orporate Governance, Social Capital and Competitive Advantage of Commercial Banks in Kenya

Abstract

Competitive advantage is the unique combination of elements within the business model which enables a firm to better satisfyitheineedsiiniits environment, earning economic rents in the process. Few commercial banks in Kenya especially tier one banks have gained competitive advantage compared to their peers in tier 2 and tier 3. Some tire 2 and 3 banks have experienced sudden unexpected systemic collapse with a number of mergers and buyoff ensuing. Some studies have attributed the cause of failure of banks to violation of banking laws, poor corporate governance and deteriorating cash reserves. Studies done on the effect of corporate governance and competitive advantage have shown varying contradictory findings. This study postulates that social capital could be playing a mediating role on the nexus between corporate governance and competitive advantage hence this study was expected to give conclusive results. The study used board diversity, CEO’s attributes, board independence and board committees as the independent variables; competitive advantage as dependent variable and social capital as the mediating variable. The study was guided by stewardship theory, agency theory, resource-dependency theory and stakeholder theory. The research adopted descriptive and correlational research designs. Target population comprised the 42 commercial banks operating in Kenya while the respondents were 294 senior officers who included a corporate affairs manager, a risk compliance officer, an internal auditor, a legal counsel and three board members from each bank. The research approach was census survey of all banks in Kenya. Questionnaire was the data collection tool. Pilot test was performed to ascertain the questionnaire quality. Reliability was confirmed using Cronbach alpha with a coefficient of 0.7 and above being used as a benchmark for approving the reliability of the research instrument. SPSS software was used in data analysis. Data analysis involved a combination of descriptive and inferential statistics. Multiple regression analysis as well as Pearson product moment correlation analysis was utilized to test the nexus betweenitheiindependent variables and the dependent variable. The variables were regressed using 5%isignificanceilevel to find out the strengthiofithe variables andidirectioniof their relationship. Study results indicated statistically significant regression results between board diversity (t=9.155; p=0.000), CEO attributes (t=5.745; p=0.000), board independence (t=3.287; p=0.000), board committees (t=3.304; p=0.000) and competitive advantage. The results of multiple regression analysis using Hayes (2017) PROCESS Macro version 3.4 (Model 4) found that corporate governance had a significant direct effect on competitive advantage with β = .531, p =.000. The total effect using the data without outliers, (direct + indirect effect) = 0.531 + 0.198= 0.729 implying that the two paths contribute to the total effect, hence giving rise to a partial mediation (F (5,221) = 161.687, p =.000). The study found the mean indirect effect as positive and significant from the data M5 = a5×b5 =.610× 0.324 = .198, SE =.038, 95% CI= [.126,.277] and confidence intervals for the indirect effect does not straddle a zero in between, which supports the presence of mediation effect. The study therefore concludes that social capital has a significant mediating effect on the relationship between corporate governance and competitive advantage of commercial banks in Kenya. Therefore, the study recommends that banks need to embrace both corporate governance and social capital simultaneously to achieve better competitive advantage.