Main Theories influencing Corporate Governance Development. 

Main Theories influencing Corporate Governance Development. 

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This study explored ownership structure and corporate governance and its effects on performance of firms in Kenya with reference to banks. The study revealed that there was no significant difference between type of ownership and financial performance, and between banks ownership structure and corporate governance practices. Further results revealed...

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... in the industry. Corporate governance in the banking sector in Kenya largely relates to the responsibility conferred to and discharged by the various entities and persons responsible for and concerned with the prudent management of the financial sector (Central Bank of Kenya, 2006). The corporate governance stakeholders in the banking sector include the board of directors, management, shareholders, Central Bank of Kenya, external auditors and Capital markets Authority (CCG, 2004). According to the guideline on corporate governance as stipulated in the Central Bank of Kenya (CBK) prudential guidelines of (2006) for institutions licensed under the banking act Cap 488, an institution is required to have non-executive director who is not involved in the day-to-day management and not a full-time salaried employee of a banking institution or of its subsidiaries. In addition, it is a requirement that it has an independent non-executive director who is not employed by the institution in an executive capacity within the last five and does not have any conflicting interests with the institution. However, no shareholder with more than five percent (5%) shareholding in a banking institution is supposed to be an executive director or form part of the management of the institution or institution’s holding company. On the same note, no director and chief executive officer is required to take up a position before he/she is cleared by the central bank and that the directors of the institutions shall control the manner in which the business is conducted i.e. corporate planning, effective functioning of board and management committees in key areas, set-up an effective internal audit department and compliance function, maintain adequate capital base among others (CBK Prudential Guidelines, 2006). As concerns the Board of Directors for each institution, the guidelines stipulate that the board is responsible for formulating policies, procedures and guidelines concerning duties, responsibilities and code of conduct of its officers. Relevant board committees are constituted to assist the board and its directors in discharging the duties and responsibilities. In order to achieve the necessary balance, CBK requires all institutions’ board to have at least five directors, three-fifths of whom should be non-executive Directors. This is because of banks special nature of deposit-taking giving them an added responsibility of safeguarding the interests of the depositors. Similarly, independent non-executive directors comprise the majority of the non-executive directors serving on the board to ensure that the non-executive directors, who form the majority, render the necessary independence to the board from the executive arm of the banking institutions, and help mitigate any possible conflict of interest between the policy-making process and the day-to-day management of the institution. In the increasingly complex banking environment, the presence of suitably qualified independent directors can contribute effectively towards achieving the main tasks of the board (CBK Prudential Guidelines, 2006). Further, independent directors are required to provide the necessary checks and balances on the board of the institution so as to ensure that the interests of minority shareholders and general public are given due consideration in the decision-making process. Independent directors are not supposed to be brought in as a mere formality as this would be tantamount to deceiving the minority shareholders and the public. As concerns foreign banks, CBK Prudential Guidelines (2006) stipulate that formation of local Committees is a requirement. This specifically applies to their branches, which need to have at least five members in their local committees whose responsibilities are similar to those of the Board of Directors. On multiple directorships, an individual is not allowed to hold the position of a director in more than two institutions licensed under the Banking Act unless those institutions are subsidiaries or holding companies. However, government bodies represented in institutions’ boards by virtue of their position as government bodies are exempted. The Chairman of the board is supposed to be a non-executive director the guidelines state. On conflict of interest, directors, chief executive officers and management are not allowed to engage directly or indirectly in any business activity that competes or conflicts with the institution’s interest such as outside financial interest, other business interests, employment and corporate directorship (CBK Prudential Guidelines, 2006). This section reviews some of the corporate governance theories with a view to understand how they relate to governance. Several theories exist that attempt to highlight the objective of the firm and how the firm should be responsible in meeting its obligations. This study looked at four main theories that have influenced corporate governance development as shown in (Figure 2). 2.6.1 Principal-agent Theory It has been argued that the agency theory has been the most dominant issue in corporate governance and the principal-agent theory is generally considered the starting point of this debate. Agency theory hypothesises that in the modern corporation, in which share ownership is widely held, managerial actions depart from those required to maximise shareholder returns (Mallin, 2007). 2.6.2 Stewardship Theory Stewardship theory offers an alternative to agency theory by suggesting that when a convergence of values exists between principals and agents or when organisations promote unselfish values, responsible behaviour results by internal means (Dicke, 2000). Lack of trust referred to by the agency theory regarding authority and ethical behaviour is what is replaced by this theory which is one of the key distinguishing features of it (Donaldson & Davis, 1991). 2.6.3 Stakeholder Theory According to Freeman et al. (2004), stakeholder theory basically aims at striking a balance between the interests of a corporation’s stakeholders and their satisfaction. It tries to identify the purpose of the firm. Identification of the firm’s purpose therefore becomes the driving force underlying its activities (Freeman et al., 2004). By highlighting the firm’s responsibility to its stakeholders, the author states that it pushes the management to design and employ appropriate methodologies to determine the nature of the relationship between interested parties and the management in order to deliver on their purpose. Freeman further says that there is a realization that economic value is created by people who voluntarily come together, cooperate and hence improve everyone’s circumstances (Freeman et al., 2004). According to Mallin (2007), Transaction Cost Economics (TCE) theory though closely related to agency theory views the firm as a governance structure. She notes that certain economic benefits to the firm exits when a firm undertakes transactions internally rather than external. Mallin further states that in its turn, the firm becomes larger, the more transactions it undertakes and will expand up to the point where it becomes cheaper or more efficient for the transaction to be undertaken externally. Stiles and Taylor (2001) point out that this theory is concerned with managerial discretion and it assumes that managers are given to self-interest seeking and moral hazard and that they operate under bounded rationality. The theory also regards the board of directors as an instrument of control hence, managers will tend to sacrifice rather than maximise profit of course not being in the interests of shareholders just like the agency theory (Mallin, 2007). 2.7 Knowledge Gap Many other researchers have examined the relationship between variety of governance mechanisms and firm performance. However, the results are mixed. Some examine only the impact of one governance mechanism on performance, while others investigate the influence of several mechanisms together on performance. There is a yawning gap that exists since none of them covers effects of ownership structure on corporate governance and performance specifically in the commercial banking sector in Kenya. The only study done in Kenya by the Centre for Corporate Governance focussed on governance practices in the commercial banking sector in Kenya. More so, the many unpublished work done in Kenya followed suit by focusing corporate governance in general with only one study among them focussing on the relationship between implementation level of Capital Markets Authority guidelines on corporate governance and profitability of companies listed at the Nairobi Stock Exchange (NSE). It is against this background that the researcher found it necessary to carry out a study on ownership structure and corporate governance and its effects on performance in the Kenyan commercial banking sector to bridge the gap that exist. In order to look at the ownership structure and corporate governance and its effects on performance in the Kenyan commercial banking sector, a survey design was used. The population of the study comprised of banks within Nairobi City in Kenya. Stratified sampling was employed to select the banks. A total of 40 bank managers drawn from state-owned, locally-owned and foreign-owned banking institutions selected through purposive sampling procedure participated in the study. The stratification of the sample allowed for diversity of views and statistical analysis. A semi-structured questionnaire consisting of both closed and open-ended questions was used. The questionnaire was personally administered to the bank managers to collect primary data from the selected banks. Descriptive ways of Statistical Package for Social Sciences (SPSS) were used to analyze the data into frequencies and percentages. One-way Analysis of Variance (ANOVA) was used to test the hypotheses. This survey used Alpha – α (Cronbach), the model for internal ...

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... The study adopted a descriptive longitudinal design through the use of panel data. The panel data technique was deemed suitable as the study's data entailed both time series and cross sectional components (Mang'unyi, 2011). This was applied across 58 companies for a five years period resulting to 290 data points. ...
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