indicated that it affected but at a moderate extent. None of the respondents indicated low or very low extent.

4.2.8 Board of Directors’ Remuneration The study sought to determine whether the board of directors’ remuneration affected performance in KCB Bank Kenya Limited. The respondents were asked whether board of directors’ remuneration affected performance. The findings are presented in table 4.16 and figure 4.3.

Table 4.16 Whether Board of Directors’ Remuneration affect performance

Variable Measure Frequency Percentage%

Board of Directors’ Yes 132 69.1 Remuneration No 59 30.9

Total 191 100

Source: Author (2017)

Figure 4.3 Whether Board of Directors’ Remuneration effect on performance

30.9% Yes No 69.1%

Source: Author (2017)

According to the study and as shown in table 4.16 and figure 4.3, 69.1% of the respondents agreed that the board of directors’ remuneration affected performance while 30.9% did not agree. Majority of the respondents therefore agreed that board of director’s remuneration affect performance of banking industry in Kenya.

4.2.8.1 Extent to which Board of Directors’ remuneration affect performance affect performance of KCB Bank Kenya Limited

Table 4.17 Board of Directors’ company size effect on performance Indicators/ Rating Very Lo Mod High Very Low w erate High

BoD company size 0.0 0.0 20.1 70.8 9.1

Source: Author (2017) From table 4.17 on the extent to which Board of directors’ compensation and company size affected performance of banking industry in Kenya. Majority of respondents represented by 70.8% indicated that Board of director’s compensation and company size affected performance at a high extent, 20.1% of the respondents indicated that it affected at a moderate extent while 9.1% indicated that it affected but at a very high extent. With no respondent supporting very low and low extents.

Table 4.18 BoD commitment and retention of the best directors

Indicators/ Rating Very Low Mod High Very Low erate High

BoD commitment and retention of the best directors 0.0 0.0 27.7 38.1 34.2

Source: Author (2017)

From table 4.18 on the extent to which BoD pay and commitment and retention of directors affected performance of banking industry in Kenya. Majority of respondents represented by 38.1% indicated that BoD pay and commitment and retention of directors affected performance at a high extent, 27.7% of the respondents indicated that it affected at a moderate extent while 34.2% indicated that it affected but at a very high extent.

Table 4.19 Full disclosure of BoD pay and performance in annual general meeting

Indicators/ Rating Very Low Mod High Very Low erate High

Full disclosure of BoD pay and performance in annual 0.0 0.0 26.1 56.3 17.6 general meeting

Source: Author (2017)

From table 4.19 on the extent to which full disclosure of BoD pay and performance in annual general meeting affected performance of banking industry in Kenya. Majority of respondents represented by 56.3% indicated that full disclosure of BoD pay and performance in annual general meeting affected performance at a high extent, 26.1% of the respondents indicated that it affected at a moderate extent while 17.6% indicated that it affected and at a very high extent.

4.2.9 Board of Directors’ Expertise and Experience

This study also sought to assess the extent to which board of directors’ expertise and experience affected performance in KCB Bank Kenya Limited. The respondents were asked their views with regards to whether director’s expertise and experiences affected the performance of banking industry. The results obtained are presented on tables and figures below.

4.2.9.1 Extent to which Board of Directors’ remuneration affect performance affect performance of KCB Bank Kenya Limited

Table 4.20 Whether Board of Directors’ Expertise and Experience affect performance

Variable Measure Frequency Percentage (%)

Yes 167 87.4%

No 24 12.6%

Total 191 100

Source: Author (2017)

Figure: 4.4 Whether Board of Directors’ Expertise and Experience affect performance

12.6%

Yes

No 87.4%

Source: Author (2017)

From table 4.20 above, 87. 4% of the respondents felt that Board of director’s expertise and experience influenced the performance of banking industry while 12.6% did not. It is therefore clear that that Board of director’s expertise and experience affect the performance of banking industry.

Table 4.21 Board of Directors’ technical experience effect performance

Indicators/ Rating Very Low Mod High Very Low erate High

BoD technical experience 0.0 0.0 15.2 61.5 23.3

Source: Author (2017)

This question sought to establish the extent to which board of directors’ technical experience affected performance of banking industry in Kenya. The results obtained are presented on table 4.21. On the extent to which extent board of directors’ technical experience affected performance of banking industry in Kenya., majority of respondents represented by 61.5% indicated that board of directors’ technical experience affected performance at a high extent, 23.3% of the respondents indicated that it affected at a very high extent while 15.2% indicated that it affected but at a moderate extent.

Table 4.22 BoD education and technical qualification effect performance

Indicators/ Rating Very Low Mod High Very Low erate High

BoD education and technical qualification 0.0 0.0 26.4 48.4 25.1

Source: Author (2017)

From table 4.22 on the extent to which extent board of directors’ education and technical qualification affected performance of banking industry in Kenya., majority of respondents represented by 48.4% indicated that board of directors’ expertise affected

performance at a high extent, 26.4% of the respondents indicated that it affected moderately while 25.1% indicated at a high extent.

4.3 Descriptive Statistics Using a five point Likert-type scale respondents quantified the responses to the questions provided. The summarized aggregated statistics is as shown in Table 5.2. a score of 1 represents very low, 2 = low, 3 = moderate, 4 = High and 5 = Very high.

Table 4.23 Descriptive statistics of the variables

Shareholder Rights and Audit Committee Responsibilities Expertise and Experience

Mean 4.068323 Mean 4.159091 Standard Error 0.057863 Standard Error 0.051455 Median 4 Median 4 Mode 4 Mode 4 Standard Deviation 0.734202 Standard Deviation 0.682623 Sample Variance 0.539053 Sample Variance 0.465974 Kurtosis -1.12726 Kurtosis -0.84871 Skewness -0.10761 Skewness -0.2113 Range 2 Range 2 Minimum 3 Minimum 3 Maximum 5 Maximum 5 Sum 655 Sum 732 Count 161 Count 176 Confidence Level (95.0%) 0.114274 Confidence Level (95.0%) 0.101552

BoD Expertise and BoD Remuneration Experience

Mean 3.924242 Mean 4.095808 Standard Error 0.045145 Standard Error 0.047469 Median 4 Median 4

Mode 4 Mode 4 Standard Deviation 0.518677 Standard Deviation 0.613439 Sample Variance 0.269026 Sample Variance 0.376308 Kurtosis 0.705877 Kurtosis -0.34901 Skewness -0.10737 Skewness -0.05551 Range 2 Range 2 Minimum 3 Minimum 3 Maximum 5 Maximum 5 Sum 518 Sum 684 Count 132 Count 167 Confidence Level 95.0%) 0.08938 Confidence Level 95.0%) 0.0937

As indicated in Table 4.23, all variables were rated large as regards to the measures of central tendency that is mean, mode and median. Audit Committee Expertise and Experience was rated relatively high (M=4.16, Std Deviation=0.682). This means that Audit Committee Expertise and Experience on corporate governance issues have a positive influence on the performance of the bank. The standard deviation and variance are also small denoting less variability of scores in the distribution.

BoD Expertise and Experience has also been rated highly (M=4.095, Std Deviation=0.613). This implies that Expertise and Experience of BoD on corporate governance influences the performance of the banking industry in Kenya. The low standard deviation and variance denotes less variability of scores in the distribution.

Shareholder Rights and Responsibilities was rated highly as well (M=4.068, Std Deviation=0.734). This is a clear indication of the success of the shareholder rights and responsibilities. The standard deviation and variance are also small denoting less variability of scores in the distribution.

BoD Remuneration has also been rated highly but marginally lower than the other strategies (M=3.924, Std Deviation=0.859). What this means is that BoD Remuneration has some impact on performance of banking industry but not as much as the other variables. The low standard deviation and variance denotes less variability of scores in the distribution.

4.4 Chapter Summary The chapter explored an overall 87% survey return rate, summary of respondents’ gender, years of service and the role effective corporate governance in KCB Bank Kenya Limited. The variables measured were shareholder rights and responsibilities, Audit committee Expertise and Experience, BoD Remuneration and BoD Expertise and Experience. Information on the variables was collected using questionnaires and content analysis. The questionnaires used contained closed questions which were refined using Arbitrary scale and Likert scale or respondents made a choice of “Yes” or “No” answers.

Descriptive statistics such as frequencies and percentages were used in data analysis. The analyzed data was presented in tables. In general, the key observation were that most of the corporate governance variables tested greatly affected the performance of the banking industry, derived from the samples obtained from the KCB bank study.

The next chapter shows the summary of findings, conclusions and recommendations.

CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction This chapter entails the conclusion and the recommendations of the research study.

5.2 Summary of the Findings The main purpose the study was to evaluate the role of effective corporate governance in performance of the banking industry in Kenya. The specific objectives of the study were; to assess how shareholders voting rights and responsibilities, audit committee’s expertise and experience, board of directors’ expertise and experience and board of directors’ remuneration influences performance of the banking industry in Kenya. The study used descriptive designs. A sample of 249 employee from a population of 659 employee in KCB Bank Kenya Limited was studied. The sample was identified through proportionate stratified sampling. The data was collected through descriptive was presented using tables descriptive statistics.

The results indicated that the technical expertise of most KCB Bank employee was high with 60.7% of all respondents having degree, 22.0% of bank employee had masters while 17.3% had diploma level of education. Majority of the bank’s employees had worked with KCB Bank Kenya Limited for more than 16 years this was depicted by 51.3% while 38.7% had worked for a period of between 6 -15 years. 9.9% of the employees had worked less than 5 years. The results also indicated that 7.3% of the total respondents were from the top management, 23.0% from middle management and 69.6% from low level management.

From the study findings on how Shareholder rights and responsibilities affects performance of banks, 84.3% of the total respondents said it affects while 15.7% said it does not affect. The study also showed that AC’s expertise and experience affects performance; this was represented by 92.1%. Majority of the respondents i.e. 69.1% stated that BoD remuneration affects performance of banks while 30.9% said it does not affect. The respondents stated that BoD expertise and experience affect performance of banks this was represented by 87.4% while 12.6% said it does not affect.

5.3 Discusion of findings 5.3.1 Rights and responsibilities of shareholders and their influence on the performance of the banking industry in Kenya According to study findings on the extent to which shareholders’ rights and responsibilities affect performance of banking industry in Kenya. Majority of the respondents said that it affected performance of the company, this was represented by 84.3% while 15.7% said that it did not affect. Majority of the respondents stated that banks provided a conducive engagement platform compared to other organization especially since the Annual general meeting is taken seriously by the management and shareholders are able to exercise their rights and responsibilities, this affected the overall performance banking industry in Kenya.

5.3.1.1 Shareholders right of nomination for the director and their remuneration

The results indicated that shareholders had a right to nominate as well as determine directors pay. The results established that shareholders right of nominating a director and his remuneration affected performance at a high extent this was indicated by 46.2% of the respondents, 30.7% said ascertained that it affected at a very high extent, while 23.1% said it affects at moderate extent. According to the CMA (2002) guidelines on corporate governance shareholders’ have the right to approve directors as well as their remuneration. This research concurs with this assertion and confirms its validity.

5.3.1.2 Shareholders right to information on performance of a company The results indicated that shareholders right to information on performance of the company affected performance at a high extent. 39.1% of the respondents agreed that it affected performance at a high extent, this affirmed that shareholders right to information was a major factor in keeping the company in check. 36.2% said it affected at a very high extent, while 24.7% said it affects at moderate extent. Consistent with the SA King IV (2016) guidelines on corporate governance, an oargzanition should ensure that annual reports are published to enable stakeholders to make informed assessments of the organization’s performance as well its short-medium and long-term prospects.

5.3.1.3 Shareholders right to authorize new equity issues and dividend payout plan The results indicated that shareholders right to authorize new equity issues and dividend payout plan affected performance. Majority of the respondents indicated by 52.3% affirmed that it affected at a high extent. 12.1% of the respondents agreed that it affected performance at a very high extent while 35.6% said that it affected at a moderate extent. The results are consistent with Model Proxy (2016) shareholders voting guidelines, these guidelines emphasize that some companies must have the approval of their shareholders in order for them to allocate their profits between dividends, compensation for the directors and statutory auditors, and other uses.

5.3.1.4 Shareholders engagement through general meetings

The results indicated that shareholders engagement through general meetings affected performance at a high extent represented by 63.1%. 10.6% of the respondents agreed that it affected performance at a very high extent, while 26.3% said it affected at moderate extent. The Hampel Report (1998) has been seen to promote investor relations and social activism, it is through shareholder engagement that shareholders can have the opportunity to deciding whether or not they were satisfied with the company’s corporate governance systems.

5.3.1.5 Shareholders right to approve mergers and acquisitions The results indicated that shareholders right to approve mergers and acquisitions affected performance. 61.7% of the respondents agreed that it affected performance at a high extent. 24.1% said it affected at a very high extent, while 14.1% said it affected at a moderate extent. Consistent with the results Allen (2005) asserts that stakeholder model of corporate governance gives shareholders an opportunity to determine how an organization’s resources is used efficiently to the benefit of all those that may influence or are influenced by the corporation.

5.3.2 Audit committee’s expertise and experience and its effect on performance of banking industry in Kenya

previous research indicate that audit quality is an important element of efficient and reputable corporate governance, since audits can enhance the credibility of financial information and directly support better corporate governance practices through transparent financial reporting. Therefore, where audit committee are seen as not meeting the accepted quality standards greater loss through reputation damage may be experienced. (Chee Haat et al., 2008)

From the study findings on extent to which audit committee’s expertise and experience affect performance of banking industry in Kenya. Majority of the respondents said that audit committee expertise and experience affected performance of the company, this was represented by 92.1% while 7.9% said that it did not affect. The respondents stated that banks were very keen on the expert knowledge and experience of the audit committee members and that they were strictly recruited based on their professional qualifications. Therefore, audit committee’s expertise and experience affected organizational performance of banks in Kenya.

5.3.2.1 Audit committee’s educational and technical qualification Majority of the respondents that is 50.2% said that audit committee’s educational and technical qualification affected performance at a high extent, 32.8% said it affected at a very high extent while 17.0% said it affected at a moderate extent. These results emphasize the need for highly educated and technically qualified audit committee empowered to play an important role in the performance of a company. This places them at levels of competence needed to question management on any strategic direction taken.

5.3.2.2 Audit committee’s technical experience Majority of the respondents that is 70.3% stated that audit committee technical experience affected performance at a very high extent, 18.6% said it affected at a high extent while 11.1% said it affected at a moderate extent. The results indicated that in deed audit committee expertise and experience influenced the performance of KCB Bank Kenya limited. Consistent with King IV (2016) corporate governance guidelines, corporate governance structure should comprise of appropriate balance of knowledge, skills, experience, diversity and independence so as to discharge its governance roles and responsibilities objectively and effectively.

As seen in the literature, technical experience is mainly derived from senior financial experts who have prior experience in audit, financial management or even served previously in senior executive roles such as former CEOs.

5.3.3 Board of directors’ remuneration effect in influencing performance of the banking industry in Kenya

The study findings on the extent to which board of directors’ remuneration affects performance of the banking industry in Kenya indicated that, in deed it did influence performance this was represented by 69.1% while 30.9% did respondent by saying stating the opposite. The respondents stated that, banks need to have good reward system for the BoD so as to ensure that their interests were aligned with the company’s interests as well as retain the best talent, this impacts motivation and individual level performance and eventually affects performance of banking industry in Kenya. OECD (2015) principles on corporate governance state that board members and executives as well as financial intermediaries and service providers should be awarded with the right incentives so as to perform their role well within the frameworks of checks and balances

5.3.3.1 BoD Company size The study findings indicate that the size of the company affected performance 70.8% said it affected at a high extent, 9.1% indicated that it affects at a very high extent while 20.1% said it affects at moderate extent. A good corporate governance structure needs to remunerate its board properly, respondents indicated that high levels of compensation to BoD was to a large extent an indicator that KCB was considered a large company and therefore this size in itself led to the drive to a higher board remuneration and consequently a big impact on performance.

5.3.3.1 BoD commitment and retention of directors On whether Board of director commitment and retention of good directors affected performance 38.1% said it affected at a high extent, 34.2% indicated that it affects at a very high extent while 27.7% said it affects at moderate extent. This is by far the most evenly distributed measure between high, very high and moderate extent.

A good corporate governance structure needs to remunerate its board properly. A fair and competitive remuneration package retains the best directors as well as increasing

their commitment to pursuing objectives that are in line with the company’s and shareholder’s interests.

5.3.3.3 Full disclosure of BoD remuneration 56.3% of the respondents stated that full disclosure of BoD remuneration affected performance at a high extent, 17.6% said it affected at a very high extent while 26.1% said it affected at moderate extent. The results indicated that in was making BoD pay package open for public scrutiny was determinant of good corporate governance. The results affirmed one of the principles in the Greenbury report (1995) which requires that annual report indicating full disclosure of all remuneration elements such as pay bonuses, share options and pensions to be published. It also requires that the relative incentives should be aligned with the level of performance and interests of the BoD and shareholders.

5.3.4 Does board of directors’ expertise and experience influence the performance of banking industry in Kenya From the study findings on how the respondents rated board of directors’ remuneration effect on performance of the banking industry in Kenya. Majority of the respondents represented by 87.4% stated banks needed a board of directors with expert knowledge and experience on matters to do with corporate governance in the banking industry so when it comes to implementing on issues to do company’s strategy, it affected overall performance.

5.3.4.1 BoD education and technical qualification 62.5% of the respondents rated BoD education and technical qualification influence on performance as high, 23.3% rated it as very high while 15.2% as moderate. This indicate that KCB Bank management viewed educational qualification as success factor in its performance. Echoing the results is the Kings IV (2016) whose overriding concern is ensuring that the governing body is knowledgeable, skilled, experienced, diverse and independent enough to discharge fully its governance role and responsibilities.

5.3.4.2 BoD technical experience

The findings indicate that competency of the BoD in terms of technical experience is a driver in the good corporate governance and performance. This is shown by 48.4% of

the respondents who rated it highly while 25.1% rating it as very high only 26.5% rated it moderately. The results are consistent with the CBK prudential guidelines which requires Board members to be qualified, experienced and should constantly increase their competency level through training and continuous professional development (CPD) for their positions. Also, worth noting is that they should have a clear understanding of their role in corporate governance and be able to exercise sound and objective judgment about the affairs of the bank (Osebe and Chepkemoi, 2016).

5.4 Conclusions The study finding indicated that shareholders rights and responsibilities influence the performance of the banking industry in Kenya. The respondents stated that banks were very keen on the expert knowledge and experience of the audit committee members and that they were strictly recruited based on their professional qualifications. Therefore, audit committee’s expertise and experience affected organizational performance of banks in Kenya.

Based on the study findings, audit committee’s expertise and experience affect performance of banking industry in Kenya. The respondents stated that banks were very keen on the expert knowledge and experience of the audit committee members and that they were strictly recruited based on their professional qualifications. Therefore, audit committee’s expertise and experience affected organizational performance of banks in Kenya.

The study has indicated that board of directors’ remuneration affects performance of the banking industry in Kenya. Majority of the respondents stated that, banks need to have good reward system for the BoD so as to ensure that their interests were aligned with the company’s interests as well as retain the best talent, this impacts motivation and individual level performance and eventually affects performance of banking industry in Kenya.

The study findings indicated that board of directors’ expertise and experience influence the performance of banking industry in Kenya. Majority of the respondents stated that banks needed a board of directors with expert knowledge and experience on matters to do with corporate governance in the banking industry so when it comes to implementing

on issues to do company’s strategy, it affected overall performance.

It is important to point out that all the qualitative indicators or variables in the questionnaire required respondents to rank their rating into five categories namely; Very Low, Low, Moderate, High and Very High. Of great significance to this study is the fact that none of the respondents picked Very low and Low rankings signifying the ultimate importance of corporate governance as perceived by the KCB employees and to a larger extent the banking sector.

5.5 Recommendations and Areas for further studies 5.5.1 Shareholders rights and responsibilities The research study recommends that banks should ensure that they are aware of the rights and responsibilities of their shareholders. Banks should conduct shareholder satisfaction survey which is the best way to find out how satisfied their shareholders with their overall performance in the industry and also come up with engaging them more frequently rather than relying on the annual general meeting. Improving shareholder satisfaction on performance of the company will help you improve employee motivation and improve individual performance which translates to improved organizational performance.

5.5.2 Audit committee’s expertise and experience The study recommends that banks should delve more on Audit committee member competence when hiring, it should determine how qualified a member and if he or she is competent enough to do a certain audit task. Tasks that require customer service audit or risk audit should be handled by members competent in customer service or risk respectively, each audit committee member should be well placed to enable them to provide proper audit services.

5.5.3 Board of directors’ remuneration. As seen in this study, the board is responsible for the strategic direction of the company offering oversight and guidance to the management on such matters as investment policy, mergers and acquisition and capital raising. This study recommends that banks should have a good reward system for the BoD in place offering good remuneration packages to their directors, this package should be competitive enough compared to the

market rate within banking industry. This will ensure that their interests are aligned with the company’s interests as well as retain the best talent. Improving the quality of BoD reward system can start from motivating directors through bonuses, good monthly salaries, and commissions. Banks can use employee feedback survey to find out whether they have a good reward system for directors in place and ensure that they update it in case in needs to.

5.5.4 Board of directors’ expertise and experience The research study recommends that Banks should improve on its level of corporate governance. The Management need to create a predefined set of expertise and experience that is required of their directors. Just like audit committee expertise and experience directors with industry expertise have the capacity to offer better inputs into strategic decision-making and having a dynamic and talented board of directors ultimately will positively impact the performance of the banking industry.

5.5.5 Areas for further studies Corporate governance plays an important role in ensuring efficiency, sustainable growth and financial stability in the economy. It therefore imperative that corporate governance in other financial sectors like Insurance sectors and SACCOs is a reviewed. Further studies on the relationship between an organization’s size and BoD remuneration should be conducted and analysis done also to assess its relationship with overall performance.

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APPENDIX I

Appendix 1: Introduction Letter Charllotte Ludi Obado, P.O Box 48400-00100, Nairobi. Dear Respondent, I am an MBA student in the Chandaria Business School at the United Stated International University. I am carrying out a research on the “The Role of Corporate Governance in The Performance of Banking Industry in Kenya, A Case of KCB Bank Kenya Limited”. The purpose of this questionnaire is to gather data to assess the influence corporate governance components on the performance of banking industry. You have been considered as an active player and hence selected as one of the respondents in this study. The information given will be treated confidentially and will be used strictly for academic purposes only. Your cooperation will be highly appreciated. Thank you in anticipation. The researcher Signature______Miss Charllotte Ludi Obado

APPENDIX II

QUESTIONNAIRE Please answer questions by putting a tick [√] in the appropriate box or by writing in the space provided. SECTION A: GENERAL INFORMATION 1. Gender: Male [ ] Female [ ] 2. Age: 24 - 30 years. [ ] 31 - 40 years. [ ] 41 - 50 years. [ ] 51 years and above [ ] 3. Highest Level of Education Diploma [ ] Degree [ ] Masters [ ] Any Others (Specify) [ ] 4. Duration of Working in KCB Bank Kenya Limited. 5 Years and below [ ] 6 – 15 Years [ ] 16 - Years and above [ ] 5. Respondent Category Top level management [ ] Middle level management [ ] Low level management [ ]

SECTION B: SHAREHOLDERS’ RIGHTS AND RESPONSIBILITIES 6. Does Shareholders’ rights and responsibilities affect performance of banking Industry in Kenya Yes [ ]

No [ ] Briefly explain ………………………………………………………………………………………… ………………………………………………………………………………………… …………………………………………………………………………………

7. Kindly rate the extent to which shareholder rights and responsibilities affect performance of the banking industry.

1. Very Low 2. Low 3. Moderate 4. Large 5. Very Large Rating 1 2 3 4 5

Shareholder rights and responsibilities affect

8. Kindly rate the extent to which the following shareholder rights and responsibilities affect performance of the banking industry

Indicators / Rating 1 2 3 4 5

Shareholder voting rights and responsibilities

i. Right to nominate directors and their remuneration ii. Right to Information on performance of the company iii. Right to authorize new equity issues and dividend payout plan iv. Shareholder engagement through general meetings v. Right to approve mergers and acquisitions

SECTION C: AUDIT COMMITTEE’S EXPERTISE AND EXPERIENCE 9. Does Audit Committee’s expertise and experience influence performance of banking Industry in Kenya Yes [ ] No [ ]

Please Explain

iii

………………………………………………………………………………………… ……………………………………………………….………………………….……… ……………………………………………………………………………..

10. Kindly rate the extent to which Audit Committee’s expertise and experience affect performance of the banking industry.

1. Very Low 2. Low 3. Moderate 4. Large 5. Very Large Rating 1 2 3 4 5

Audit Committee’s expertise and experience

11. Kindly rate the extent to which the following aspects of Audit committee affect performance of the banking industry. Indicators / Rating 1 2 3 4 5 i. Audit committee educational and technical qualities ii. Audit Committee technical experience

SECTION D: BOARD OF DIRECTOR’ REMUNERATION 12. Does the Board of director’ remuneration affect performance of banking industry In Kenya? Yes [ ] No [ ]

Please Explain ………………………………………………………………………………………… ……………………………………………………………………………… 13. To what extent does Board of director’ remuneration affect performance of banking industry in Kenya?

1. Very Low 2. Low 3. Moderate 4. Large 5. Very Large

Rating 1 2 3 4 5

Board of director’ remuneration

14. To what extent does the following affect performance of banking industry in Kenya

Indicators / Rating 1 2 3 4 5

i. BoD company size ii. BoD commitment and retention of the best directors iii. Full disclosure of BoD pay and performance in annual general meeting

SECTION E: BOARD OF DIRECTOR’ EXPERTISE AND EXPERIENCE

15. Does the board of director’ expertise and experience influence performance of Banking Industry in Kenya? Yes [ ] No [ ] Briefly explain………………………………………………………………………………… ………………………………………………………………………………………….

16. How can you rate board of director’ expertise and experience influence performance of Banking Industry in Kenya?

1. Very Low 2. Low 3. Moderate 4. Large 5. Very Large Rating 1 2 3 4 5

Board of director’ expertise and experience

17. Kindly rate the extent to which the following affect performance of Banking Industry in Kenya?

Indicators / Rating 1 2 3 4 5 i. BoD technical experience ii. BoD education and technical qualification

Thank you for your cooperation