Corporate governance and financial performance of state-owned enterprises in Kenya

• DOI: https://doi.org/10.1108/CG-01-2021-0007
• Published date: 12 November 2021
• Date: 12 November 2021
• Pages: 798-820
• Subject Matter: Strategy,Corporate governance
• Author: Albert Ochien’g Abang’a,Venancio Tauringana,David Wang’ombe,Laura Obwona Achiro

Corporate governance and f‌inancial

performance of state-owned enterprises

in Kenya

Albert Ochien’g Abang’a, Venancio Tauringana, David Wang’ombe and

Laura Obwona Achiro

Abstract

Purpose –This paper aims to report the results of an investigation into the effect of aggregate and

individual corporategovernance factors on the financial performanceof state-owned enterprises (SOEs)

in Kenya.

Design/methodology/approach –The paper uses balanced panel data regression analysis on a

sampleof 45 SOEs in Kenya for a four-year period (2015–2018).

Findings –The panel data analysis results showthat board meetings, board skill and gender diversity

individual provisions of corporate governance are significantly and positively associated with capital

budget realization ratio (CBRR). Moreover, the study finds that aggregate corporate governance

disclosure index, board sub-committees, board size and independent non-executive directors are

positivebut insignificantly related to CBRR.

Research limitations/implications –The current study is based on secondarydata, other methods of

knowledge inquiry such as interviews and questionnaires may provide additional insights on the

effectivenessof corporate governance on financialperformance.

Practical implications –Overall, the results imply that corporate governance influences the

performance of SOEs in Kenya. The results suggest that Mwongozo Code of Corporate Governance

provisions should be changed to increase the number of women representations on board and the

number of directors with doctoral qualifications because of their positive impact on the financial

performance of SOEs in Kenya. Also,policymakers with remit over SOEs should re-evaluate why other

corporategovernance appear not to have an impactwith a view of making the necessary changes.

Originality/value –The paper contributes to the dearth of literature on the efficacy of corporate

governanceon the financial performance of SOEsin developing countries.

Keywords Performance, Corporate governance, Kenya, State-owned enterprises,

Mwongozo code of corporate governance

Paper type Research paper

1. Introduction

There has been a copious of studieson the relationship between corporate governance and

performance (Afrifa and Tauringana, 2015;Khongmalai and Distanont, 2017;Assenga

et al., 2018;Gupta et al.,2019). This manifest increased attention is given to corporate

governance and its impact on performance. Yet, there is still no unanimity in the extant

literature on the impact of corporate governance on financial performance. For example,

Assenga et al. (2018) explored the impact of board characteristics on the financial

performance of Tanzanian firms between 2006–2013 and established a positive impact of

gender diversity on both return on equity (ROE) and return on assets (ROA). However, the

findings did not support the association of board size and PhD qualification on financial

performance. Likewise, Khongmalai and Distanont (2017) examined the relationship

Albert Ochien’g Abang’a is

based at Strathmore

Business School,

Strathmore University,

Nairobi, Kenya.

Venancio Tauringana is

based at the Department of

Accounting, University of

Southampton,

Southampton, UK.

David Wang’ombe is based

at Tangaza University

College, Nairobi, Kenya.

Laura Obwona Achiro is

based at the Centre for

Research in Accounting,

Accountability and

Governance, University of

Southampton,

Southampton, UK.

Received 7 January 2021

Revised 11 May 2021

22 July 2021

Accepted 18 October 2021

The authors thank the Editor

Prof. Gabriel Eweje, Associate

Editor Dr Gagan Deep Sharma,

and three anonymous

reviewers for their constructive

comments and

recommendations. The authors

wish to thank Mr Ouma Peter

Ochuodho of National Lands

Commission, Nairobi, Kenya for

his fruitful and helpful

comments. Abang’a

acknowledges the research

funding provided by

Strathmore University. The

authors declare that they have

no competing interests.

PAGE 798 jCORPORATE GOVERNANCE jVOL. 22 NO. 4 2022, pp. 798-820, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-01-2021-0007

between corporate governance practices and the performance of state-owned enterprises

(SOEs) in Thailand and observed a negative relationship between the board of directors

and performance. Besides, Gupta et al. (2019), revealed inconsistent results on the role of

gender diversity and corporate governance structures on operating performance among

Nepalese enterprises. The variationin results may be due to several reasons.

Firstly, similar to Arora and Sharma (2016) and Owusu and Weir (2016), we contend that

the majority of existing studies investigate the impact of individual provisions of corporate

governance on financial performance (Adams and Ferreira, 2009;Buallay et al., 2017;

Assenga et al., 2018). Nevertheless, there is a stream of literature that supports broader

dimension of corporate governance arguing that the full impact of corporate governance on

financial performance canbe achieved when a broader dimension of corporate governance

measurement is used as opposed to a single provision (Ho, 2005;Brown et al., 2011;

Owusu and Weir, 2016). A major issue of concern is that despite the call for the broader

dimension of corporate governancein assessing financial performance, evidence suggests

that individual provisionsthat constitute a composite measure of corporate governancemay

have a different impact on financial performance. For instance, Owusu and Weir (2016)

examined the relationship between composite and individual measures of corporate

governance and established a positive significant relationship of the composite measure

with financial performance but failed to find support for some provisions included in the

composite measure; board structure and financial affairs and auditing sub-indices. Again,

Mardnly et al. (2018) investigated the impact of aggregate and individual provisions of

corporate governance of listed firms at Damascus Securities Exchange and established a

positive but insignificant relationship between aggregate measure of corporate governance

and financial performance and out of the four provisions (board of directors, audit,

disclosure and ownership structure) that constituted composite measure, it was only

ownership structure that was significant in explaining variation in performance. Abang’a and

Wang’ombe (2021) support the call for further studies on the impact of both composite and

individual provisions of corporategovernance in a single study for further insight.

Secondly, the archetypical entity in the mainstream literature on the relation ship between

corporate governance and performance is the private firm (Menozzi et al.,2012;Grossi et al.,

2015;Thompson et al., 2018). Grossi et al. (2015) analysed prior literature on corporate

governance of SOEs and concluded that despite the relevance of good corpora te governance

in public service, empirical research in the field is limited despite a ca ll for more studies (Darko

et al., 2016). In addition, Menozzi et al. (2012) argued that relative to the private sector, only a

handful of corporate governance studies have been done in SOEs. Findings of studie s in the

private sector may not be generalized to SOEs due to theoretical lenses under pinning such

studies. Viewed from the lenses of agency, stakeholder and resource dependency theo ries,

larger boards of directors, for example, are expected to provide monit oring mechanisms and

resources to the organization that should improve entity performance. Ho wever, when such a

view is applied to SOEs, problems may arise. For example, the agent-princ ipal relationships in

SOEs are often unclear due to difficulty in determining whi ch principals’ interest the agent

should serve; citizen or government? (Bruton and Peng, 2015). Fu rther, the corporate

objectives to be pursued by agents are often too vague and broad comprising of social and

economic objectives (Kim et al.,2019). Finally, there is doubt as to whether SOE directors

appointed by politicians are able to act in the best inter est of the citizen and whether there is

the autonomy of such directors to perform their work without political interfere nce (Kuzman

et al.,2018

). Corrobarating this assertion, Apriliyanti and Kristian sen (2019) observe that SOEs

are generally exposed to corruption than their private counterparts because of the potential

political interference in board composition as well as in business decisions by politic ians and

public officials.

Thirdly, the majority of studies linking corporate governance and performance have

been dominant in developed and emerging economies (Afrifa and Tauringana, 2015;

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