Abstract:
Though the Modern Portfolio Theory suggest a positive relationship between risk and
return, empirical studies in the banking sector show mixed findings. Excessive risk
taking in the financial sector has been attributed to lapses in corporate governance
issues. Study findings are inconclusive thus, there is need for further research.
Research studies also show that CEO power influences the effectiveness of the board
and the quality of its decisions thus could be a suitable moderator. Hence, this study
sought to investigate the moderating effect of CEO power on the relationship between
corporate governance and risk taking among commercial banks in Kenya. The study
specific objectives were to determine the effect of board independence; board
ownership; board members financial expertise and board meeting frequency on bank
risk taking and to determine the moderating effect of CEO power on the relationship
between board independence; board ownership; board members financial expertise
and board meeting frequency on bank risk taking. The control variables for the study
were bank age and bank size. Grounded on positivism research paradigm, the study
was informed by Agency Theory, Prospect Theory and Resource Dependence theory.
The study adopted both explanatory and longitudinal research design. The target
population consisted of 43 commercial banks that were registered with Central Bank
of Kenya during the period 2008 -2018. After applying the inclusion/exclusion criteria
36 banks formed the study population. The study used secondary data that was
extracted from audited financial statements of individual banks and Central Bank of
Kenya supervisory financial annual reports. Data was analyzed using descriptive and
inferential statistics with the significance of each independent variable being tested at
95% confidence level. The Hausman test informed the choice between fixed effect
and random effect with the test preference being fixed effect model (ρ< 0.05). The
findings show that board ownership (β 3 = -0.38, p=0.000<.05) and board financial
expertise (β 4 -0.42, p=0.000<0.05) had negative and significant effect on risk-taking
in commercial banks in Kenya. However, board independence (β 1 =0.57,
p=0.000<0.05) and board meeting frequency (β 2 = 0.90, p=0.000<.05) had positive
and significant effect on risk-taking. CEO power had a buffering interaction effect on
the relationship between board ownership (β= 0.041; ρ<0.05 ∆R 2 =0.04), board
independence (β=0.260; ρ<0.0, ∆R 2 =0.01) board financial expertise (β=0.031; ρ<0.0,
∆R 2 =0.05) and risk-taking on commercial banks, while CEO power had enhancing
interaction effect on the relationship between board meeting frequency (β= -0.027;
ρ<0.05, ∆R 2 =0.01) and risk taking. Nevertheless, CEO power had significant
moderating effect on the relationship between: board independence, board ownership,board financial expertise, board meeting frequency and risk taking. Thus, the study
concluded that firms with high board ownership and board financial expertise have
low probability of risk taking, while banks with high board independence and
frequent board meetings have high probability of risk taking. Moreover, in banks with
powerful CEOs, board financial expertise, board independence and board ownership
increase bank risk taking. On the other hand, in banks with powerful CEO’s, board
meeting frequency reduced risk taking. Based on the findings, the study recommends
that banks should have a balanced number of executive to non-executive board
members, board meetings with risk taking as an item in the agenda, a high number of
board financial expertise and a considerable percentage of board share ownership.
Ultimately, board members will be able to focus on banks’ agenda and ensure their
role in monitoring and evaluating the consequences of their decisions especially when
there is a powerful CEO.