Effect of board composition and COVID-19 on financial performance of Deposit Taking Saving and Credit Cooperative Societies in Kenya

Abstract

An institution's financial performance greatly depends on the proper makeup of its board of directors. Each member brings a unique set of skills, expertise, experience, and networks. Despite having a board of directors guided by ethical norms, the Deposit Taking Savings and Credit Cooperatives (SACCOs) sector has suffered due to a wave of fraud impacting risk management and reporting. Despite growing academic interest in the relationship between board composition and financial performance, little is known about the impact following the COVID- 19 outbreak, and existing conclusions are often contradictory. This study sought to determine the impact of board composition on the financial performance of deposit-taking SACCOs in Kenya. Specifically, it examined how the financial performance of these SACCOs before and after the COVID-19 era was impacted by the gender, size, frequency, and experience of board members. The study employed stakeholder and agency theories to empirically ascertain the extent to which board composition influenced financial performance. The findings reveal that a higher proportion of female board members has a significant negative effect on the financial performance of DT-SACCOs in Kenya. Higher female representation on boards is associated with lower ROA, particularly in the pre-COVID period. However, this relationship weakened during the pandemic, indicating that board diversity might become more valuable during crisis periods. Moreover, the findings show that board size has a non-linear relationship with financial performance, characterized by an inverted U-shaped pattern, suggesting an optimal board size exists, beyond which additional members may reduce effectiveness. For board experience, the results, while showing a positive relationship with financial performance, did not demonstrate statistical significance across the study period. Nonetheless, the results indicated that the COVID-19 pandemic significantly moderated the relationship between board composition and financial performance. The findings indicate that the effectiveness of different board characteristics varied across the pre- and post-COVID periods. This suggests that crisis periods require different governance approaches.

Keywords: Board Composition, SACCOS, Financial Performance