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2023 
 

Examining the relationship between 

corporate governance and financial 

accountability in state-owned enterprises in 

Kenya. 

 
 

Muyonga, Truphena 
Strathmore Business School  
Strathmore University 

 
 

 
 
 

 

 

Recommended Citation 

Muyonga, T. (2023). Examining the relationship between corporate governance and financial accountability in 

state-owned enterprises in Kenya [Strathmore University]. http://hdl.handle.net/11071/13403 

 
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EXAMINING THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND 
FINANCIAL ACCOUNTABILITY IN STATE-OWNED ENTERPRISES IN KENYA 

 
 
 
 
 
 
 
 
 
 

TRUPHENA MUYONGA 

 REG: MPPM 137506 

 
 
 
 
 
 
 

A RESEARCH THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE 
REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF PUBLIC 

POLICY AND MANAGEMENT - STRATHMORE UNIVERSITY 
 
 
 
 
 
 
 
 
 
 
 
 

JUNE  2023 



ii  

DECLARATION 
I declare that this work has not been previously submitted and approved for the award of a degree by 

this or any other University. To the best of my knowledge and belief, the dissertation contains no 

material previously published or written by another person except where due reference is made in the 

dissertation itself. 

© No part of this thesis may be reproduced without the permission of the author and Strathmore 

University 

 
 
Signature: …………………………… Date: ……3…0-…05…-2…02…3 ………… 
 NAME: TRUPHENA MUYONGA STUDENT NO: REG: MPPM 137506 
 
 
 
 
 
 
 

Approval 
 
The research thesis for Truphena Muyonga was reviewed and approved for examination by; - 
 

Signature: …………………………… Date: ………29….05….20…23…………… 
 

Dr. Bernadette Wanjala 
 
Strathmore University Business School 



iii  

ABSTRACT 
State corporations have been instrumental to the development of society, serving as the main avenue 
for governments to deliver public services. They have been instrumental in the delivery of health, 
education, transport and other critical services and they continue to account for a significant portion of 
economic activity. However, locally their performance has been below par resulting from lack of 
financial accountability and transparency which limits their ability to deliver public services and 
maintain a good standing. The focus of this research was to examine whether corporate governance 
factors do have an influence on the financial accountability of state-owned enterprises. The study 
specifically looked at board diversity, board independence, ethical practices and risk governance 
practices influence on financial accountability of state-owned enterprises. Further, the impact of 
political environmental was considered as moderator variable in the stated main objective. The survey 
was premised on the stakeholder and agency theory. A descriptive research design was applied in the 
survey with a total of 138 state-owned enterprises considered for the research. A sample of 102-ranking 
officer in the finance/governance and compliance departments were considered in the research. Semi-
structured questionnaires were designed to collect research data with drop and pick method used in the 
collection of study data. The collected survey data was analyzed using a mix of quantitative and 
qualitative research approach. The survey obtained eighty responses which presented a 78% response 
rate which was dependable for utilization in quantitative analysis of the interaction between the 
predictor variables and financial accountability of the state-owned corporations. The study used the 
Spearman rank correlation in analysis with the results affirming that there is a significant correlation 
between corporate governance factors, political environment, and the operational performance of state 
corporations in Kenya. Regression tests affirmed there was significant predictive power of corporate 
governance factors on the financial accountability of state-owned firms in Kenya. The findings of the 
study led to the conclusion that corporate governance factors (board diversity, board independence, 
ethical practices, risk governance practices) have positive and significant effects on the financial 
accountability of State-Owned Enterprises in Kenya. This shows that the state firms can increase their 
financial accountability through the application of proper corporate governance practices. The study 
found out that board diversity and board independence did not have a significant influence on the 
financial accountability of State-Owned Enterprises in Kenya. Individually, the coefficients supported 
the conclusion that ethical practices and risk governance practices have a positive impact on financial 
accountability of State-Owned Enterprises in Kenya. Overall, the findings found out that political 
factors do have a positive moderating effect on the relationship between corporate governance factors 
and financial accountability of State-Owned Enterprises in Kenya. The study suggestions are that for 
state firms to increase the degree of financial accountability, the study recommends that they embrace 
the best governance practices and ensure that these practices specifically address how to properly 
manage shareholders’ assets, provide adequate risk management and that the codes of conduct and 
standards of operation are enforced in day-to-day operations and not just put in writing. The study 
further calls on the government to develop sector specific governance frameworks that would 
complement the guidelines from the Mwongozo code of governance. Finally, the study calls on the 
government to enact legislations that makes the provisions of the Mwongozo code mandatory and not 
just mere suggestions. 



iv  

 

TABLE OF CONTENTS 
 

DECLARATION.............................................................................................................................. ii 

ABSTRACT ..................................................................................................................................... iii 

TABLE OF CONTENTS ................................................................................................................. iv 

LIST OF TABLES ........................................................................................................................ viii 

LIST OF FIGURES ......................................................................................................................... ix 

LIST OF ABBREVIATIONS ........................................................................................................... x 

DEFINITION OF TERMS .............................................................................................................. xi 

CHAPTER ONE ............................................................................................................................... 1 

INTRODUCTION............................................................................................................................. 1 

1.1 Background of the Study .......................................................................................................... 1 

1.1.1 Corporate Governance ....................................................................................................... 4 

1.1.2 Financial Accountability .................................................................................................... 5 

1.1.3 Political Environment ........................................................................................................ 6 

1.1.4 The Mwongozo Code of Governance ................................................................................ 7 

1.1.5 State-Owned Corporations in Kenya ................................................................................. 9 

1.2 Statement of the Problem ........................................................................................................ 10 

1.3 General Objective ................................................................................................................... 12 

1.3.1 Specific Objectives .......................................................................................................... 12 

1.4 Research Questions ............................................................................................................. 12 

1.5 Scope of the Study .................................................................................................................. 12 

1.6 Significance of the Study ........................................................................................................ 12 

CHAPTER TWO ............................................................................................................................ 14 

LITERATURE REVIEW ............................................................................................................... 14 

2.1 Introduction ............................................................................................................................. 14 

2.2 Theoretical Review ................................................................................................................. 14 

2.2.1 Stakeholder Theory .......................................................................................................... 14 

2.2.2 Agency theory .................................................................................................................. 15 



v  

2.3 Empirical Review .................................................................................................................... 17 

2.3.1 Corporate governance factors and Financial Accountability in State-Owned Enterprises
.......................................................................................................................................... 17 

2.4 Overview of Literature and Research Gaps ............................................................................ 26 

Table 2.1 Literature Gaps ............................................................................................................. 28 

2.5 Conceptual Framework ........................................................................................................... 31 

Figure 2.1 Conceptual Framework ................................................................................................ 33 

Table 2.2 Operationalization of Variables .................................................................................... 33 

2.6 Chapter summary .................................................................................................................... 34 

CHAPTER THREE ........................................................................................................................ 35 

RESEARCH METHODOLOGY .................................................................................................. 35 

3.1 Introduction ............................................................................................................................. 35 

3.2 Research Philosophy ............................................................................................................... 35 

3.3 Research Design ...................................................................................................................... 35 

3.4 Target Population .................................................................................................................... 36 

3.5 Sampling Design and Sample Size ......................................................................................... 36 

3.6 Data Collection Instruments .................................................................................................... 37 

3.7 Data Collection Procedures ..................................................................................................... 37 

3.8 Research Quality ..................................................................................................................... 37 

3.8.1 Validity Test ..................................................................................................................... 37 

Table 3.1 KMO and Bartlett's Test ............................................................................................... 38 

3.8.2 Reliability Test ................................................................................................................. 40 

Table 3.2 Reliability Test ................................................................................................................ 40 

3.9 Data Analysis and Presentation ............................................................................................... 40 

3.10 Ethical Considerations .......................................................................................................... 41 

CHAPTER FOUR ........................................................................................................................... 42 

PRESENTATION OF RESEARCH FINDINGS ......................................................................... 42 

4.1 Introduction ............................................................................................................................. 42 

4.2 Response Rate ......................................................................................................................... 42 

Figure 4.1 Response Rate Source: Research Data (2023) ............................................................. 42 

4.3 Background Data..................................................................................................................... 42 

4.3.1 Department Presented by Participants ............................................................................. 43 



vi  

Table 4.1 Department of Participants within the State-Owned Enterprise in Kenya .................... 43 

4.3.2 Position held by Participants ............................................................................................ 43 

Figure 4.2 Position of the Participant Source: Research Data (2023) ............................................ 44 

4.3.3 Education level of Respondent ........................................................................................ 44 

Figure 4.3 Education Attainment among Respondents Source: Research Data (2023) ................ 44 

4.3.4 Length of Existence of State-Owned Corporation ........................................................... 45 

Table 4.2 Length of State Corporation Existence ......................................................................... 45 

4.3.5 Industry of Operation for State Corporations ................................................................... 45 

Table 4.3 Industry of State-Owned Corporation ........................................................................... 45 

4.3.6 Funding of State-Owned Corporations ............................................................................ 46 

Figure 4.4 Source of Funding for State-Owned Corporations Source: Research Data (2023) ...... 46 

4.3.7 Summary of Mwongozo Code ......................................................................................... 46 

4.4 Descriptive Analysis ............................................................................................................... 47 

4.4.1 Financial Accountability .................................................................................................. 47 

Table 4.4 Descriptive Analysis of Financial Accountability ........................................................ 48 

4.4.2 Board Diversity ................................................................................................................ 48 

Table 4.5 Descriptive Analysis of Board Diversity ...................................................................... 49 

4.4.3 Board Independence ......................................................................................................... 49 

Table 4.6 Descriptive Analysis of Board Independence ............................................................... 50 

4.4.4 Ethical Practices ............................................................................................................... 50 

Table 4.7 Descriptive Analysis of Ethical Practices ..................................................................... 51 

4.4.5 Risk Governance Practices ............................................................................................... 51 

Table 4.8 Descriptive Analysis of Risk Governance Practices ..................................................... 51 

4.4.6 Political Environment ...................................................................................................... 52 

Table 4.9 Descriptive Analysis of Political Environment ............................................................. 52 

4.5 Correlation Analysis ............................................................................................................... 53 

Table 4.10 Correlation Test ........................................................................................................... 54 

4.6 Regression Analysis ................................................................................................................ 55 

4.6.1 Corporate Governance Factors and Financial Accountability ......................................... 55 

Table 4.11 Regression Summary Corporate Governance Factors and Financial Accountability 55 

4.6.2 Corporate Governance Factors, Political Environment and Financial Accountability .... 56 

Table 4.12 Regression Corporate Governance Factors, Political Environment and Financial 
Accountability ......................................................................................................................... 57 



vii  

CHAPTER FIVE ............................................................................................................................. 59 

DISCUSSION, CONCLUSION AND RECOMMENDATION .................................................. 59 

5.1 Introduction ............................................................................................................................. 59 

5.2 Summary ................................................................................................................................. 59 

5.3 Discussion ............................................................................................................................... 60 

5.3.1 Board Diversity and Financial Accountability ................................................................. 60 

5.3.2 Board Independence and Financial Accountability ......................................................... 61 

5.3.3 Ethical Practices and Financial Accountability ................................................................ 62 

5.3.4 Risk Governance Practices and Financial Accountability ............................................... 64 

5.3.5 Political Environment and Financial Accountability ....................................................... 65 

5.4 Conclusions ............................................................................................................................. 66 

5.5 Recommendations ................................................................................................................... 67 

5.6 Limitations of the Study .......................................................................................................... 69 

5.7 Areas for Further Research ..................................................................................................... 69 

REFERENCES ................................................................................................................................ 71 

APPENDICES ................................................................................................................................. 82 

Appendix I: Ethical Review Committee Approval ....................................................................... 82 

Appendix II: Participant Consent Form ........................................................................................ 84 

Appendix III: Research Questionnaire .......................................................................................... 87 

Appendix IV: Diagnostic Tests Autocorrelation............................................................................ 95 

Appendix V: NACOSTI Research Letter...................................................................................... 96 

Appendix VI: List of State-Owned Enterprises ............................................................................ 98 
 



viii  

 

LIST OF TABLES 

Table 2.1 Literature Gaps ............................................................................................................. 28 

Table 2.2 Operationalization of Variables .................................................................................... 33 

Table 3.1 KMO and Bartlett's Test ............................................................................................... 38 

Table 3.2 Reliability Test .............................................................................................................. 40 

Table 4.1 Department of Participants within the State-Owned Enterprise in Kenya .................... 43 

Table 4.2 Length of State Corporation Existence ......................................................................... 45 

Table 4.3 Industry of State-Owned Corporation ........................................................................... 45 

Table 4.4 Descriptive Analysis of Financial Accountability ........................................................ 48 

Table 4.5 Descriptive Analysis of Board Diversity ...................................................................... 49 

Table 4.6 Descriptive Analysis of Board Independence ............................................................... 50 

Table 4.7 Descriptive Analysis of Ethical Practices ..................................................................... 51 

Table 4.8 Descriptive Analysis of Risk Governance Practices ..................................................... 51 

Table 4.9 Descriptive Analysis of Political Environment ............................................................. 52 

Table 4.10 Correlation Test .......................................................................................................... 54 

Table 4.11 Regression Summary Corporate Governance Factors and Financial Accountability 55 

Table 4.12 Regression Corporate Governance Factors, Political Environment and Financial 

Accountability ............................................................................................................................... 57 

 

 



ix  

LIST OF FIGURES 

Figure 2.1 Conceptual Framework ................................................................................................ 33 

Figure 4.1 Response Rate Source: Research Data (2023) ............................................................. 42 

Figure 4.2 Position of the Participant Source: Research Data (2023) ............................................ 44 

Figure 4.3 Education Attainment among Respondents Source: Research Data (2023) ................ 44 

Figure 4.4 Source of Funding for State-Owned Corporations Source: Research Data (2023) ...... 46 



x  

LIST OF ABBREVIATIONS 
CBRR Capital Budget Realization Ratio

CG Corporate governance 

CEO Chief Executive Officer 

PSE Pakistan Stock Exchange 

SCD Systematic Country Diagnostic 

SOE State Owned Enterprises 

USA United States of America 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  



xi  

DEFINITION OF TERMS 
Board diversity Diversity refers to the degree of variety and in management

and leadership positions including foreigners, experts, and

women (Goyal, Kakabadse, & 

Kakabadse, 2019). 

Board independence Board independence is a measure of the extent to which

boards include people without material relationships with 

the company and who do not get involved in the day-to-day

operations of the firm (Ahmad, Rashid, & 

Gow, 2017). 

Corporate Governance Corporate governance refers to the means through which 

organizational heads are directed, controlled, and held 

accountable for their actions (Solomon, 2020). 

Ethical practices Ethical practices guide other principals on the directions to 

take on certain matters, such as communication with

stakeholders, human rights, and community 

development (Ferrell, 2016). 

Financial Accountability The stipulations define the responsibility for the way money

is used and managed (Agwor & Akani, 2017).

Accountability exercises hold public service organizations 

and individuals answerable for the outcomes, activities, and 

stewardship through financial accountability structures such 

as the Mwongozo Code of governance 



xii  

Mwongozo Code of 

Governance 

The Mwongozo Code of Governance is a framework

developed under the guidance of the Implementation

Committee, the Institute of Certified Public Secretaries of

Kenya (ICPSK), the State Corporations Advisory

Committee (SCAC), and the World Bank to provide a

framework that provides an embodiment of the professional

codes of conduct, board charters, and performance

management of state-owned corporations 

in Kenya (Maranga, 2021). 

Risk governance practice Risk management protects firms from present and

unforeseen risks and effective risk management 

programs are core factors that influence strategic and risk

appetite choices (Lundqvist, 2015). 

State Owned Enterprises A business enterprise partially or fully owned by the state

and formed with the mandate of partaking in commercial

activities on the government's behalf (Milhaupt &

Pargendler, 2017). 

 

 

 
 
 
 
 
 
 
 
 
 
 



1  

CHAPTER ONE 
 

INTRODUCTION 
1.1 Background of the Study 
State-Owned Enterprises (SOE) serve as channels through which governments promote public 

interests, and according to Lin, Lu, Zhang, and Zheng (2020), their performance has been central to 

economic growth in developed countries such as China, Japan, and the USA. Jia, Huang, and Man 

Zhang (2019) aver that poorly run state firms carry substantive macroeconomic risks on fiscal policy, 

financial stability, and via productivity spill overs, economic performance. However, despite the 

knowledge that the failure of these firms poses great risks to development, SOEs in developing states 

are especially susceptible to poor management (Böwer, 2017). A World Bank (2021) report indicates 

that between the financial years 2018-2020, a third of the 46 commercial state corporations in Kenya 

made losses, and in the 2019-20 financial year, the aggregate operational performance of commercial 

state corporations turned negative. According to Omware, Atheru and Jagongo (2020), in addition to 

policy reforms, holding the management accountable for these firms’ performance outcomes is one way 

to create incentives for them to ensure the firms perform more efficiently and deliver quality 

government products and services. 

The structures governing how organizational heads are directed, controlled, and held accountable for 

their actions are referred to as corporate governance structures and Omware, Atheru and Jagongo 

(2020), and Turnbull (2019) hail good corporate governance practices as essential to promoting 

accountability among corporate heads. Corporate governance practices promote accountability and 

aim to address a series of major corporate scandals that came about from non- compliance with the 

law, nepotism, a non-merit-based system, and exploitation of minority shareholders that was affecting 

the firms’ ability to meet shareholder expectations (Herbing, 2021). Corporate governance mandates 

organizations to recognize the interests of public and private shareholders responsibly and ethically, 

and according to Salehi, Moradi, and Paiydarmanesh (2017), there are increasing debates on the 

potential for corporate governance in addressing the lack of transparency challenges facing state-

owned firms. 

According to Gakpo (2021), governance structures are designed to encourage corporates to be 

accountable, fair, transparent, and responsible in their undertakings as well as reporting. Ndikwe and 

Owino (2016) confirm that good corporate governance (CG) is at the heart of healthy organizations 

and sustained competitive advantage in research into the relationship between CG and public schools’ 



2  

financial performance. In another research, CG was linked to improved investor confidence, capital 

generation and organizational performance. These improvements result from the adoption of ethical 

practices and greater risk management (Solomon, 2020). Empirical evidence from the USA links the 

composition of independent and outside directors in a committee to reduced occurrence of fraud in 

earnings management (Bajra & Asllanaj, 2021). In Asia, Ahmad, Rashid, and Gow (2017) provide 

evidence that independent boards are more accountable and demand more transparency from their 

boards. 

In Velte’s (2017) exploration, the composition of the board in terms of board independence and 

diversity has a significant impact on the reliability and timeliness of responsibility reporting, thus 

increasing the firm’s accountability to its investors. In India, Muttakin and Subramaniam (2015) assert 

that disclosure standards are significantly decided by ownership components which compose ownership, 

degree of board independence and Chief Executive Office (CEO) duality factors. Regionally, Gakpo's 

(2021) study highlighted the importance of small boards in enhancing ethical income distribution within 

an organization and in Tanzania’s, Assenga, Aly, and Hussainey (2018) opined that the separation of 

CEO/Chairperson roles and gender diversity enhances the quality and timeliness of audit reports.  

In the US, corporations are often subject to different obligations to federal and state governments, 

regulators at each level of government as well as the demands of relevant bodies such as the stock 

exchange (Aguilera & Grøgaard, 2019). The UK Corporate Governance Code sets out standards of 

good practice for listed companies on board composition and development, remuneration, shareholder 

relations, accountability, and audit. The code addresses the selection of board leadership and company 

purpose, division of responsibilities, composition, succession and evaluation, audit, risk and internal 

control, and remuneration (Aguilera et al., 2021). The Nigerian Code of Corporate Governance 2018 

provides directions for best practices for the country’s firms and promotes public awareness of 

corporate values and ethical practices that will enhance the business environment’s integrity (Adeyemi 

& Olarewaju, 2018). The King IV Code on Corporate Governance code provided the principles and 

recommended practices that state corporations in the country principles and recommended practices. 

The code aims to promote ethical culture, good performance, effective control, and legitimacy. 

The Kenyan government expects state firms to complement the private sector and be sustainable and 

competitive in their commercial activities, thus designing and operating them with principles of self-

financing, sustainability and profitability (Kuria, 2015). However, despite their contribution to national 

development, Kenyan state corporations suffer from cyclical mismanagement, pilferage, and 



3  

bureaucracy, combined with irresponsibility and incompetence among both employees and directors 

(Government of Kenya Sessional Paper No. 4, 1991). The governance structures are complex, 

involving the parliament, ministries, boards and CEOs, and this complexity has been a source of 

confusion and conflict, especially with regard to the allocation of responsibilities and accountability 

for results (Kuria, 2015).  

The Mwongozo Code of governance was established with clear measures aimed at addressing matters 

related to board effectiveness, transparency, accountability, risk management and ethical leadership 

(Republic of Kenya, 2016). The code aims to entrench principles and values of public service and best 

practices in the management of state corporations. However, despite the potential benefits of effective 

governance practices, changing governance models is complicated, given the models are embedded 

within the national institutional environment. Moreover, governments in developing economies 

regularly change national laws in a bid to ensure the proper implementation of good governance 

practices. Bett and Kihara (2022) aver that the code’s litmus test is whether it will endure the 

management and governance challenges that have plagued public entities around the world, given the 

World Bank (2021) opines that the code fails to guarantee public participation, contradicts provisions 

of the statute and does not address the main challenges facing Kenyan state firms Moreover, it also 

fails to fit in the social and economic environment given it is not a legally binding norm (Oruke et al. 

2022). 

According to Andreas, Christine and Diana (2021), there have been limited studies examining the 

efficacy of the Mwongozo code since its publication as executive order 7. Additionally, Kenya’s 2022 

general election has seen the new administration initiate a host of reforms mainly targeted at top 

positions in state firms, and this is bound to change the degree of dedication and application of the 

Mwongozo code within state firms. Consequently, little is known about the impact of its 

implementation on the state firms given majority of SOEs boards had not adhered to Mwongozo code 

requirements (Oruke et al., 2022). These researchers examined the relationship between corporate 

governance and modification of audit opinion and confirmed that the majority of Kenyan state firms 

received modified opinions which shows financial discrepancies in the firms’ reports. Githiri (2020) 

investigated the code’s application and effectiveness and averred that weak legal frameworks, 

corruption and political interference have significantly impacted the code’s implementation.  

The research by Kangogo (2020) avers that the Mwongozo code has not provided a framework of 

preventive and detective techniques which makes it ineffective as a tool for transparency. This gap 



4  

informs the choice of the current research which sought to assess the relationship between corporate 

governance and state firms’ financial accountability with specific focus on the political environment as 

a mediating variable. According to Ochieng (2017), accountability refers to the degree of answerability 

of decision-makers to report, explain, and justify their actions to a firms’ stakeholders (Zahraa, 2021). 

It indicates the degree to which managers are able to meet the stakeholders’ normative, cultural, and 

professional expectations (Zahraa, 2021). 

1.1.1 Corporate Governance 
Corporate governance refers to the system of rules, guidelines, structures, procedures, and processes 

that dictate how an organization’s board of directors manages and oversees its operations (Andreas, 

Christine, & Diana, 2021). According to Solomon (2020), corporate governance (CG) is a mechanism 

through which stakeholders monitor boards and management to safeguard their interests. CG practices 

are designed to ensure boards of directors balance aspects of power, transparency, and accountability 

in a company’s relationships with shareholders, associated stakeholders, employees, and the 

government among others (Gakpo, 2021). Hence CG aims to encourage boards to ensure that they 

prioritize stakeholders as well as the organization's interests when making decisions and adhering to 

laid-down governance practices (Jia, Huang, & Man Zhang, 2019). 

Effective CG incorporates elements of accountability, transparency, protection, and guarantee of the 

rights and privileges of all stakeholders and the extent of genuine checks and balances in the 

organization (Böwer, 2017). Companies are usually directed by a Code of Corporate Governance 

framework and adherence to these guidelines has been associated with improved accountability and 

responsibility of organizational boards towards its stakeholders’ interests. CG practices can be explained 

in Jensen and Meckling’s (1976) agency theory which provides clear parameters for corporate officers 

and board members making strategic decisions and their impact on the relationship between agents 

and principles. Empirical evidence shows that CG is a multifaceted subject encompassing multiple 

variables that interact together to affect an organization’s degree of commitment to practising sound 

and safe professional behaviours and practices that conform to regulations and legislation (Yusoff, 

Ahman & Darus, 2019). 

Corporate governance codes are relatively recent in modern business and empirical investigations have 

focused on different aspects of CG frameworks. Queiri, Madbouly, Reyad, and Dwaikat (2021), for 

instance, examined CG in terms of the ownership concentration, ethical guidelines, board size, the 

number of board meetings, and the ratio of the independent board of directors, finding that firms under 



5  

institutional ownership and with smaller boards perform better financially. In Malaysia, Yusoff, Ahman, 

and Darus (2019) used the board size, the degree of board independence, the number of board meetings, 

and female directors as the predictors of a company’s accountability, finding that only board size affects 

the degree of accountability in corporate disclosure. In Jordan, Alkurdi and Mardini (2020) examined 

tax avoidance strategies and found that managerial and institution ownership system discourages tax 

avoidance behaviour while foreign-owned institutions with large boards encourage such vices. 

Some studies suggest that boards having frequent board meetings and foreign directors are effective at 

reporting (Min & Chizema, 2018), while Davis and Garcia-Cestona (2021) aver that the degree of 

inclusion, fostering ethical practices and diversity determines the quality of financial reporting. 

Milhaupt and Pargendler (2017), on the other hand, argue that SOE boards must be independent and 

without interference from political heads to become competitive. However, according to Setiawati, 

Icih, and Suangga (2019), having independent directors does not necessarily enhance board 

effectiveness while larger boards are more effective due to the presence of more diverse and 

knowledgeable directors. Jin and Mamatzakis (2018), on the other hand, aver that larger boards can be 

ineffective if they lack the requisite professional ability in skills to achieve quality reporting standards, 

calling for boards to evaluate the competencies and skills of their members. 

These studies vary significantly and so do their findings. However, it is certain that poor governance 

leads to the collapse of organizations and boards gave to be more proactive and design competent 

governance structures to ensure they meet the expectations of a wide range of stakeholders. This study 

adopted the variables used in the study by Abang'a, Tauringana, Wang'ombe, and Achiro (2021) to 

investigate the effect of CG practices on SOE’s financial accountability. However, it examined 

emerging issues and additional measures to enhance the application. Agency theory was used to 

understand and explain these corporate governance practices and how they enable stakeholders to 

dictate, monitor, and control top managers to ensure they align the organization's goals with their 

expectations. 

1.1.2 Financial Accountability 
Accountability is the exercise whereby individuals are held answerable for the outcomes of their 

activities and stewardship (Arslan, 2021). Financial accountability is an assessment that reviews value 

for money and acceptance by individuals of personal responsibility for their actions in relation to 

quality of their outputs and decisions (Brown, 1998). Dewi, et al (2019) aver that financial 

accountability results from holding an individual accountable for effectively performing a financial 



6  

activity. Agwor and Akani (2017) aver that financial accountability ensures budgets comply with 

accounting and lawful requirements, prepare precise and up-to-date financial statements, and enact 

systems of internal controls to manage risk or fraud. Financial accountability assigns responsibility for 

financial decisions and is associated with good governance in the management of public finances 

(Idoko & Jimoh, 2013). Accountability is a principal part of good governance and according to the 

stakeholder theory, an organization must be accountable to those who was affected by its decisions or 

actions (Dewi et al., 2019). Since SOEs are usually funded by government taxes, they must be 

accountable to the government, the taxpayers, shareholders, and other stakeholders (donors and 

employees) (Kamau & Simiyu, 2019). 

Mestry (2018) asserts that financial accountability practices compel management to make sure that the 

finances given to them are spent according to proper rules and regulations. Dewi et al. (2019) associate 

financial accounting with increased organizational effectiveness. Njobvu, Kaira and Chowa (2018) 

opine that financially accountable organizations practice financial honesty, deter fraud, and ensure 

proper recording and prompt reporting of financial statements, keeping stakeholders informed and 

knowledgeable about the organization’s financial position. According to Eton, Murezi, Fabian, and 

Benard (2018), management can guarantee quality financial accountability by preparing and 

circulating correct financial statements or reports to stakeholders in a prompt fashion. Assenga, Aly, 

and Hussainey (2018) asserts financially accountable institutions are more legitimate and credible 

which significantly contributes to their competitiveness and sustainability since they suffer little fraud 

and mismanagement. The Institute of Social Accountability posits that accountability is expressed in 

terms of accounting quality, reporting standards, and assurance. In this study, disclosure, monitoring 

and evaluation measures, roles and responsibilities of the boards of directors, and feedback system put 

in place by the SOE were used as indicators of accountability. 

 

1.1.3 Political Environment 

The political environment refers to the political conditions in a country, describing the state of stability 

and peace, as well as the attitude of the elected government towards business. As affirmed by Eton, 

Fabian and Benard (2022), a stable political system can make business-friendly decisions through its 

policy decisions and approach towards implementation of the aforementioned policies. Political factors 

that affect businesses range from government stability, regulation and deregulation to bureaucracy, 

trade control and corruption level (Olubodun, 2019). Aguilera and Grøgaard (2019) identify taxation, 



7  

employment laws, and political stability as the political factors that affect businesses performance. The 

research affirms that the political ideology of the government influences firms’ financial as well as 

market performance in terms of sales growth and accountability and explains the variation in 

performance between state corporations across national contexts. 

According to the logic behind Jensen and Meckling’s (1976) agency theory, the goals, objectives, and 

assistance provided by the government influences firm performance and can generate conflict if they 

vary significantly from the expectations of other stakeholders (Lazzarini & Musacchio, 2018). These 

differences arise from the expectations of state firms to pursue social objectives, meet political 

objectives, and remain operationally sustainable. Furthermore, according to Cuervo- Cazurra (2017), 

state owners are usually accused of ineffective monitoring and the implementation of risk-averse 

strategies. The researcher associated state ownership with negative firm performance. According to 

Richmond et al. (2019), poor governance of SOEs is at the root of the problem, especially with regard 

to ownership policy, financial allocation, and the balance between delegation of active management 

and active government interference.  

Currently, the Kenyan cabinet has approved the Privatization Bill 2023, which aims to sell Govt- 

owned entities to the private sector in light of their continued underperformance (Ngugi, 2023). While 

the privatization plan was drafted in 2008, out of an initial 26 parastatals that were scheduled for 

privatization, the government has managed to conclude only one deal involving Kenya Wine Agencies 

Ltd (KWAL) in over a decade. The government aims to do away with the bureaucratic legal framework 

guiding the sale of inefficient State enterprises, which has been cited as a hindrance to the privatisation 

process (Herbst, 2019). Meanwhile, in an effort to get greater control over state-owned firms, the new 

president has made board changes in at least 58 parastatals in a series of reforms that has seen more 

than 100 appointees exiting (Alushula & Muiruri, 2023). These changes affect the firms’ performances 

over the next months. This study is positioned as one of the first to examine these changes as they 

occur and was informative in examining the moderating role of the political environment on the 

performance of state-owned corporations. 

1.1.4 The Mwongozo Code of Governance 

The Mwongozo Code of Governance is a framework developed under the guidance of the 

Implementation Committee, the Institute of Certified Public Secretaries of Kenya (ICPSK), the State 

Corporations Advisory Committee (SCAC), and the World Bank to provide a framework that provides 

an embodiment of the professional codes of conduct, board charters, and performance management of 



8  

state-owned corporations (Maranga, 2021). The framework draws inspiration from the Kenyan 

constitution, 2010, OECD guidelines, the Malaysian Code, the corporate governance report issued by 

King III, and other overarching principles (Oruke, Iraya, Odhiambo, & Omoro, 2020). According to 

Maranga (2021), the code is key to informing on matters that influence the board's effectiveness, 

transparency, risk management, tenure, disclosure, and corporate citizenship among others. The 

framework also addresses stakeholder issues such as engagement, shareholder rights, and obligations. 

The code is one of the recommendations suggested by the Presidential Task Force on Parastatal Reforms 

and promises to transform Kenya’s public sector into a vibrant sector with high degrees of compliance, 

transparency, and corporate, social, and environmental responsibility (Omenta, 2019). 

In reviewing the Mwongozo Code of Governance, Omenta (2019) affirms that the code was developed 

under the executive order, adopted foreign codes with little regard to the national conditions and 

norms, developed provisions for board appointment procedures, structure, and remuneration 

packages, and described the roles of the board. Accordingly, Maranga (2021) adds that the code makes 

significant efforts to promote stakeholder engagement and public participation in policymaking and 

board independence in decision-making. However, despite the seemingly considerate principles, 

Mwikairi (2018) argues that implementing the same has been difficult. The scholar argues that 

guaranteeing board independence and control has been troublesome, considering board appointments 

still occur based on political patronage rather than individual qualifications and competencies. This 

makes it difficult to develop a framework for control and accountability, especially in appointments 

and board decisions. 

Gikaria (2021) provides evidence that since the Mwongozo Code is subordinate to the 2002 State 

Corporations Act in the hierarchy of norms and is not a compulsory code, many state corporations 

choose to ignore its overarching principles in a bid to reduce the costs associated with complying to 

numerous conflicting legislations. According to Githiri (2020), Kenyan politicians have shown little 

interest in implementing recommendations made by the implementation committee such as the 

recommendation to repeal the State Corporations Act Cap 446 and provide proper definitions of the 

state corporations and their governing principles. This has resulted in a lack of uniformity in board 

composition and governance factors, bloated boards, conflicting guidelines on CEO appointment and 

improper skills mix among state firm boards. 

In conclusion, researchers confirm that lack of procurement transparency and corruption are the biggest 

threat to the effective governance of state corporations in Kenya (Mihyo & Mukuna, 2018; Koech, 



9  

2018). Otieno, Ogutu, Ndemo, and Pokhariyal (2020) demonstrate that the powerful executive arm of 

the government holds too much power over the activities of state corporations, arguing that the board 

serves on the president's behalf. Mutambo (2017) avers that role duplication among state corporations 

in Kenya is high, and this is a significant challenge as some executives are not aware of their roles and 

purviews. The Code requires that the board carries out an internal review every five years to review the 

code’s applicability in the current environment, making it essential for continued research into how 

the code can be upgraded to address emerging issues. The section below reviews corporate governance 

practices that have been identified in the literature to make proposals that the Kenyan government can 

adopt to improve financial accountability within state corporations. 

1.1.5 State-Owned Corporations in Kenya 

State corporations are set up and controlled in Kenya under the provisions of the State Corporations Act. 

State-owned enterprises (SOEs) refer to any commercial entities whereby the government has 

significant control through direct and indirect ownership (Ginting & Naqvi, 2020). They are diverse in 

nature, and vary in size, sector of operation, complexity, and extent of government ownership and 

control (IMF, 2020). They use perpetual succession models whereby they remain operational through 

several changes in the composition of management (Kabiru, Theuri, & Misiko, 2018). Heo (2018) adds 

that SOEs are able to sue and be sued and hold both movable and immovable assets. The government 

forms state firms to meet commercial and social goals such as the provision of health services, 

education, security, income redistribution, and to correct market failures, among others (Kamau & 

Simiyu, 2019). 

According to the State Corporations Office, Kenya has 176 registered state corporations that exist in a 

wide variety of sectors. Mutua (2017) reports that Kenyan state-owned corporations contribute to about 

fifteen per cent of the national revenue and offer affordable, accessible, and standard goods and services 

in important sectors such as health, education, energy, and transport. Mutinda (2021) asserts that since 

they offer services that the private sector cannot afford, they are provided with substantial amounts of 

public finances. If professionally managed, state corporations can improve the Kenyan population’s 

welfare and promote inclusive growth (Fondo, 2016). 

However, an IMF report by Böwer (2017) affirms that although SOEs make up a significant share of 

employment and output in several countries, many are still loss-making. State corporations have been 

characterized by monopolistic production, corruption, nepotism, political interference, and financial 

mismanagement (Böwer, 2017), which has affected their effectiveness in delivering quality services 



10  

and being accountable. Owing to the scale of their operations and embeddedness into the economy, 

Xili (2019) avers that poorly regulated state firms pose a significant threat to economic productivity 

and can amplify financial instability. Poor governance structures, lack of close monitoring from the 

relevant regulatory authorities, and clear distinctions between roles have contributed to the 

mismanagement of public funds and a series of corporate scandals (Mutinda, 2021). The Kenyan 

government has had to regularly bail out underperforming state firms such as Telkom Kenya and Pan 

Africa Paper Mills to help them in restructuring after a series of losses (CBK, 2016). According to a 

Bloomberg (2021) report, many of Kenya’s largest state firms are loss making, adding that to remain 

operational, they will need as much as Kshs 382 billion. The report affirms that firms such as East 

African Portland Cement, Kenya Railways and Kenya Power make a combined shortfall of more than 

Kshs. 70 billion each year 

Despite many reforms designed to improve management within state corporations, poor fiscal 

management capabilities and lack of good governance structures have significantly contributed to the 

lossmaking reported. They are constantly underperforming financially and offer substandard goods 

and services in comparison to privately-owned firms (Fondo, 2016). This has resulted in a lack of 

confidence and trust in the citizens in them. Empirical and theoretical evidence suggests that good 

governance structures are key to the effective management of state firms; this study sought to examine 

the effect of governance practices on the financial accountability of these state firms. 

 

1.2 Statement of the Problem 

Increasing concerns regarding state firms’ governance have fueled speculation about whether SOEs 

can achieve the desired goals, especially when the local governments have weak oversight structures, 

and politicians have significant influence. Accountability structures aim to improve financial resource 

utilization and are the foundations for effective performance monitoring and evaluation as they provide 

a means to gauge the effectiveness of utilization of revenue and expenditure in service delivery 

(Evelyne & Boateng, 2016). As in many other countries, Kenyan institutions are integrating corporate 

governance standards with aspirations of meeting international standards of accountability in 

developed economies (Kimani et al., 2021). Multiple codes have been enacted to direct the 

management of public organizations, such as the Mwongozo code, which was developed to promote 

good corporate practices and enhance board effectiveness, transparency, accountability and ethical 

leadership in state corporations (PSCK & SCAC, 2015). Despite this, state corporations have not 



11  

performed at expected levels due to weak governance and other external factors. Corporations have 

been beset by a number of challenges linked to the lack of effective and efficient management of public 

finances (Wachira, 2019). They also lack official financial documentation against which accountability 

can be gauged (Oruke et al., 2022).  

Financial accountability is the result of a complex structures of oversight and control, and Diamastuti 

et al. (2021) argue that decisions surrounding employment, resource allocation, state control, as well 

as commitment to good governance all intertwine to influence good corporate governance and 

corporate social responsibility disclosure. However, many state firms fail to comply with integrated 

reporting frameworks presented by national governments. In Nigeria, Idoko and Jimoh's (2013) study 

showed that poor financial accountability was predicated by a poor regulatory framework, weak 

infrastructure, and failure to address governance failures within the government apparatus. Kimani et 

al. (2021) are also of the opinion that instituting good CG practices, such as guaranteeing 

independence and diversity of the board, has had little impact on the financial accountability of state-

owned firms in Kenya. These observations were made by Manini and Abdillahi (2015) in their paper 

which found negative influences of certain corporate governance mechanisms on commercial banks’ 

quality of financial reports. Michael and Eric (2020) established a significant association between 

Control activities and financial accountability in South Nyanza County Governments, while Kisaka 

and Jagongo (2021) avered that elements if financial accountability, such as transparency, timely 

responses and adherence to constitution requirements, improved managerial performance. 

While the Kenyan government, through the Mwongozo Code, assures investors that it is committed to 

transparency and accountability, insufficient capacity, execution problems, and poor enforcement have 

contributed to the deteriorating financial accountability in the public sector (Andreas, Christine, & 

Diana, 2021). According to Abang’a et al. (2021), of all the state corporations, only ten were able to 

post profits for the fiscal years 2019/2020. Furthermore, a third of state firms were loss-making, and 

the aggregate operational performance of commercial state corporations turned negative in the 2019-

20 financial year. This suggests that improving governance alone does not guarantee improved 

performance outcomes. Research into the CG- accountability nexus offers certain gaps that motivate 

the current research. Perego and Verbeeten (2015) provide results from charities in the Netherlands, 

while Diamastuti et al. (2021) addressed social and environmental responsibility disclosure among 

Indonesian state firms. Dewi, Azam and Yusoff (2019), on the other hand, specified the determinants 

of information quality disclosure in local governments’ financial statements as Manini and Abdillahi 



12  

(2015) investigated commercial banks using SEM methodology. Michael and Eric (2020) and Kisaka 

and Jagongo (2021) both based their findings on financial accountability within county governments, 

while the current explores state firms. Given the Mwongozo code purports to promote financial 

responsibility, this study seeks to examine the code’s effectiveness as a management control tool. 

1.3 General Objective 

To undertake an analysis of corporate governance issues influencing financial accountability in State 

Owned Enterprises in Kenya and suggest policy options. 

1.3.1 Specific Objectives 

i. To assess the link between corporate governance factors (board diversity, board independence, ethical 

practices, and risk governance practices) and financial accountability in State Owned Enterprises in 

Kenya. 

ii. To assess the moderating effect of the political environment on the relationship between corporate 

governance and financial accountability in State Owned Enterprises in Kenya. 

1.4 Research Questions 
i. What is the link between corporate governance factors (board diversity, board independence, ethical 

practices, and risk governance practices) and financial accountability in State Owned Enterprises in 

Kenya? 

ii. What are the moderating effects of the political environment on the relationship between corporate 

governance and financial accountability in State Owned Enterprises in Kenya? 

1.5 Scope of the Study 
 
The research investigated state corporations located in Nairobi City County. Specifically, the study 

studied the effect of corporate governance factors on the financial accountability of state corporations 

in Kenya. The study adopted quantitative metrics in the analysis of the relationship between variables. 

The research scope examined on the financial accountability of the 138 SOEs in Kenya as of 2022 by 

applying a cross-sectional examination. 

1.6 Significance of the Study 
 
This study made observations that were important to policymakers who gained value on the importance 

of corporate governance structures as policy instruments. The study findings increased the 

understanding of how state firms can use CG elements to enhance accountability among state firms. This 

study was informative to stakeholders who were able to understand how certain practices employed by 

state corporations affect their ability to deliver quality services. This improved how they view and 



13  

demand for accountability within state firms. This study was also important to scholars and 

academicians who developed a better understanding of how corporate governance factors relate to 

financial accountability among SOEs. Further, this study made theoretical contributions to the agency 

theory and its relationship with good governance practices. Moreover, the study also helped in the 

identification of study gaps that researchers can use in future examinations into governance structures 

and their impact on firm performance. Furthermore, the findings also improved the understanding of 

the relationship between politics and governance within state firms.  



14  

CHAPTER TWO 
 

LITERATURE REVIEW 
2.1 Introduction 
The theoretical and empirical reviews are contained in this chapter. The section presented the 

stakeholder theory and then proceeded to a discussion of the empirical literature on different 

governance factors and their effect on financial accountability. 

2.2 Theoretical Review 
2.2.1 Stakeholder Theory 
The Stakeholder Theory was introduced by Freeman (1984), who sought after the relationship between 

organizations and the environments in which they operate and how these interactions determine the 

firm’s performance. An extension of systems theory, Freeman (1984) identifies multiple stakeholders 

whom firms must consider when making decisions, affirming that there should be no single prevailing 

set of stakeholder interests. This theory argues that firms must understand and balance the interests of 

all their stakeholders to remain operational and competitive. In extending the theory, Freeman (1984) 

identified legal and social stakeholders. Organizations have a legal responsibility to their contractual 

stakeholders, such as lenders, employees, suppliers, distributors, and the government and social 

stakeholders, who include pressure groups, the community, the media, environment, among others 

(Mungai & Muturi, 2019). 

Freeman (1984) argues that firms should strive to meet the expectations of their stakeholders, and this 

theory has proved useful to firms assessing their environment to identify stakeholders and the severity 

of their expectations. According to Ortega-Rodríguez, Licerán-Gutiérrez, and Moreno- Albarracín 

(2020), transparency is a key element in accountability among non-profits and affirms that firms use a 

set of controls to ensure they remain accountable to their stakeholders. Jeong and Kearns (2015) opine 

that firms can express responsibility to stakeholders through transparency indicators, adding a positive 

association between organizational transparency and legitimacy. Mithia and Kosgey (2022) argue that 

the stakeholder theory aims to improve the value of an organization. Wanjau, Muturi, and Ngumi 

(2018) provide evidence that listed firms in East Africa that have a high degree of corporate transparency 

are more profitable than firms that don’t disclose their financial outcomes and risk exposure. 

Freeman (1984) states it is imperative that managing stakeholder interests improves relationships and 

has monetary and sentimental effects on consumers. Therefore, the stakeholder argues that firms must 

implement deliberate systems and technologies to ensure they remain appealing to their stakeholders. 



15  

While the theory purports to offer corrective measures to perceived defects in business and business 

ethics, Sternberg (1997) argues that stakeholder theory is misguided, and incapable of providing better 

corporate governance and improving business performance or business conduct. Moreover, Beck and 

Storopoli (2021) argue that it is impossible to contextualize and address the needs of all stakeholders 

equitably. The argument is that some stakeholder interests will have to take the back seat. Others argue 

that stakeholder interests are too broad to manage realistically (Pinto, 2019). However, the stakeholder 

theory understands these weaknesses, and according to Hörisch, Schaltegger, and Freeman (2020), 

stakeholder theory stresses the need for firms to develop competencies to improve their ability to 

identify overarching stakeholders and their expectations. 

Freeman (1984) affirms that firms must identify and address the most significant expectations to 

become legitimate before a wide range of stakeholders. This component makes the theory useful in 

identifying the needs of multiple stakeholders from various settings. Kariuki, Ombaka, and Mburu 

(2021) used the theory to examine the effect of governance practices on the performance of public 

universities, while (Kiriinya, Ngugi, Mwangangi, & Odhiambo, 2018) used the theory to examine the 

impact of trust and transparency on pharmaceutical firms’ performance. The study was used to examine 

state firms' audit performance Gacheru (2020), signifying the extensiveness of its use. This theory was 

significant in this study as it justifies the need for transparency- enhancing strategies. The Mwongozo 

Code of Governance aims to entrench transparent and ethical business behavior among state 

corporations and this theory was a valuable instrument in this study which sought to build upon existing 

frameworks to develop a quality governance framework that would enhance state firms' transparency. 

2.2.2 Agency theory 
The agency theory is a concept used to explain and resolve issues that may emerge from the 

relationship between principals and their agents. As per the agency theory, a principle refers to the 

individual who relies on the actions of an agent for specific goods/services. The agency theory was 

advanced by Jensen and Meckling (1976) who sought to explain and conceptualize the role and 

behaviour of agents, including managers and directors of companies. Jensen and Meckling (1976) 

opined that the agency problem exists due to differences in priorities, expectations and pressures faced 

by agents from different stakeholders and the scholars assert that holding directors accountable for 

their choices is among the main issues of corporate governance. According to Mwangi and Nyaribo 

(2022), there should be a concentered effort to ensure that agents act with the principles’ interests at 

heart and the agency theory provides the rationale for ensuring that the board of directors is accountable 

for its choices. 



16  

The agency theory explains that the difference in interests of the directors and managers of a given firm 

and its owners gives rise to the agency problem and that a board of directors is the first corporate 

governance mechanism that owners can use to represent and protect owners’ interests because the 

board of directors performs the role of ensuring that managers achieve organizational goals. The 

scholars (Mwangi & Nyaribo, 2022; Mwanza, 2013; Al-Gamrh, Al- Dhamari, Jalan, & Jahanshahi, 

2020) also identify other governance control mechanisms such as the number of board committees, the 

frequency of board meetings, gender diversity and board tenure, number of independent, executive and 

non-executive directors on the board, as well as board independence in their explorations. 

The agency theory has been successfully applied to a myriad of disciplines such as economics, 

accounting, politics, and sociology, and in examinations into the effects of CG on SACCO’s financial 

performance (Wako, 2020), financial management of community development funds (Mwanza, 2013), 

and on the education sector (Mwangi & Nyaribo, 2022). According to Oruke el al. (2020), self-seeking 

agents can be effectively controlled through boards dominated by non-executive directors, and as per 

Wako’s (2020) findings, board accountability, integrity, professionalism, and transparency and has 

positive influences on SACCO’s financial performance. Elsewhere, Aguilera et al. (2021) used the 

theory in research which affirms that political ideology is a critical component of SOE’s performance 

around the world with Çera, Breckova, Çera and Rozsa (2019) adding that business enabling policies, 

tax treatment, corruption and political connections all have significant influences on the business 

climate.  

Despite the potential offered by the agency theory in explaining agency behaviours, it fails to account 

for selfish human decisions when agents fail to act in accordance with shareholder interests and goals. 

Yusof (2016) adds that despite its influence, the theory does not provide sufficient understanding of 

many issues surrounding human behavior, given these behaviors are also influenced by the social 

environment, other institutional factors and the local context. Moreover, stakeholders often lack the 

requisite information and institutional mechanisms either to bargain over the terms of management’s 

employment, or to monitor and control management’s activities. However, this theory is still useful as 

it advances our understanding of corporate governance not only as a mechanism for addressing agency 

issues but also as a political and social instrument. This theory will anchor the board structure factors 

such as diversity and accountability as well as the risk management and political environment factors 

which influence agents’ behaviors and decisions. 

 



17  

2.3 Empirical Review 
2.3.1 Corporate governance factors and Financial Accountability in State-Owned Enterprises 
2.3.1.1 Board Diversity on Financial Accountability 
Diversity refers to the degree of variety and in management literature, board diversity refers to the state 

of having leadership positions occupied by people from a wide variety of backgrounds including 

foreigners, experts, and women (Goyal, Kakabadse, & Kakabadse, 2019). According to Sarhan, Ntim 

and Al Najjar (2018), despite being initially formed to address the moral shortcomings of male-

dominated leadership, diversity principles are developed based on cost- benefit concerns. A wider 

range of diverse characters has been associated with increased organizational performance since it 

improves the boards’ understanding of different market conditions but Carter, et al., (2010) opine that 

this relationship is endogenous. 

A French study by Beji, Yousfi, Loukil, and Omri (2021) sought the effect of board characteristics on 

corporate social responsibility, assessing data reported between 2003 and 2016. Empirical analysis 

revealed that diversity is positively associated with the firm's CSR performance. Larger, more 

experienced boards improved all areas of CSR performance, gender diversity improved human rights 

dimensions while national diversity strongly influences community involvement and environmental 

responsibility factors. Sarhan, Ntim, and Al Najjar (2018) assessed the effect of board diversity on firm 

performance by focusing on 600 firms listed in North Africa and the Middle East. The study sourced data 

reported between 2009 and 2014 and relied on regressions, revealing a significant positive association 

between board diversity proxied by gender and nationality, and profitability. Further, the analysis 

revealed that diversity has significant impacts on governance practices, particularly remuneration 

factors. Highly diverse boards were more inclined to adopt pay according to performance rather than 

using pay scales. Moreover, age diversity was associated with fundraising capability which is key to 

firm performance. 

In Pakistan, Khan and Abdul Subhan (2019) reviewed the impact of board diversity and audit on the 

performance of firms listed in the Pakistan Stock Exchange (PSE) 100 Index. The study used data 

reported between 2008 and 2017 and used quantitative techniques in data analysis. The findings were 

that while having females on boards enhances performance, their number has insignificant effects. 

Further, according to this study, foreign board membership reduces the firms’ financial performance due 

to the different cross-cultural perceptions and communication barriers. Nigeria’s Nwezoku and 

Egbunike (2020) specified the relationship between board diversity and intention to commit tax fraud 

and avoidance using data from quoted healthcare manufacturers. Using an ex-post facto research design 



18  

and Panel Estimated Generalised Least Squares in analysis, the findings were that while age and gender 

diversity have strong correlations with tax aggressiveness, tenure and non-executive diversity factors 

had negative effects. This study was from manufacturing firms while the current addressed state firms. 

A South African study by Vilakazi (2021) employed quantitative methods in examining the effect of 

board diversity factors on state-owned firms’ non-financial performance outcomes. Analysis revealed 

that the presence of females on the board has insignificant effects on the firm's ability to realize non-

financial goals. The study concluded that although increasing female board membership advances 

gender equality, it does little to improve service provision. This study specified board diversity while 

the current researched on all CG practices contained in the Mwongozo code of governance.  

Mwangi and Nyaribo (2022) focused on a variety of corporate governance structures and their impact 

on the performance of state firms in the education sector. Regressions were used in data analysis of 

data from 27 firms. The findings were that the three investigated CG factors, CEO independence, audit 

committee independence and board diversity all have significant effects on the corporations' financial 

performance of the organization in respect to Return on Equity, Return on Assets, and Tobin's Q. The 

study called on state firms to establish guidelines that would guarantee the appointment of experienced 

and qualified CEOs and auditors from a wide variety of backgrounds. 

Similarly, Abang'a, Tauringana, Wang'ombe, and Achiro (2021) investigated state firms' CG practices 

in a bid to establish their effect on the firm's financial performance. The study collected panel data 

reported by 45 SOEs between 2015 and 2018 and the findings were that diverse boards, with 

professional elements and frequent meetings, have a strong correlation with capital budget realization 

ratio (CBRR). Meanwhile, the independence of non-executive members, the existence of sub-

committees, and large boards had insignificant effects on financial performance, showing the need for 

skilled diverse boards operating under strict rules. This study used financial performance while the 

current used financial accountability. 

2.3.1.2 Board Independence on Financial Accountability 
Independence shows the degree to which individuals make decisions without external influence 

(Koech, 2018). Board independence is a measure of the extent to which boards include people who are 

not part of the company’s executive team, without material relationships with the company, and who 

do not get involved in the day-to-day operations of the firm (Ahmad, Rashid, & Gow, 2017). Board 

independence has been associated with an improved capacity to criticize CEO decisions and greater 

diversity, resulting in improved decision-making (Adeyemi & Olarewaju, 2018). Governance 



19  

frameworks call for the establishment of non-executive membership positions to control the executive 

team. However, according to Amartey, Yu, and Chukwu-lobelu (2019), independent directors can 

have negative impacts on the firm's performance if they cannot make informed decisions. 

Al Amosh and Khatib (2021) applied content analysis in an investigation on the impact of ownership 

structure and board independence on environmental, social, and governance performance disclosure. 

The study sourced data from 51 Jordanian firms reported between 2012 and 2019. The findings were 

that there is a significant difference in reporting quality among foreign-owned and state-owned firms. 

Further, it was ascertained that the board's independence moderates the quality of disclosures and 

reduces the influence of block holder owners in disclosure decisions. This study specified state-owned 

and foreign-owned firms while the current focused on state firms. 

Malaysia’s Yusoff, Ahman, and Darus (2019) purposed to examine the influence of board size, board 

independence, board meetings, and diversity on firms' transparency, accountability, liability, 

responsibility, and responsiveness. The study used data reported between 2015 and 2016 from 100 listed 

companies and used descriptive and content analysis. The analysis determined that many firms had 

failed to properly incorporate accountability related CSRD practices and that board size was the only 

measure that improved accountability reporting. 

A similar exploration was carried out in the UAE, where Al-Gamrh, Al-Dhamari, Jalan, and Jahanshahi 

(2020) investigated the relationship between foreign ownership, board independence, and social and 

financial performance of listed firms. Analysis revealed that while Arab ownership reduces firms’ social 

and financial performance, foreign ownership has positive effects. Further, the researchers ascertained 

that independent board members play an important role in monitoring Arab-owned firms' practices and 

reducing the negative association between Arab-owned firms and socio-financial performance. This 

study specified Arab and foreign-owned firms, making it unique to firms with that type of ownership 

and not state firms. 

In Ghana, Amartey, Yu, and Chukwu-lobelu (2019) researched corporate governance practices 

employed in the country's financial sector and their impact on board accountability using data reported 

from banks between 2011 and 2016. The study used structural equation modelling in analysis, 

revealing that the banks mainly rely on a shareholder approach to accountability. The study revealed 

that the banks relied heavily on the quality of audit committees and external and internal auditors to 

enhance accountability. The study asserts that requiring frequent elections for non-executive board 



20  

members and regularly rotating external auditors would improve accountability within the banks. 

Kaawaase, Nairuba and Akankunda (2021) adopted a cross-sectional and correlational research design 

to investigate the effect of board expertise, board independence, and board role performance as the 

governance factors implemented in Uganda's financial sector on the quality of financial reporting. 

Applying regressions in analysis, it became apparent that while board expertise and board role 

performance factors improve the quality of financial reporting, the composition of independent 

executives had insignificant effects. The study asserts that financial firms should pay close attention to 

the educational qualifications and recent performances of their executives to improve the quality of 

internal audits and financial reporting. 

Wachira (2019) carried out an empirical review into the effect of governance factors on risk disclosure 

among listed non-financial firms in Kenya using data from 48 listed firms reported between 2010 and 

2016. The descriptive study used content and regression methods in analysis, revealing that boards 

characterized by dispersed ownership, a higher percentage of non-executive directors and foreign 

owners, and a reasonable number of women are more transparent about risks facing the firm. This was 

more prevalent in large profitable firms which face pressures from a wide variety of stakeholders. 

2.3.1.3 Ethical Practices in Financial Accountability 
Ethical business practices refer to those contemporary organizational standards, principles, values, and 

norms that govern how individuals behave within an organization (Ndikwe & Owino, 2016). Ethical 

practices dictate how all businesses and their representatives conduct themselves and they guide other 

principals on the directions to take on certain matters such as communication with stakeholders, human 

rights, and community development (Ferrell, 2016). Ferrell, Harrison, Ferrell, and Hair (2019) argue that 

ethical business practices direct firms to have the least negative impact, while at the same time enriching 

the system in which they function. Gacheru (2020) argues that ethical businesses translate abstract 

ethical injunctions into a series of obligations that promote the quality of their interactions with the 

environment. 

Kim and Thapa (2018) reviewed anti-corruption policies and their impact on the profitability and 

growth of listed firms. The study collected panel data from 392 firms listed under the Singapore Stock 

Exchange (SGX). Relying on panel data regressions, the findings ascertained that anti-corruption 

policies actualized in the country between 1995 and 2014 significantly increased the firm's net profit 

margin and asset growth. The study asserts that Singapore's case is unique and called for an 

investigation into anticorruption policies under different cultures. 



21  

Turyakira, (2018) carried out a literature review on the impact of ethical practices used by SMEs in 

developing countries on their performance. The study also sought after the significance of business 

ethics to SMEs and the ethical dilemmas and challenges that arise upon actualizing the practices. The 

research asserts that one of the main causes of failure for businesses is the involvement in unethical 

behaviour by employees, as well as top executives. The study identified issues associated with illegal 

funds transfer, unethical accounting, and corruption in the workplace. The research called on businesses 

to provide an ethical framework and the top management to remain committed to the terms of the code 

of conduct. 

Anyim, Ufodiama, and Olusanya (2018) researched the Nigerian public to examine the effect of ethics 

standards and practices on public sector opinions. The study involved government agencies and 

parastatals and applied Chi-square statistics in hypotheses testing. The study reports that Nigeria’s 

government does not include human resource departments in its ethics infrastructure and lacks a 

comprehensive ethics framework that forms the guiding principles of executives in the public sector. 

The result is that the public sector suffers from reputational damage due to many instances of reported 

corruption. 

Barare (2018) affirms that the Kenya Revenue Authority is committed to ethical leadership in an 

investigation into the effect of the company’s ethical leadership practices on its performance. The 

specific focus was on the effect of the leader's integrity, ethics training, ethical recruitment process, and 

ethical organization culture on the firms' performance. Descriptive as well as regressions were used in 

the analysis revealing a significant positive effect of ethical practices and culture on state firms' 

performance in terms of employee attraction and retention, efficiency, and image. Further, the study 

established that the organization's leaders must undergo routine training to keep them upraised with 

the best ethical considerations and to address the ethical gaps in state firms’ engagements. 

Shafique, Kalyar, and Ahmad (2018) reviewed the ethical leadership-job satisfaction, performance, 

and turnover intention nexus among tourist firms in Pakistan. Using structural equation modelling, the 

research reveals a strong positive influence of ethical leadership practices on employees’ job 

satisfaction and performance. Further, the analysis findings point to the conclusion that ethical leaders 

harm turnover intentions. The study called on managers to have empathy and consideration of their 

employees as this will determine their ability to attract and retain quality employees who are key to 

sustained competitive advantage. 



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Kang (2019) conducted empirical research into the effect of ethical leadership, the perceived salience 

of an ethics code, and the leader-follower distance on employees' work performance. The study sourced 

data from four multinationals and used regressions in the analysis. The findings were that a manager's 

ethics and principles have a positive influence on the employees’ perceived salience of the firm’s ethics. 

This, in turn, resulted in improved performance output. Further, the study asserts that frequent 

interactions between the leader and the employee strengthen the impact of ethical leadership on 

employee performance. 

Kwakye, Yusheng, and Gyau (2021) assessed the effect of organizational ethical behaviour on the 

profitability of Ghanaian firms. The study specified the effect of good ethical behaviour, corruption 

reduction, and nepotism reduction on return on assets using a cross-sectional survey approach. The 

analysis involved multiple regressions, revealing a significant association. The findings were that 

observable efforts to reduce corruption and nepotism have significant positive effects on the firm’s ROA. 

Conclusions were that firms must implement policies that promote ethical leadership and reduce or 

eradicate corruption and nepotism to remain profitable and competitive. 

Nginyo, Ngui, and Ntale (2018) focused on KenolKobil Company, Kenya, when investigating the 

influence of corporate governance structures on the firms' performance. The specific focus was on 

transparency, accountability, responsibility, and fairness in the firm’s competitive position. The study 

analysed the quantitative data using descriptive and correlational analyses. The analysis determined 

that transparent, accountable, and responsible firms are more competitive and enjoy a larger market 

base. Recommendations were for firms to promote accountability through honest and independent 

audit committees and independent boards. The study also called for firms to embrace codes of conduct 

and cultivate a culture of internal support and communication. 

2.3.1.4 Risk Governance Practices and Remuneration Control on Financial Accountability 
Risk management protects firms from present and unforeseen risks, and effective risk management 

programs are core factors that influence strategic and risk appetite choices (Lundqvist, 2015). 

According to Andreas, Christine, and Diana (2021), companies operate in turbulent environments and 

deserve effective procedures that would improve their ability to identify, assess and manage the 

business, operational, market, liquidity, and credit risks. Koech (2018) opines that companies should 

have ethics committees, risk management committees, risk framework and metrics; risk information 

sharing competencies to effectively address emerging challenges. 

Dewi, Azam, and Yusoff (2019) investigated the factors that influence the quality of information 



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reported by local governments in Indonesia by focusing on the internal control system and human 

resource competence. The study used path analysis on the collected data revealing a significant positive 

association between the variables and the quality of reported information. Further, the analysis also 

revealed that having competent human resources is essential to sustained quality financial reporting, 

which improves financial accountability and firm profits. The study called on appropriate oversight 

mechanisms to ensure the free and accurate flow of company information, as this reduces organizational 

malpractices. 

Al-hadal, Alsamhi, Tabash, and Farhan (2020) reviewed the governance mechanisms applied by Indian 

and Gulf state countries on the performance of listed firms. The study used data reported between 2009 

and 2016 and applied multiple regressions in the analysis. The findings of the analysis were that 

policies promoting board accountability and the degree of independence of the audit committees have 

insignificant effects on the firms’ ROE and Tobin’s Q. The findings also revealed that the quality of 

information reporting does not impact the firm's value but has a positive impact on its ROA. These 

studies were based on larger markets than the Kenyan market, which is still developing. This study 

conceptualized performance in terms of ROA and Tobin’s Q, while the current measures it is using 

financial accountability. 

Adeyemi and Olarewaju (2018) researched the effect of internal control systems on the financial 

accountability of public firms in Nigeria. The study proxied financial accountability in terms of 

effective and efficient financial operation, and compliance with applicable laws and regulations. The 

study sourced data from unit heads and accounting and audit representatives and applied descriptive 

analysis and regression techniques, showing a positive relationship between an organization's internal 

control systems and compliance, effectiveness, and efficiency in financial operations. Thus, improving 

the control environment, control activities, risk assessment, and information and communication 

mechanisms would enhance accountability in the public sector. 

In Uganda, Olwol, Mpora, Kayongo, and Tukundane (2022) researched internal control systems and 

their effect on organizational accountability by focusing on the country's National Water and Sewerage 

Corporation. The company's risk assessment, control environment, control activities, and internal 

control systems formed the independent variables, and the cross-sectional survey study used 

quantitative and qualitative approaches in analysis. Findings were that internal control systems have a 

significant effect on the firms' accountability. The analysis singled out risk assessment capacity and 

the control environment as the most significant internal control activities that influence organizational 



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transparency, responsiveness, and compliance. 

In another exploration, Eton, Fabian, and Benard (2022) examined the importance of internal control 

systems on the financial accountability of local governments in Uganda. The study also used a 

correlational design and regressions in the analysis of the extent of the relationship between the study 

variables. The findings were that internal control systems have a significant effect on public firms’ 

financial accountability. This research singled out control environment and monitoring controls as the 

most influential internal control systems. However, control activities such as supervision, role 

identification and separation, and the top management commitment had insignificant effects on 

organizational accountability. 

Kigen and Ndegwa (2021) researched the impact of governance structures and the performance of state 

firms with a specific focus on the Kenya Revenue Authority. The study targeted all employees and 

specified the effect of ethical practices, CEO duality, and audit committee competencies and 

independence on the state firm’s non-financial performance. The study used regression, text analytics, 

and document analysis, to determine the significant impact of governance committees on the firm’s 

reporting quality. The study also identified nomination committees’ role in board appointments and 

succession planning which is essential for sustained transparency. The study concludes that is it 

necessary that state firms work with ethical leaders and stringent rules to tame unethical behaviour by 

a firm’s executives since transparency remains an essential indicator of corporate performance. 

2.3.1.5 Political Environment on Financial Accountability 
Mustapha (2019) conducted an investigation into the effect of political institutions on public financial 

management in a study that used cross-country dataset reported by the Public Expenditure and Financial 

Accountability (PEFA). According to the analysis, the presence of ex-ante legislative budgetary 

institutions, better oversight institutions and more programmatic political party systems do not enhance 

the handling of public finances. However, there is evidence that PFM systems can be improved with 

the presence of multiple political parties controlling the legislature. The researcher affirmed that 

internal resistance is a more critical hindrance than weak capacity and that the wider political and 

institutional environments generate the incentives for reforming the PFM systems. 

The research by Bandiyono (2019) was on the association between CG and political connections on 

the value of firms listed on the Indonesian Stock Exchange. The research sourced data from 

manufacturing firms reported between 2014 and 2016. The analysis involved panel data estimation 

with the results revealing that both variables under investigation had positive and significant effects on 



25  

firm value. Malaysia’s Najaf and Najaf (2021) also sought after the effect of political ties on corporate 

performance of politically connected firms but utilized secondary data. From the literature analysis, the 

researchers’ findings were that more efficient political systems produce firms with a good record of 

corporate performance. The researchers concluded that politicians, through their impact on reinforcing 

firm efficacy, influence performance outcomes. 

Arslan and Alqatan (2020) explored the institutional factors that determine the implementation of good 

CG practices in Pakistan. Data was collected through semi-structured interviews involving CEOs, 

Directors, CG consultants and experts. The study revealed that apart from the political system, the 

country’s culture, voting, auditing, legal as well as board values all influence the institution of good 

corporate practices. The researcher asserted that the firms relied on political connections in exchange 

for strategic advantages such as access to resources. However, conclusions were that board 

appointments are often appointed on connections rather than merit, which results in low-skilled people 

occupying higher positions. 

While these studies mostly provide positive effects, according to Bartlett (2021), political connections 

tend to undermine the business performance of connected firms. The researcher used a cross-sectional 

design and relied on the BEEPS survey as the main data source for South East Europe. The researcher 

referred to the concept as “business capture”, whereby politicians take control of state institutions 

through the appointment of politicians to company boards or outright ownership of firms by politicians 

or their family members. The researcher argued that political connections contribute to poor business 

and investment decisions, wasteful use of scarce resources and damaged corporate reputation and 

called for regulations that would reduce or eliminate business capture. 

On the other hand, Balqis, Raharjo and Supratiwi (2022) opine that having political connections may 

have positive impacts on corporate performance. The research sourced secondary data which, upon 

analysis, led to the observation that political connectedness enhances firms’ access to various benefits 

such as superior incentives, monitoring and succession frameworks, lower tax rates and cost of 

borrowing that enhance corporate performance. In Nigeria, Haladu and Bin-Nashwan (2022) also 

demonstrated that the political apparatus plays an important role in facilitating sustainability reporting. 

The researchers collected primary and secondary data reported between 2015 and 2019 and specified 

the moderating impact of policy administrators on the relationship between CG attributes and 

sustainability reporting. According to the researchers, inefficient environmental policy administration 

regimes have an interactive impact on the sustainability reporting of listed firms. 



26  

Locally, Oluoch, K’Aol and Kosha (2021) specified the moderating influence of regulatory 

frameworks on the relationship between strategic leadership and NGO’s Financial Sustainability. The 

research utilized a descriptive correlational research design that investigated NGO CEOs and board 

members and applied correlational analysis whose findings were that regulatory frameworks do not 

have a significant moderating effects on firms’ sustainability in the presence of strategic leadership. In 

the research by Mutuma, Iravo, Waiganjo and Kihoro (2017), the government policies directing 

resource redistribution, monitoring and evaluation were reported to have insignificant effects on a 

culture of shared responsibility within local governments. The study which sourced data from county 

government officials and relied on multiple regressions concluded that promoting strategies that 

encourage responsibility sharing would enhance service delivery at local levels of government. 

2.4 Overview of Literature and Research Gaps 
The studies reviewed above present valuable insights into different corporate governance frameworks 

and their impact on firm performance. Beji, Yousfi, Loukil, and Omri (2021), for instance, called for 

more women and nationalities to improve firms’ international position. However, these findings vary 

from the findings made by Pakistan’s Khan and Abdul Subhan (2019), whose study provided evidence 

that the number of female boards does not have a significant influence on an organization’s decisions. 

Further, according to Sarhan, Ntim, and Al Najjar (2018), the diversity aspect becomes important when 

it comes to remuneration since distinct categories of earners within the organization encourage 

transparency. On the other hand, Nigeria’s Nwezoku and Egbunike (2020) opine that while age and 

gender diversity improve tax aggressiveness, including tenure and non-executive diversity factors 

negated the effects. These studies only specified the diversity aspect of corporate governance. 

In Jordan, Al Amosh and Khatib (2021) and Al-Gamrh, Al-Dhamari, Jalan, and Jahanshahi (2020) 

provided evidence that the ownership structure has a significant impact on a firm's transparency scores, 

with a high number of foreign owners/board members being associated with increased transparency. 

On the other hand, according to Anyim, Ufodiama, and Olusanya (2018), state firms should have 

updated and frequently quoted codes of ethics and standards of operation as these are useful for creating 

a culture of ethics and governance. The study u