Corporate Governance Mechanisms and Financial Performance of Commercial Banks in Kenya

Abstract

The role of effective corporate governance mechanisms as key components of prudent financial management has become an issue of global significance and has received new urgency due to various corporate scandals and failure. This study seeks to examine the impact of corporate governance mechanisms (audit committee size, board gender diversity and board size) on banks' profitability based on the annual reports of forty two banks in Kenya in the period 2014. The study controls for the effect of bank size and capital of the banks. The study utilized a correlational research design and was based on the agency theory. Using multiple regression as a method of estimation, the results reveal that audit committee size, board gender diversity and bank capital have no significant effect on bank profitability in the selected sample. The regression results indicate that board size negatively influences financial performance; whereas bank size is positively associated with financial performance. The study suggests that banks with effective corporate governance mechanisms may improve financial performance depending on the measure used although not all corporate governance mechanisms are significant. The study is significant because it can aid the policy makers in the formulation of policies, which can be effectively implemented for better and easier regulation of banks. The findings of the study have significant managerial and theoretical implications.