University of Ghana http://ugspace.ug.edu.gh UNIVERSITY OF GHANA CORPORATE GOVERNANCE PRACTICES AND PERFORMANCE OF MICROFINANCE INSTITUTIONS IN GHANA. BY DAVIS OHENE FOBI (10402214) A LONG ESSAY SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON, IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF MASTER OF BUSINESS ADMINISTRATION (FINANCE OPTION) DEGREE MAY 2019 University of Ghana http://ugspace.ug.edu.gh University of Ghana http://ugspace.ug.edu.gh DECLARATION I, the undersigned student do hereby declare that this Dissertation is the result of my own original research and that no part of it has been presented for another Degree in any University. All sources of borrowed materials have been duly acknowledged. …………………………… ………………………………… DAVIS OHENE FOBI DATE (10402214) i University of Ghana http://ugspace.ug.edu.gh CERTIFICATION I declare that the research and the presentation of this Dissertation were in accordance with the guidelines on supervision of Dissertation arranged by the University. ……………………………………… ………………………………… PROF. GODFRED A. BOKPIN DATE (SUPERVISOR) ii University of Ghana http://ugspace.ug.edu.gh DEDICATION I dedicate this work to the Almighty God for bringing me this far. I also dedicate it to my lovely mother who has always been there for me through thick and thin so far as my academic life is concerned. I further dedicate this work to Mr. Francis Asenso Boakye for his tremendous assistance towards the successful completion of the program. iii University of Ghana http://ugspace.ug.edu.gh ACKNOWLEDGEMENTS First and foremost, I offer my profound gratitude to the most high God for making this a dream come through. I am very grateful to my mentors, Professor Godfred A. Bokpin and Professor Ebenezer Oduro Owusu, for the immense interest they have shown in the study and for their meticulous guidance and incredible support. I also acknowledge all my lecturers for their individual key roles played during the course of the program. Furthermore, I acknowledge Mr. Patrick Ebo Bonful Jnr., Mr. Emmanuel Genfior, and Ms. Priscilla Akuamoah for their editorial assistance. Lastly, I acknowledge my grandmother, Ms. Ruth Birago, my siblings, Mr. Richard Adu, Mr. Bright Kwame Amponsah, and Ms. Helina Badu, and my study group members as well as all my friends for their support and encouragement. iv University of Ghana http://ugspace.ug.edu.gh TABLE OF CONTENT DECLARATION ................................................................................................................... i CERTIFICATION ................................................................................................................ ii DEDICATION ..................................................................................................................... iii ACKNOWLEDGEMENTS ................................................................................................. iv TABLE OF CONTENT ......................................................................................................... v LIST OF TABLES ............................................................................................................... ix ABSTRACT .......................................................................................................................... x CHAPTER ONE .................................................................................................................... 1 INTRODUCTION ................................................................................................................. 1 1.1 Background of the Study ............................................................................................. 1 1.2 Statement Of The Problem .......................................................................................... 3 1.3  Objectives of the Study ............................................................................................... 4 1.4 Research Questions ...................................................................................................... 5 1.5 Significance of the Study ............................................................................................. 5 1.6 Scope of the Study ...................................................................................................... 6 1.7  Organisation of the Study ............................................................................................ 6 CHAPTER TW O ................................................................................................................... 7 LITERATURE REVIEW ...................................................................................................... 7 2.1 Introduction .................................................................................................................. 7 2.2 Definitions for Microfinance and MFIs ....................................................................... 7 v University of Ghana http://ugspace.ug.edu.gh 2.3 Microfinance in Ghana .............................................................................................. 10 2.4 The Role of Microfinance in Socio-Economic Development ................................... 11 2.5 Definition of Corporate Governance ......................................................................... 13 2.6 Importance of Corporate Governance for  Organisational Performance ................... 13 2.7 Corporate Governance Theories ................................................................................ 15 2.7.1 Agency Theory ................................................................................................... 15 2.7.2 Stewardship Theory ............................................................................................ 17 2.7.3 Stakeholder Theory ............................................................................................. 18 2.8 Microfinance Institutions And Corporate Governance.............................................. 19 2.9 Corporate Governance Characteristics ...................................................................... 22 2.9.1 Board Size ........................................................................................................... 24 2.9.2 Board Composition ............................................................................................. 24 2.9.3 Board Diversity ................................................................................................... 25 2.9.4 CE O Duality ....................................................................................................... 26 CHAPTER THREE ............................................................................................................. 28 METH OD OL OGY ............................................................................................................. 28 3.1 Introduction ................................................................................................................ 28 3.2 Research Philosophy .................................................................................................. 28 3.3 Research Design ........................................................................................................ 28 3.4 Research Strategy ...................................................................................................... 29 3.5 Study Population ........................................................................................................ 29 vi University of Ghana http://ugspace.ug.edu.gh 3.6 Study Sample ............................................................................................................. 30 3.7 Type and Sources of Data .......................................................................................... 31 3.8 Definition of Variables .............................................................................................. 31 3.9 Hypotheses Development .......................................................................................... 31 3.9.1 Board Size ........................................................................................................... 32 3.9.2 Board Composition ............................................................................................. 33 3.9.3 Board Diversity ................................................................................................... 33 3.9.4 CE O Duality ....................................................................................................... 34 3.10 Model Specification ................................................................................................. 34 CHAPTER FOUR ............................................................................................................... 36 ANALYSIS AND DISCUSSION OF RESULTS ............................................................... 36 4.1 Introduction ................................................................................................................ 36 4.2 Descriptive Statistical Analysis ................................................................................. 36 4.3 Relationship Between Variables and Tobin’s Q (Regression Analysis) ................... 38 4.3.1 Board Size ........................................................................................................... 39 4.3.2 Board Composition ............................................................................................. 39 4.3.3 Board Diversity ................................................................................................... 40 4.3.4 CEO Duality ....................................................................................................... 40 4.3.5 Control Variables ................................................................................................ 40 4.4 Relationship between Variables and Return on Assets (R OA) (Regression Analysis) ......................................................................................................................................... 41 4.4.1 Board Size ........................................................................................................... 42 vii University of Ghana http://ugspace.ug.edu.gh 4.4.2 Board Composition ............................................................................................. 43 4.4.3 Board Diversity ................................................................................................... 43 4.4.4 CEO Duality ....................................................................................................... 43 4.4.5 Control Variables ................................................................................................ 44 CHAPTER FIVE ................................................................................................................. 45 SUMMARY  OF FINDINGS, C ONCLUSI ON AND REC OMMENDATI ONS .............. 45 5.1 Introduction ................................................................................................................ 45 5.2 Summary of Findings ................................................................................................ 45 5.2 Conclusions ................................................................................................................ 47 5.4 Recommendations...................................................................................................... 49 REFERENCES .................................................................................................................... 50 viii University of Ghana http://ugspace.ug.edu.gh LIST OF TABLES Table 4.1: Descriptive Statistics of Variables .......................................................................... 36 Table 4.2: Independent Variables and Tobin’s Q .................................................................... 38 Table 4.3 Independent Variables and R OA ............................................................................. 42 ix University of Ghana http://ugspace.ug.edu.gh ABSTRACT This study examined the relationship between corporate governance and performance of the microfinance industry in Ghana. The study used fixed effect panel data regression analysis. The specific objectives were to identify the key corporate governance components within the microfinance sector, analyse the effect of recognised corporate governance practices on Tobin’s Q of MFIs, and also to analyse the effect of recognised corporate governance practices on R OA of MFIs. The corporate governance characteristics were board size, CE O duality, board composition, and board diversity. According to the results, the mean ratio of Tobin’s Q is 0.682, implying that on the average a lot of the microfinance firms are not doing well at all. The suggestion here is that these firms are barely breaking even. The maximum Tobin’s Q indicating performance is shown to be 156% and the minimum as low as 13%. The Return on Assets (R OA) shows a wide variation between firms. The mean performance of MFIs relative to R OA is shown to be 21%, with the minimum being -75%, with the maximum being 78%. The regression analysis also found that board size and board diversity had a positive impact on firm performance, while CE O duality and board composition had a negative impact on firm performance. There was evidence to show that most of the MFIs in Ghana adopted the two-tier board structure, where different people occupied the CE O and chairmanship positions. The study also found most of the MFIs to be relying more on debt financing and that the debt structure impacted positively on firm performance. The study found mixed results with regards to corporate governance characteristics and the performance of MFIs in Ghana, but it is undoubtedly clear that corporate governance structures have impact on the performance of MFIs in Ghana x University of Ghana http://ugspace.ug.edu.gh CHAPTER ONE INTRODUCTION 1.1 Background of the Study The purpose of ithis istudy is to examine the effect of some corporate governance characteristics ion the iperformance iof imicrofinance iinstitutions (MFIs) iin Ghana. For some time now, firms have come to the realisation of how good governance promotes higher returns and consequently improves on the level of confidence of these firms. It has also been identified that the nature and characteristics of corporate governance structures do have a strong effect on both iinternal iand iexternal ifactors ithat seek to iaffect the performance iof ithe firm (Kyereboah-Coleman & Biekpe, 2005). It should be noted however that the developed market economies have over the decades made corporate governance a priority policy agenda. In recent times however, the iconcept iis iwarming iitself ias ia ipriority policy area in developing economies. According to Berglof & ivon iThadden (1999) ithe concept of icorporate igovernance was made popular iafter ithe iAsian iFinancial iCrisis and iin Africa, it has ibeen a popular concept due to the poor performance of firms on the continent. There are studies that have identified ihow icorporate igovernance ihas increased ithe value iof ifirms by boosting ithe bottom line of firms. iGompers et al (2003) for instance found ithat icompanies iwith istrong ishareholder irights iyielded 8.5% more iannual ireturns than firms with weak rights. The study again concluded that firms that were more democratic enjoyed high profits, high valuations, high sales and growth and low capital expenditures. iFirms iwith ipoor igovernance systems are iless iprofitable iand have high risk of bankruptcy, low valuations, pay less dividends, 1 University of Ghana http://ugspace.ug.edu.gh whereas the reverse apply to firms with very good governance systems. They tend to enjoy high profits, low bankruptcy risks, high valuations, and high dividend payouts. Another study by Claessens (2003) also affirms that firms are able to get igreater iaccess ito ifinancing, ilower capital icost, high iperformance iand better itreatment iof iall istakeholders when the firm has a better corporate governance framework. Apart from experiencing poor performance and risky financing patterns, firms with very poor governance framework create a favourable environment for microeconomic crisis like what took place in Asia in the 1990s and the United States in 2007. Donaldson (2003) has also identified how corporate governance is key in creating a greater investor confidence and market liquidity. iBassem (2009) defined imicrofinance as ithe iprovision iof ifinancial and inon-financial iservices to ithe rural ipoor iwho iare mostly classified as unbankable. These people’s exclusion has been primarily due to their levels of poverty and requirement by banks, which at most serve as barriers to their inclusion. The ievolution of imicrofinance has been a idirect iresponse ito the efforts of individuals, organisations and agencies at iensuring ithat ithe iipoor get iaccess to credit. In their attempts at fulfilling their core mandate of reaching out to ipoor iborrowers and also ibeing ifinancially isustainable, ithe issue of governance has become a critical issue that can either engender or stifle the growth of MFI institutions. In fact, apart from ensuring that their social goals are reached, governance and financial sustainability of MFIs have become an overriding concern due to the shrinking resource base for donor funds, which was a major financing source for MFIs. The implication is that MFIs have to support themselves (Ledgerwood, 1999). As have been noted in the previous paragraphs, governance systems and frameworks have direct implication for the sustainability of MFIs in meeting their social goals (Labie, 2001). 2 University of Ghana http://ugspace.ug.edu.gh 1.2 Statement Of The Problem The overwhelming international growth iof the imicrofinance industry has been attributed to the huge interest in accessing services provided by the sector (Thrikawala, 2016). Ming- Yee (2007) makes the assertion that about 10,000 MFIs issue out loans worldwide as of 2007. According to data provided by the Microcredit Summit Campaign (MSC) Report of 2009 indicate that about 204 imillion iof ithe ipoorest iclients have ibeen ireached iat ithe iend iof 2012 (MSC, 2014). This figure had increased to 211 million in 2013. The phenomenal growth had meant that there was going to be intense competition among MFIs which may serve as basis for iunfair ipractices and poor itransparency issues idue ito poor or ilack iof igovernance. In iMFI iliterature, it has been noted by researchers such as Mersland & Strøm (2009); Cull et al. (2007); iGant, de Silva, iAtapattu, & iDurrant (2002); iHartarska (2005); iLabie, 2001; iRock et al (1998); van iGreuning, iGallardo, & iRandhawa (1998), that good governance has been one of the critical elements used in strengthening stewardship as well as achieving MFI primary goals and promoting higher growth of the industry. It has also been established that achieving financial self-sufficiency and at the same time deliver its social mandate to lowincome clients has been a difficult task for many MFIs. Good governance practices allow MFIs to have efficient and transparent operations. iAccording ito ithe iCentre ifor tihe iStudy of iFinancial iInnovation (CSFI, 2008), one of the most difficult areas in the microfinance industry is corporate governance practice, and that it is a pressing issue among policy makers. In the extant literature, there are very scanty istudies ithat consider ithe irelationship ibetween icorporate igovernance ipractices iand microfinance sector. In fact, very ifew istudies exist ion the idirect relationships ibetween icorporate igovernance iand MFI 3 University of Ghana http://ugspace.ug.edu.gh iperformance. iThe few that exist, report of conflicting results. Despite the scanty studies however, there is the general understanding among practitioners that when there is an improved corporate governance practices it induces higher MFI profitability (iBassem, 2009; iCull et al., 2007; iHartarska, 2005; iHartarska & iNadolnyak, 2007; iMersland, 2009). There iis therefore ithe pressing ineed ifor ian iempirical study on ithe irelationship ibetween MFIs iand icorporate governance to establish how some of these icorporate igovernance icharacteristics affect ifirm iperformance, especially iin the contest of a ideveloping economy such as Ghana. In this context therefore, ithis istudy seeks to iexamine the irelationship that exists ibetween icorporate igovernance ipractices iand iperformance iin ithe microfinance sector in Ghana. 1.3  Objectives of the Study The general iobjective iof ithe istudy was ito iexamine the relationship between icorporate igovernance iand performance iof the microfinance industry iin Ghana. iHowever, ithe ispecific iobjectives iare ito: i. Identify ithe key corporate governance components within the microfinance industry in Ghana. ii. iAnalyse ithe effects iof irecognised icorporate igovernance ipractices on Tobin’s Q iof iMFIs iin Ghana. iii. iAnalyse ithe effects of irecognised icorporate igovernance ipractices ion R OA iof iMFIs iin Ghana. 4 University of Ghana http://ugspace.ug.edu.gh 1.4 Research Questions In order ito iachieve ithe iresearch iobjectives ithe istudy seeks to answer the following research iquestions: 1. What iare ithe key corporate governance components within the microfinance industry iin iGhana? 2. What iare ithe ieffects iof corporate governance practices ion Tobin’s Q iof iMFIs iin iGhana? 3. What are ithe effects iof icorporate igovernance ipractices ion R OA iof MFIs iin iGhana? 1.5 Significance of the Study The significance iof ithis istudy is broad iand diverse. First of all the concept of good governance and how it interacts with microfinance profitability has not been well explored in the context of Ghana. In fact, there is almost no known study to this effect. iThis istudy therefore ifills ithe knowledge igap iin ithe extant corporate iliterature iby adding to ithe body of theory on how this effect of the relationship pertains in sub-Saharan Africa. Furthermore, Ghana’s financial market compared to that of the developed economies is not mature and therefore possesses very ineffective corporate controls. iIt is therefore iimportant ito iinvestigate how this internal icorporate igovernance structure affects ithe financial performance of MFIs. At this period where reports of the collapse and insolvency of some financial institutions abound in Ghana, the opportunity to delve into the potential cause of the poor performance or otherwise is critical. Again, findings from this study would afford practitioners within the microfinance sector to adopt best icorporate igovernance ipractices ito ienhance their iperformance iin ithe industry. It would also afford policy makers the opportunity to use findings from this study 5 University of Ghana http://ugspace.ug.edu.gh to implement new regulations or strengthen the existing ones to forestall sanity in Ghana’s financial sector. 1.6 Scope of the Study The istudy iis ilimited ito only ithe microfinance sub-sector iof Ghana’s financial sector. The specific icorporate igovernance ivariables ithat ithe study considers are isize iof ithe board, board composition, board diversity, and CE O duality. In terms of performance, the study used iTobin’s Q iand iReturn ion Assets to imeasure ithe iperformance of ithe microfinance institutions. Other control variables are isize iand the idebt istructure iof ithe ifirm. 1.7  Organisation of the Study The whole long essay ihas ibeen divided iinto ifive ichapters. iChapter ione constitutes ithe general iintroduction where ithe background, istatement iof ithe iproblem, iobjectives, and significance iof ithe istudy are outlined. iChapter itwo ideals iwith ithe ireview of theoretical and empirical iliterature related to corporate igovernance iand iMFI iperformance. Chapter three iis devoted itoi the presentation iof the imethodology iused iin ithe istudy. iChapter ifour ipresents the ianalyses and idiscussions of iresults iwhile iconclusions and irecommendations iconstitute ithe ilast ichapter iof ithis istudy. 6 University of Ghana http://ugspace.ug.edu.gh CHAPTER TW O LITERATURE REVIEW 2.1 Introduction This iChapter presents ithe review of iliterature where definition of microfinance, its evolution and development are reviewed. Also the concept of good governance and the various theories that underpin the concept were reviewed. A review of empirical studies especially ion ithe irelationship iof icorporate igovernance and ifirm iperformance was also done iin ithis ichapter. 2.2 Definitions for Microfinance and MFIs There ihas ibeen a itremendous igrowth of ithe concept iof imicrofinance from a narrow concept of microenterprise credit over the last two decades (Thrikawala, 2016). According to Helms (2006), there are ia irange iof iservices offered to ilow iincome ipeople isuch ias isavings, imoney itransfer, micro credits, iand to some extent, iinsurance that are offered by microfinance. The reason for the increasing interest in microfinance stemmed out of the Microcredit Summit in 2007, at which programme the concept of microfinance was formally defined to be a iprogramme ithat iextends ismall iloans ito ivery ilow iincome ipeople ifor itheir iself-employment iprojects, iallowing ithem to icare for ithemselves iand ifamilies. There are some variations in the way microfinance is defined by individual countries therefore making it difficult to have one universally accepted definition. However, a number of criteria were used in propounding a definition at the Microcredit Summit. These criteria include: 7 University of Ghana http://ugspace.ug.edu.gh • Small loan sizes (size) • iMicro ientrepreneurs iand ilow iincome ihouseholds (Target users) • iThe iuse of ifunds for iincome igeneration and ienterprise idevelopment as well as icommunity iuse on projects such as health, education and consumption (Utilisation) • Most terms of imicrofinance iloans are iflexible and ieasy to iunderstand, iand iare isuited to ithe ilocal iconditions iof ithe icommunity (Terms and conditions). Another definition of microfinance has been given iby the iAsian iDevelopment iBank (ADB) and according ito them, it is ithe iprovision iof a ibroad irange of iservices that includes ideposits, iloans, ipayment services, imoney itransfers and iinsurance ito the ipoor iand ilow iincome ihouseholds and itheir imicroenterprises (ADB, 2000). Robinson (2001) presents a broad and extensive definition by identifying it ias “small-scale financial services” made up of icredit iand isavings provided to farmers, fishermen ior herdsmen who own ior ioperate ismall ienterprises or imicroenterprises iwhere igoods are iproduced, irecycled, irepaired or isold, as well as service providers, wage or commission workers, landlords, small machines and equipment rentals etc at the local levels, rural or urban, in developing countries. An Australian context is given in the definition by Burkett & Sheehan (2009). They see microfinance ias a iset of itools, iapproaches iand istrategies that are put in place to iaddress ithe ineeds of ipeople iwho are ifinancially excluded. Apart from ithe elements already mentioned, Burkett & Sheehan added that imicrofinance iseeks to iprovide ifair, isafe iand iethical ifinancial iservices for ipeople who iare not iable to iaccess imainstream ifinancial iservices. To them, the ipurpose of microfinance is to ialleviate and ieliminate ipoverty. 8 University of Ghana http://ugspace.ug.edu.gh Hudson (2008) also gives a similar definition except to emphasize women as the majority of the beneficiaries of such financial services, where such services are not provided by the mainstream financial institutions due to the small amounts involved. He also sees the purpose of microfinance as enabling people especially women to iraise itheir iincome and iimprove itheir iliving istandards. The World Bank (1999) has defined microfinance to be the iprovision of ifinancial iservices and ithe imanagement of ismall iamounts of imoney ithrough a irange of iproducts and a isystem of iintermediary ifunctions that iare itargeted at ilow iincome iclients which iincludes iloans, isavings, iinsurance, itransfer iservices and iother ifinancial iproducts and iservices. It ihas also ibeen posited by Littlefield, Murduch & Hashemi (2003) ithat imicrofinance is ione of ithe icritical idimensions of ithe ibroad irange of ifinancial itools for ithe ipoor, iand iits iincreasing irole in idevelopment has iemanated ifrom a inumber of ikey issues such as ithe ifact ithat ithe ipoor needs iaccess to iproductive iresources, and ithat ithey ihave the icapacity to iuse iloans ieffectively for iincome-generation and also the fact ithat the iformal ifinancial isector has iprovided ivery ilittle or no iservices to ilow-income ipeople, icreating a ihigh idemand for icredit and isavings iservices iamongst ithe ipoor. iThe vision and purpose for the establishment of microfinance, according to Adjei & Arun (2009), iwas to isupply iformal ifinancial iservices to ithe ipoor, iwho are mostly ineglected iby commercial ibanks due to itheir tiny isavings and ismall iloan demands, iand also the fact that they lacked collateral. Zeller & Meyer (2002) have indicated that the inability of the poor to access loans have constrained itheir iability ito initiate itheir iown ibusinesses, ifinance iemergency ineeds, iacquire iassets as iwell as insure ithemselves iagainst iillness and idisasters ithat ibefall ithem. The importance of microfinance therefore cannot be overemphasized. 9 University of Ghana http://ugspace.ug.edu.gh 2.3 Microfinance in Ghana The iconcept of imicrofinance is inot new in iGhana. People have always had the tendency to save or take ismall loans ifrom iindividuals iand groups iwithin ithe icontext of iself-help to istart ibusinesses or ifarming iventures. iFor iexample, iavailable ievidence isuggests ithat the ifirst icredit iunion in iAfrica was iestablished in iNorthern iGhana in i1955 by iCanadian iCatholic imissionaries. iHowever, iSusu, iwhich is ione iof the imicrofinance ischemes in iGhana, is ithought to ihave ioriginated from iNigeria and ispread to iGhana in ithe early itwentieth icentury.  Over ithe iyears, ithe imicrofinance isector has ithrived and ievolved iinto its icurrent istate idue to ivarious ifinancial isector ipolicies iand iprogrammes iundertaken by idifferent igovernments isince iindependence. iAmong ithesei iare: • iProvision of subsidized icredits in ithe 1950s; • iEstablishment of the iAgricultural iDevelopment iBank in 1965 ispecifically to iaddress the ifinancial ineeds of ithe ifisheries and iagricultural isector; • iEstablishment of iRural and iCommunity iBanks (RCBs), iand the iintroduction of iregulations isuch as icommercial ibanks ibeing irequired to iset iaside 20% of itotal iportfolio, to ipromote ilending to iagriculture iand ismall scale iindustries in ithe i1970s and iearly i1980s; • iShifting ifrom a irestrictive ifinancial isector iregime to a iliberalized iregime in 1986; • iPromulgation of iPNDC iLaw 328 in i1991 to iallow the iestablishment of idifferent icategories of inon-bank ifinancial iinstitutions, iincluding isavings and iloans icompanies, iand icredit iunions. 10 University of Ghana http://ugspace.ug.edu.gh The ipolicies ihave iled to the iemergence of ithree ibroad icategories of imicrofinance iinstitutions. These are: • iFormal isuppliers iisuch as isavings and iloans icompanies, irural and icommunity ibanks, as well as isome idevelopment and icommercial ibanks; • iSemi-formal isuppliers isuch as icredit iunions, ifinancial inon-governmental iorganizations (FNG Os), and icooperatives; • iInformal isuppliers isuch as susu icollectors iand clubs, irotating and iaccumulating isavings and icredit iassociations (R OSCAs and ASCAs), itraders, imoneylenders and other iindividuals. iIn iterms of ithe iregulatory iframework, irural and icommunity ibanks are iregulated iunder the iBanking iAct 2004 (Act 673), iwhile the iSavings and iLoans iCompanies are icurrently iregulated iunder ithe iNon-Bank iFinancial iInstitutions (NBFI) Law 1993 (PNDCL 328)[2]. Programmes that have been implemented to address the isub-sector in iGhanai include ithe iFinancial iSector iImprovement iProject, iFinancial iSector iStrategic iPlan (FINSSP), the iRural iFinancial iServices iProject (RFSP), the iUnited iNations iDevelopment iProgramme (UNDP) iMicrofinance iProject, ithe iSocial iInvestment iFund (SIF), ithe iCommunity iBased iRural iDevelopment iProgramme (CBRDP), iRural iEnterprise iProject (REP), and iAgricultural iServices iInvestment iProject (ASSIP). 2.4 The Role of Microfinance in Socio-Economic Development As has already been indicated, the purpose of microfinance is to extend ismall iloans iand iother ifinancial iservices to ilow income groups. This role becomes a critical economic channel that has been designed to speed up financial inclusion and also help the ipoor ito iwork itheir iway iout of ipoverty. The formal banking sector has excluded this category of 11 University of Ghana http://ugspace.ug.edu.gh people in banking leaving a huge gap which has been filled by microfinance. The reason for this gap has been identified to be the high cost iin ireaching iout to ithe unbanked iand the underbanked iareas, where iscale of operations is very low due to low numbers and low values of transactions ( OECD, 2004).  Other reasons include perceived high risk in lending to the poor because of lack of collateral. Microfinance thus became an effective strategy for p verty alleviation that had the potential of positively impacting the lives of the poor and small scale enterprises. According to IYMC (2005), international and national policies such as Millennium Development Goals (MDGs), poverty reduction programmes, women empowerment programmes, assistance for vulnerable groups and standard of living improvement can all be facilitated by microfinance. According to the  OECD (2004), a well harnessed iimicrofinance isector ican imake isustainable icontributions ithrough ifinancial iinvestment ileading ito ithe iempowerment of the citizenry. The effect is the promotion of iconfidence iand iself-esteem, especially ifor iwomen. iThe irole iof imicrofinance has been recognized iin three ways. The first has to do with how it enables ipoor ihouseholds to imeet itheir most ibasic ineeds and protecting ithem iagainst irisks. Another role iis how it is iassociated iwith ithe improvements of the ieconomic iwelfare of ihouseholds. The third has ito do with how it supports iwomen’s ieconomic iparticipation, empowerment iand the promotion of igender equality. In order to ensure that all these benefits accrue to the intended targets there is the need to have well sustained, efficient and self-financing microfinance system, there is the need to ensure that there are strong corporate governance structures. 12 University of Ghana http://ugspace.ug.edu.gh 2.5 Definition of Corporate Governance Due to the existence of many and varied perspectives on this subject matter, there also exists iseveral idefinitions for icorporate igovernance. iThe differences iin idefinitions are iprimarily based on the kind of theory that the author draws from. Issues of governance arise when there is a iseparation between iownership of the ifirm and ithe management. Certain important questions have been suggested by Tricker (2000) in situations where iownership iis inot iapplied idirectly in the icontrol of iinvestment. They are: 1. iHow should ioversight ibe iexercised iover ithose mandated ito run ithe company? 2. How are the interests of the ownersprotected ? 3. Who sets the firm’s direction and is responsible for accountability? 4. iHow is the ipower iover the firm legitimized? 5. iTo iwhom iis the firm iaccountable iand, iultimately iresponsible? iAccording ito iTricker (2000), icorporate igovernance iis iabout ithe iexercise iof such ipower. This is further reinforced by the assertion of the Cadbury Committee Report of 1992 to the effect that icorporate igovernance iis ithe isystem iby iwhich icompanies iare idirected iand icontrolled. Bassem (2009) then makes the assertion that for an organization to be able to achieve its corporate mission; these control mechanisms stated above become very necessary. 2.6 Importance of Corporate Governance for  Organisational Performance According to iBrunnermeier i (2009), iErkens et al. (2012) and iRadelet iet al. (1998) the i1997 iAsian ifinancial icrisis and the 2007 global financial crisis were caused by non- compliance of corporate governance practices and lack of investor protection. Several other icorporate iscandals isuch ias iEnron, iTyco iInternational iand Qwest Communications in 13 University of Ghana http://ugspace.ug.edu.gh the US, iHIH iInsurance,  iOne iTel, iHarris iScarfe in iAustralia and iAir iNew iZealand were all attributed to the non-adherence to igood icorporate igovernance ipractices. According to iFrance iet al. i (2002), iLockhart i (2004), there were calls for the backing of investor protection and more importantly, good corporate governance practices following these worldwide massive scandals. There is also enough evidence to suggest that similar fate can befall the microfinance sector should there be ilack iof good icorporate igovernance practices. There iis ithe possibility iof such noncompliance leading ito iproblems related ito ifirm isustainability iand iloss of business iclients. iGalema et al. i (2012) ifor iexample reports iof some malpractice in some MFIs in India that lead to increased debt liability of poor borrowers forcing some of them to commit suicide. The issue of how and why boards and shareholders c uld sit back and allow such scandals, and more specifically the failure of corporate governance systems to take place has thoroughly been argued by researchers. Varma (2005) makes the point that the effect of such failures is so devastatingly huge for institutions to ignore them. There is the suggestion by Brown & Gladwell (2009) that ideficient irisk imanagement ipractices, weak iboard icomposition, iand inon-executive idirectors’ failings iand the inability of ishareholders ito imonitor iand scrutinize ithe idecisions iof ithe iboards have been identified ias critical iareas that need ireforms if such scandals could be avoided. The focus of the debate following each of the financial crisis has been ion iways ito iimprove icorporate igovernance ipractices iacross iindustries iand isectors. According ito Chung iet al. (2003), iDalton et al. (1998) and Hossain iet al. (2000), ithere are empirical ievidence ito ithe effect ithat when corporate governance is improved it leads to improvement in the performance of firms. For firms ito iachieve ibetter iperformance iand to be able to ibuild a good ireputation, there is the need for good icorporate igovernance ipractices. iGood icorporate igovernance ipractices ihelp investors, donors, managers and 14 University of Ghana http://ugspace.ug.edu.gh state authorities to make the right decisions at all times. Various reforms such as the Sarbanes- Oxley [S OX] iAct i2002 iin ithe iUS, iCLERP 9 in iAustralia, iCombined iCode in ithe iUK, and ithe  iOECD iCode confirm this assertion. 2.7 Corporate Governance Theories 2.7.1 Agency Theory The principal-agent problem ihas ibeen the isubject iof idebate isince iBerle iand iMeans i (1932) supported the idea of iseparation iof imodern icorporate imanagement ifrom iits iowner. Huse (2007) considers iagency itheory as the ‘Bible’ of icorporate igovernance and has dominated the iacademic iliterature (iGabrielsson & iHuse, 2004). iIts itheoretical iarguments iare in ieconomics, ifinance and iorganisational itheory, iand it ihas iinfluenced iregulators iin iseveral icountries iwhen ilooking to ireform icorporate igovernance iactivities (iCornforth & iEdwards, 1999). iMany istudies of icorporate igovernance iemphasise ithe iimpact of iagency itheory on icompany ivalue in imaximising the iwealth of ishareholders, ias this itheory is ihighly iconcerned iwith ithe iowners’ iperspective (iFama & iJensen, 1983; iJensen & iMeckling, 1976; iMitchell, iAgle, & Wood, 1997). The whole concept of the iagency itheory iis ipremised on the fact ithat whiles owners (ishareholders) possess ithe financial muscle, the ability and capability to manage is missing and therefore imanagement iof ithe ifirm is entrusted into ithe ihands iof professional executives iwho iare supposed ito iact in ithe iinterest iof the ishareholders. iIn this arrangement, ithere iis ithe possibility iof a collision iof ithe iinterests iof imanagers and shareholders. This conflict is what is termed, the agency problem. According to Jensen & Meckling (1979), the agency problem comes about due to the 15 University of Ghana http://ugspace.ug.edu.gh differences in goals and also the fact that the idivision iof ilabour iof icooperating iparties differ. The agency theory makes an analysis of the irelationship, iwhere ione iparty, known as ithe iprincipal, idelegates iwork ito a isecond iparty, known as ithe iagent, iwho ihas a role ito iperform the role assigned to him by the principal. In the case of a firm, the role of the principal is obviously covered by the shareholders of the firm; while the executives are the agent that performs the role assigned to him by the shareholder. The purpose of the iagency itheory iis ithe evaluation iof ithe iagency iproblem that arise when the objectives and the will of the principal is in variance with that of the agent. In other words, risk aversion may lead to a collision of the two parties. iAgency itheory ihas ibeen iused iby imany idisciplines ias ian iimportant itheory ias iwell ias a icontroversial itheory iwhen istudying icorporate igovernance (iEisenhardt, i1989; iMitchell iet al., i1997). iIt iprovides a isuitable iway iof iexplaining irelatinships iwhen iboth iinterests iare iat iodds iand ibetter iagreements ican ibe iimplemented ithrough iappropriate imonitoring iand a iwellorganised icompensation isystem. iAccording to iagency itheory, idirector(of) iboards iare iappointed iby ithe ishareholders ito imonitor ithe iactivities iof imanagement, iand ithis imonitoring iprocess ican be iperformed ithrough iindependent inon-executive idirectors iand iCE O/chairman iduality. iResearchers ihave iargued ithat ithis itheory iis isimple iand ihuman ibeings iare imore icomplex ithan idescribed iin ithis imodel iwhich idoesn’t icapture the ifruitfulness iof ihuman irelations (iDoucouliagos, 1994). iTherefore, iadditional itheory is ineeded to iclarify iother itypes of ihuman ibehaviours iand ithis iis ifound iin iliterature ioutside ithe ieconomic iperspective. 16 University of Ghana http://ugspace.ug.edu.gh 2.7.2 Stewardship Theory This itheory iwas ideveloped iby iDonaldson i& iDavis i(1991) ias ia icounter istrategy ito ithe iagency itheory. iTheir iargument iwas ithat ithe iagency itheory iwas isimplistic iand iambiguous iand isuggested ithat ithe iusual iconflicts iof i nterest ibetween ithe iprincipal iand iagent icould ibe iprevented iby ihaving isenior iexecutives iact ias istewards ifor ithe ibetterment iof ishareholders’ i nterest. iThis itheory iassumes ithat ithe imanager imakes idecisions i n ithe ibest i nterest iof ithe iorganisation, ieven iwhen itheir i nterests iare inot ialigned iwith ithe iprincipals’ i nterests, ibecause ithey ithink ithe iultimate ibenefit icomes iwhen ithe iorganisation ithrives. i Stewardship itheory ipinpoints ithat imanagers iwork inot ionly ifor ifinancial ireasons ibut ifor inonfinancial imotives isuch ias irecognition, i ntrinsic isatisfaction iof isuccessful iperformance, irespect ifor iauthority iand ia iwork iethic i(Muth i& iDonaldson, i1998). iFurther, iconcepts ilike ithese iare iwell isupported i n ithe iorganisational iliterature i(Herzberg, i1966; iMcClelland, i1961). iAccording ito istewardship itheory, istewards iare iworking ito imaximise ithe iorganisational iperformance iwith ithe iobjective iof igetting ibenefit ifrom ia istrong iorganisation. iThey iperceive ibetter ivalue i n icooperative ibehaviour iand itherefore ibehave iaccordingly; itheir ibehaviour ican ibe iconsidered irational. iThe istewards iattempt ito iachieve iorganisational iobjectives isuch ias iprofitability iand ithis ibehaviour ibenefits ithe iprincipals ithrough ibetter iprofits. iThey imaximise ishareholder iwealth iby iachieving igood iperformance iso ithat istewards iare iable ito imaximise itheir iutility ifunctions. i Arthur, iGarvey, iSwan, i& iTaylor i(1993) iclaimed ithat iDonaldson iand iDavis i(1991) imisunderstood iagency itheory ibecause ithey ianalysed ishareholders’ i nterest i ncorrectly. iThis iview irevitalised iagency itheory ito ia imodern iperspective. iFurther, iArthur iet ial. i(1993) iargue ithat ithe iDonaldson i& iDavis i(1991) itheory i s ion ithe igrounds ithat imanagers iare imotivated iby ithe idebt iand icapital istructure iof ithe ifirm iso ithat ithe ifirm icreates ilong-term iwealth ifor itheir iowners. i 17 University of Ghana http://ugspace.ug.edu.gh Agency iand istewardship itheories iof imanagement iexplore ithe iextent ito iwhich iauthority ishould ibe igiven ito imanagers iand iexamine ithe iset iof iassumptions ithat ithe iowner ihas iregarding ithe imanager, ias iwell ias ithe ieffect ithose iassumptions ihave ion imanagement idecision imaking. iIn iagency itheory, ithe iowner ibegins iwith ithe iassumption ithat ithe imanager iseeks ito imaximise ihis ior iher i ndividual iutility iwhereas istewardship itheory ibegins iwith ithe iassumption ithat ithere i s ia istrong irelationship ibetween ithe isuccess iof ithe iorganisation iand ithe iprincipals’ isatisfaction. iHowever, iboth itheories ifocus ion ithe ileadership iphilosophies iadopted iby ithe iowners iof ian iorganisation. 2.7.3 Stakeholder Theory Stakeholder itheory i s ian iextension iof iagency itheory iand iwas ideveloped iby iR. iE. iFreeman ifrom ithe i1984 ipublication iof iStrategic iManagement i- iA iStakeholder iApproach. iIn iresponse ito ithe ichanges ithat ioccurred i n ithe ibusiness ienvironment i n ithe i1980s, ischolars ideveloped ia inew iconceptual iframework iand ibroadened ithe iword i‘stockholder’ iby idefining istakeholders ias i“any igroup ior i ndividual iwho ican ieffect ior i s iaffected iby ithe iachievement iof ithe iorganisation’s iobjectives” i(Freeman, i2010, ip. i25) isuch ias iowners, iemployees, icustomers, icompetitors, isuppliers, ienvironmentalists, igovernments, ilocal icommunity iorganisations iand iall ithe iother igroups iwho iplay ia ivital irole i n ithe isuccess iof ia ibusiness i n itoday’s ienvironment. iThe iorigins iof istakeholder itheory iare i n ipolitics, ilaw iand imanagement itheory. iBut i n irecent iyears ithis itheory ihas ibeen idominant i n icorporate igovernance istudies i(MacMillan i& iDowning, i1999). iIn istakeholder itheory, ithe iboard irole i s ito iperform ias ithe irepresentatives iof istakeholders i n ithe icorporation i(Freeman i& iReed, i1983). iWhen iboards iare imaking itheir icorporate idecisions, ithey ineed ito iconsider ithe i nterests iof iother istakeholders, inot ionly ithe i nterests iof ishareholders. iBased ion ithe ivarious iassumptions iabout ithe istakeholder itheory, iHuse i& iRindova i(2001, ip. i157) ioutline idifferent iboard ifunctions, isuch ias iadvice, i nfluence, i nformation, i nitiation, ilegitimation, ilobbying, imonitoring, iratifying iand isupporting. i 18 University of Ghana http://ugspace.ug.edu.gh Donaldson i& iPreston i(1995) istate ithat istakeholder itheory irejects ishareholder iwealth imaximisation ias imorally iuntenable. iJones i& iWicks i(1999) isuggest ithat ithis itheory iunderstands ithat ihuman ibehaviour i s imore icomplex ithan iself-serving. iIf ia icompany ilooks iafter i ts istakeholders, iacts imorally iand iattends ito isocial ipurposes ithen ithe icompany iwill ibe imore isuccessful i(Letza iet ial., i2004). iBoards ihave ito iexplore ithe iexpectations iof ivarious istakeholder igroups iby iexplicating iand icomparing, iand ithey ialso ineed ito iassess ithe i mportance iand ipower iof istakeholders ias ithey idiverge i(Freeman i& iReed, i1983; iHuse i& iRindova, i2001). iThey ihave ito imaintain ian iappropriate ibalance ibetween ithe ivarious idemands iand imake itrade-offs ibetween istakeholders i(Vinten, i2001). iHowever, iboards ineed idifferent itypes iof imeasures ito irecognise iaspects iof ifirm iperformance, isuch ias igeneration iof igoodwill i(MacMillan i& iDowning, i1999, ip. i19) iand iCSR i(Jones i& iWicks, i1999, ip. i209). i According ito iDonaldson i& iPreston i(1995), istakeholder itheory idoes inot iprovide iany iguidance ifor ithe iboard iabout ithe ilegitimate istakeholders. iEven ithough istakeholder itheory ihas ibecome ia istaple i n imanagement itheory, iSternberg i(1998, ip. i127) istates ithat i t i s i“fundamentally imisguided, i ncapable iof iproviding ibetter icorporate igovernance, icorporate iperformance ior icorporate iconduct”. iThe istakeholder idoctrine i s i ndeed i ntrinsically i ncompatible iwith iall isubstantive icorporate iobjectives, iand iundermines iboth iprivate iproperty iand iaccountability”. 2.8 Microfinance Institutions And Corporate Governance The ifirst iappearance iof igovernance i n ithe iMFI iliterature iwas i n ia iConsultative iGroup ito i Assist ithe iPoor i(CGAP) ireport i n i1997 iunder ithe ititle i“Effective iGovernance ifor iMicrofinance iInstitutions”. iThis ireport, iaccording ito iLapenu i& iPierret i(2006), iput iemphasis ion ithe irelationship ibetween iboards iof idirectors iand ithe imanagement iof ithe iMFIs. iIn ithe iliterature, igreat iemphasis i s iput ion ihow i mportant icorporate igovernance i s, i n ithe ienhancement iof ithe iviability iof ithe iMFI isector i(Hartarska, i2005; iLabie, i2001; iMersland, i2011; iMersland i& iStrøm, 19 University of Ghana http://ugspace.ug.edu.gh i2009; iVarottil, i2012). iAgents iare ihired iby iMFI iprincipals ito imanage ithe ifirm’s ioperation ibut i n imost icases, ireturns ion isuch i nvestments iare inegligible. iSinclair i(2012) imakes ithe iassertion ithat ithe iexpectation iof ithe iprincipal ihas ialways ibeen ito igain iassurances ion ithe ifunds ior idonations imade iby ithem. iA icontinuous idisclosure iof ithe ifirm idue ito igood icorporate igovernance iattracts ia iresponse ifrom ithe imarket iforces iwhich i mposes ipressure ion ithe ifirm ito ishape iup i(Varma, i2005). iHowever, ithese ikinds iof ipressure iare inonexistent i n ithe imicrofinance i ndustry. i There ihave ibeen inumerous ireports iof iunfair ipractices iand ivery ilow itransparency i n ithe iaffairs iof ithese iMFIs i(Thrikawala, i2016) idespite ithe itremendous igrowth i n imicrofinance iacross ithe iglobe, icoupled iwith ian i ncrease i n ivaried inumber iof i nstitutions i n ithe iMFI isector. i iThese ianomalies iare iattributable ito ithe i ntense icompetition ibetween iMFIs iand ithe iavailable ievidence ipoints ito ithe iabsence iof icorporate igovernance ipractices. iThe iresults ihave ialways ibeen iMFI iunsustainability iand iloss iof iclients. iBarry i& iTacneng i(2014) iand iCaudill iet ial. i (2009) iaffirm ithe ipoint ithat ithere i s ithe ineed iby ithese iMFIs ito iadopt igood ifinancial iand imanagement ipractices i n itheir imicrofinance iactivities i n iorder ito iensure isustainability iand itransparency. iThe iadoption iof isound icorporate igovernance ipractices iare iseen ias imeans iof ihelping iMFIs ito ioperate i n ia imore iefficient iand ieffective imanner i(Hartarska, i2005). iAccording ito iMilana i& iAshta i(2012), ithe idebate inow iby ipolicy imakers, i s iabout iwhich imodel iof icorporate igovernance ipractices ishould ibe irecommended ifor iMFI iactivities. i i There i s ihowever ino ispecific icorporate igovernance iguidelines ifor iMFIs i(Arthur iet ial, i1993; iMersland, i2009) idespite ithe iexistence iof ilarge ibody iof iconsultancy ireports iand igeneral iguidelines ion igovernance ifor iall i ndustries. iGant iet ial. i(2002) ihowever iposit ithat igeneral iguidelines ifor icorporate igovernance iare iadequate ifor iMFIs isince icultural iand iregional idifferences iwould imake ithe iadoption iof ia ispecific iframework ion icorporate igovernance ivery idifficult. iVarottil i(2012) ion ithe ihand iexpresses ithe iview ithat iMFIs ineed ia ispecific icorporate 20 University of Ghana http://ugspace.ug.edu.gh igovernance iframework ieven iwhen ithey iare iexamined ifrom ia itheoretical iperspective. iAccording ito iArmendariz i& iLabie i(2011), ithe iproblem iencountered iby iMFIs i s ithe idifficulty i n i dentifying iboard imembers iwith ithe irequisite ibackground, iwho iare iable iand iwilling ito idedicate itheir itime ito ido ieffective imonitoring. iSome iof ithe i dentified icorporate igovernance ifactors ithat ihave ibeen iseen ito iaffect ithe iperformance iof iMFIs iare iCE O/chairman iduality, i nternational idirectors, i nternal iboard iauditor, iboard isize, ishareholder iownership, ifemale iCE O. iAn iexamination iof ithe irelationship ibetween ifirm iperformance iand icorporate igovernance iby iMersland iand iStrøm i(2010), iusing isecondary idata iof ithird-party irating iagencies, ipoint ito ithe ifollowing iconclusions: ithe ilocal idirectors, i nternal iauditors iand ifemale iCE Os ican ihelp ito i mprove ithe ifinancial iperformance iof iMFIs. iAlso ithe inumber iof icredit iclients iof ithe iorganisation i ncreases i f ithere i s iCE O/chairman iduality. iThey isuggest ian i ndustry-specific iapproach ito iMFI igovernance. iAnother istudy iby iBassem i(2009) iwhere ihe iused ia isurvey, iannual ireports iand iMIX imarket idata ifor ia istudy ion igovernance iand iperformance iof iMFIs i n iEuro- Mediterranean icountries, ihighlighted ihow igovernance imechanisms ican i mprove ithe iperformance iof iEuro-Mediterranean iMFIs i n irelation ito ioutreach iand isustainability. iLapenu i& iPierret i(2006, ip. i10) istate ithat ithe i“good ifunctioning” iof ithe iboard iof idirectors i s inot ienough ito iguarantee ithe isuccess iof iMFIs. i Other igovernance imechanisms iprobably iplay ia imore i mportant irole. iIt i s inecessary ito ibroaden ithe iscope iof ia istudy ito i nclude iall istakeholders i nvolved i(employees, imanagers, ielected iofficials, iclients, idonors, ibank ipartners, ishareholders, ithe igovernment, ietc.) ias iwell ias iany iorganisational iform iwith ia igoverning irole ithat imay ihave ibeen iset iup iat ithe i nception iof ithe i nstitution. iMersland i(2011) irecommends i n ihis istudy ithat istakeholders isuch ias idonors, idepositors, ilocal icommunities iand ibank iassociations ican iprovide ia imonitoring isystem ito iboost ithe iexistence iof iMFIs. i Mersland iproposes ia ithree idimensional iapproach, icomprising iof ithe irelationship ibetween iMFIs iand itheir iequity i nvestors, idebt ifinanciers, iemployees, iborrowers, icommunity, icompetitors iand 21 University of Ghana http://ugspace.ug.edu.gh igovernment iregulations. iAccording ito ihim, ithis iframework iwill ihelp i n i dentifying ithe ivarious irelationship idimensions iwithin iMFIs ithrough ia icorporate igovernance iperspective. iMersland ifurther iemphasizes ithe i mportance iof ihaving imore istudies i n ithe iMFI isector i n iorder ifor ia ideeper iunderstanding iof ithe igovernance isystem isuitable ifor iMFIs. iAnother irecommendation iwas ifor ia istudy ito i dentify ihow ia icombination iof iorganisational itypes iwould ienhance icompetition i n ithe imicrofinance i ndustry iand ihow i t iwill iaffect iperformance. i i However, ithe i ncreasing ipopularity iof imicrofinance ias ia idevelopment iand iantipoverty itool ihas ipushed ithe i ndustry itowards ifinancial iself-sufficiency iand icreated ia itension ibetween ithe iMFI’s idual imission iof ifinancial iself-sufficiency iand isocial iorientation i(Sinclair, i2012). i Furthermore, iVarottil i(2012) iand iSinclair i(2012) ipoint iout ithat ithe icommercialisation iof iMFIs ifrom inon-profit i nstitutions ito ifor-profit i nstitutions ihas icreated iseveral i ssues i n ithe i ndustry. iEven i f ithe icommercialisation iof iMFIs ihas iassisted i n iscalability iand ioutreach iby ibroadening ithe iscope iof ifinancial isupport ifor ipoor ipeople, i t ihas icaused iMFIs ito iturn iback itheir isocial igoals. iAccording ito iArena i(2012), imicrofinance iproviders iare idrifting iaway ifrom itheir imission iand icorporate igovernance i s ibeing iblamed. iThis i s ibecause ithe iexisting icorporate igovernance ipractices iavailable ito iMFIs iare ionly i nfluencing itheir iability ito iraise icapital iand ithat ihas icreated ia iperception ithat iprivate i nterests iare ibenefiting ifrom ithe ivulnerability iof ithe ipoor. i It i s i mportant ito i nvestigate ithe iextent ito iwhich icorporate igovernance ipays iattention ito ithe i nterests iof ithe ipoorer isections iof isociety ias istakeholders i(Mersland i& iStrøm, i2010). iThrough ithe iapplication iof isocial icorporate igovernance, iMFIs ican igive imore iattention ito ithe ipoor istakeholders iand imitigate ithe iproblem iof igetting iaway ifrom ithe imission. 2.9 Corporate Governance Characteristics Despite ithe iexistence iof ia iwide ibody iof istudies ithat isought ito i dentify ithe irelationship ibetween icorporate igovernance ipractices iand ifirm iperformance, ithere i s ivery iscanty istudies ispecific ito 22 University of Ghana http://ugspace.ug.edu.gh ithe imicrofinance i ndustry. iAvailable istudies ion iMFIs ihave iconcentrated imostly ion i nnovative ilending itechnologies ito i ncrease ilending ito ithe ipoor iand itheir i mpact ion iborrowers’ iwelfare. iEmpirical istudies ion ithe irelationship ibetween icorporate igovernance ipractices iand iMFI iperformance i s iat i ts iearly istages i(Bassem, i2009; iCull iet ial., i2007; iHartarska, i2005, i2009; iHartarska i& iNadolnyak, i2007; iMersland, i2009; iMersland i& iStrøm, i2009). i i In ithe ifor-profit ifinancial isector, iempirical istudies ihave ishown ithat igood icorporate igovernance ienhances ithe ifinancial iperformance iof ifirms. iIt itherefore isuffices ito iconclude ithat igood igovernance ipractices iby iMFIs iwould ienhance itheir iperformance. iIssues irelating ito ipeople iwho iserve ion ithe iboard, itheir iselection iprocedure iand itheir imotivation iare i mportant ito ibe iexamined ias ithey ihelp i n ithe iunderstanding iof ithe ireality iof icorporate igovernance i(Lorsch i& iMacIver, i1989). iThe iboard’s ieffectiveness idetermines ithe ifirm’s ifuture i(Abdullah, i2004; iGabrielsson i& iHuse, i2004). iTherefore ian iexamination iof ithe iempirical ievidence iof icorporate igovernance imechanisms ithat i mprove ifirm iperformance i s ivery i mportant. i The ievidence iof ithe idirection iof ithe ieffect iof icorporate igovernance ion ifirm iperformance i s iat ibest, i nconclusive i(Bathula, i2008; iBhagat i& iBlack, i1999; iWeir, iLaing, i& iMcKnight, i2002). iThere iare ievidence iof ipositive irelationship ibetween icorporate igovernance iand ifirm iperformance i(Gompers, iIshii, i& iMetrick, i2003; iKyereboah-Coleman i& iBiekpe, i2006). i  Other istudies ihave iobserved ia inegative irelationship ibetween igovernance iand iperformance iHambrick, iCho, i& iChen, i1996; iRose, i2007; iSheridan i& iMilgate, i2005). iThere iare ialso istudies ihowever ithat ihave ireported ino ievidence ito isupport ia ilink ibetween icorporate igovernance iand ifirm iperformance i(Abdullah, i2004; iBaliga, iMoyer, i& iRao, i1996; iDalton iet ial., i1998). iFurther, iDalton iet ial. i(1998) iand iWeir iet ial. i(2002) imake ithe isuggestion ithat ivery ilittle ievidence iexist i n isupport iof ithe iview ithat iboard icharacteristics ihave ian i mpact ion ifirm iperformance. i i 23 University of Ghana http://ugspace.ug.edu.gh Several icorporate igovernance icharacteristics ihave ibeen i dentified ito ihave isome iform iof ieffect ion igood icorporate igovernance. iSome iof ithese iare iboard isize, iCE O/chairman iduality, igender idiversity, iand iboard icomposition. iThese icharacteristics ihave ibeen iseen ito ibe iguides i n i mproving ifinancial iperformance iof ifirms. i 2.9.1 Board Size This irefers ito ithe inumber iof ipeople iserving ion ithe iboard iof ithe ifirm. iThere ihave ibeen ia ilot iof istudies ithat ihave iconfirmed ithat ithere i s ia icorrelation ibetween ithe isize iof ithe iboard ithe ifinancial iperformance iof ithe ifirm. iStudies iby iCicero, iWintoki i& iYang i(2008) iconfirm ithat itwo-thirds iof ifirms i n iAmerica ihave idownsized ithe isizes iof itheir iboards idue ito i ts i mpact ion ithe iactivities iof ithe ifirm. iThis ihas ialso ibeen iconfirmed iby iseveral igovernance ireforms isome iof iwhich ihave iput ia icap ion ithe inumber iof ipeople ithat ican iserve ion ia icompany’s iboard. i i There ihave ibeen idifferences i n iopinions ias ito ithe iright isize iof ia iboard. iJensen i(1993) ifor iexample iargues ithat iboard isizes ishould ibe ilimited, ias ia ilarge iboard i s ilikely ito ihave imany iof i ts imembers ibeing i nactive i(or ifree-riding). iSuch ia ilarge iboard i n imost icases ibecome ia imere iformality iand i neffective iwithin ithe imanagement iprocess iof ithe ifirm. i On ithe iother ihand ialso, ia iboard iwhich i s itoo ismall imay inot ipossess ithe iright ikind iof idiversity iof iknowledge iand iexperience ito isteer ithe iaffairs iof ithe ifirm i n ian ieffective imanner. iThe iUK iCombined iCode i s iof ithe iopinion ithat ithe iboard ishould ibe isizeable ienough isuch ithat ithe irequirements iof ithe ibusiness ican ibe imet iand ithat ichanges ito ithe iconstitution iof ithe iboard ias iwell ias ithe imake-up iof i ts icommittees ican ibe imanaged iwithout iunnecessary idisruption. iIt ishould ialso inot ibe itoo ilarge isuch ithat i t i s inot iadequately imanaged ito ibe ieffective i n i ts irole. i 2.9.2 Board Composition This iparticular icharacteristic ihas ito iwith ithe iway iexecutive iand inon-executive idirectors, i ncluding i ndependent inon-executive idirectors iare irepresented ion ithe iboard. iThe iCorporate 24 University of Ghana http://ugspace.ug.edu.gh iGovernance iCode i(2012) iof iSingapore imandates ithat ithere ishould ibe ia istrong ielements ion ithe iboard, iwhich i s icapable iof iexercising i ndependent iand iobjective ijudgment ion icorporate iaffairs. iNo i ndividual ior ismall isection iof ithe iboard ishould ihave ian ioverriding ipower iand iauthority ion ithe iboard’s idecision imaking. iThe icode iemphasizes ithe ineed ifor ithe ipresence iof iexecutive idirectors ion ithe iboard. iThey iapply itheir iexpertise iand ivast iamount iof iknowledge i n ispecific iareas iof ithe ifirm i(Weir i& iLaing, i2001). iDaily i& iDalton i(1993) ion ithe iother ihand imaintain ihowever ithese iexecutive idirectors iare inot iwell iplaced ito imonitor ior idiscipline ithe iCE O isince ithey ireport ito ihim. iDue ito ithis, i t ihas ibeen irecommended iby iDalton iet ial i(1998) ithat ithe ilarger iproportion iof ia iproperly ifunctioning iboard imust ibe imade iof inon-executive idirectors iwho iare iexpected ito iprovide ibetter iperformance ibecause iof itheir i ndependence ifrom ithe ifirm’s imanagement. iStudies iconducted iby iFama i(1980) iand iFama i& iJensen i(1983) ipoint ito ithe ifact ithat inon-executive idirectors iare imore i nclined ito iprotect ithe i nterest iof ithe ifirm’s iowners, ibecause iof ithe ineed ito ipreserve itheir ireputation iwithin ithe ibusiness icircles. iThis iview i s isupported iby iWeisbach i(1988), iwho istates ithat inon-executive idirectors iare imore ieffective iat imonitoring ithan iexecutive idirectors ibecause iof itheir iconcern ifor imaintaining itheir ireputation. i Whereas isome istudies ihave ishown ithat ithere i s ia ipositive ilink ibetween iboard icomposition iwith imore i ndependent inon-executive idirectors iand ifirm iperformance i(Rosentein i& iWyatt, i1990; iLee iet ial., i1992), iother istudies ihave iresulted iotherwise, ithat i s, ithat ithere i s ian i nverse irelationship ibetween ia ihigh iproportion iof ioutside idirectors ion ithe iBoard iand ia icompany’s iperformance i(Weir i& iLaing, i2001; iBhagat i& iBlack, i1998). i 2.9.3 Board Diversity Studies ion iboard istructure ihave iestablished ithat i ia imore idiverse iboard imembership i ncreases idiscussion, inovel i deas iand igroup iperformance i(Van iKnippenberg, iDe iDreu, i& iHoman, i2004). iOne iof ithe imost icontested idiversity iconcern ion ia iboard i s igender iand i s ihighly 25 University of Ghana http://ugspace.ug.edu.gh iconsidered iwhen iselecting iboard iof idirectors i i(Kang iet ial., i2007). iThere ihas ibeen ia ilot iof iemphasis ion ithe ineed ifor igender idiversity i n ithe iboard iroom. iIt i s iargued ithat ithe igender imake- up iof ithe iboard ican iaffect ithe imonitoring irole ithat i s iplayed iby ithe iboard. iWhen ithere iare imore iwomen ion iboards i t ihave ibeen ifound ito ibring ia idifferent iperspective ito idecision imaking ithat imay i mprove iperformance, ias ithey ihave ibetter iunderstanding iof ithe ineeds iof icustomers i(Brennan i& iMcCafferty, i1997; iCampbell i& iMínguez-Vera, i2008). i iMany istudies ihave iassessed ithe i mpact iof iboard idiversity iconfirmed ithat iearnings iof icompanies iwere isignificantly ihigher ifor icompanies ithat i ihad isenior ifemale iexecutives i(Kang iet ial., i2007). iWith imore iwomen i n iexecutive iposition i t ican iresult i n ihigher iearnings iand i ncrease ishareholder ivalue. iAs ia i icompany ihas imore iwomen ion iboard, i t isubsequently ileads igaining icompetitive iadvantage i(Bernardi, iBean, i& iWeippert, i2002). i iMany iresearch iaffirmed ithis ihypothesis ithat ithere i s ia idirect irelationship ibetween ithe iratio iof iwomen idirectors ion ia iboard iand icorporate ifinancial iperformance i(Renée iB iAdams i& iFerreira, i2004; iDavid iA iCarter, iSimkins, i& iSimpson, i2003). i iAdams i& iFerreira i(2004) iconcluded ithat ithe irelationship ibetween ifemale ion iboards iand icorporate iperformance iappears imore icomplex ithan iwhat iprevious ifindings ihave iasserted. iThey ifound ithat ifemale ion iboards ipositively iaffect iperformance i n ifirms ithat ihave iweak igovernance iand iwere imeasured iby ifirm’s iabilities ito iresist itakeovers. iWhilst i n ifirms iwith istrong igovernance, ihowever, i ncreasing ifemale iquotas i n ithe iboardroom ilead ito ia ireduction i n ishareholder ivalue. iThis iwas ias ia iresult iof iover imonitoring iby isuch ifirms. i 2.9.4 CE O Duality There i s iduality iwhen ione iperson icombines ithe iroles iof ithe iChief iExecutive i Officer iand ithat iof ithe ichairman iof ithe iboard. iThe icontention ihas ibeen ithat itoo imuch ipower i s i nvested i n ijust ione iperson iwhen ithere i s ia iduality. iLam i& iLee i(2008) ifor i nstance imake ithe ipoint ithat iboard iprimarily isupervises ithe imanagement iand isafeguards ithe ishareholders’ i nvestment, iand itherefore ia imerger iof ithe itwo iroles i n ione iperson igives iexcessive ipower iand idominance ito ione 26 University of Ghana http://ugspace.ug.edu.gh i ndividual iwhich imay ilead ito i neffective imonitoring iof ithe imanagement iby ithe iboard. i iMoreover, irecent ifinancial iscandals i n ithe iUnited iStates igive icredence ito ithe ipotential iabuse iof ipower iby iCE O/Chairman. iDue ito ithis, ithere i s ia ipressure ion ifirms iby icorporate igovernance iregulators ito iseparate ithese itwo iroles. i i It ishould ibe inoted ihowever ithat iempirical istudies ireport ivarying ifindings. iFama i& iJensen i(1983) imaintain ithat ithe iroles imust ibe isplit ito i mprove iperformance iChen iet ial. i(2006) ireport ithat ithere i s ino ievidence iof i mproved iperformance iwhen ifirms ichange ifrom iduality ito inonduality. iBaliga iet ial. i(1996) ireports ithat ithe iUS imarket i s i ndifferent ito ichanges i n ia icompany’s iduality istatus. iAccording ito iKeil i& iNicholson i(2002) ithe idebate iabout iwhether iduality i s ibeneficial i s idependent ion ithe isize iof ithe icompany iand ithe ichallenges i t ihas. i 27 University of Ghana http://ugspace.ug.edu.gh CHAPTER THREE METH OD OL OGY 3.1 Introduction This chapter explains the research method applied in the study. It has been used to present research design, study population and sample population, type and source of data, data analysis technique and model specification. 3.2 Research Philosophy This research has adopted the positivist approach to research due to the empirical and quantitative nature of the study. Another reason for the choice of this philosophy is the fact that the study has used statistical models and descriptive statistics in explaining the variables. The scientific nature of the study however ensures that the research is positioned towards the value free end of the axiological context of research philosophy. 3.3 Research Design The research design is a combination of the research strategies (of inquiries) (e.g. surveys and cases studies), research choices (mono method or mixed methods) and time horizon (Saunders, Lewis and Thornhill, 2009) and thus relates to the method of enquiry which provides specific direction for procedures necessary for achieving the research objectives (Creswell, 2014). Dainty (2007), emphasized that the research design in consonance with the underlying philosophies provides a broader structure for conducting the research and effectively plays the role of positioning the investigator in the empirical world and links the research questions to the relevant data. The study has adopted the descriptive survey design which determines and reports the way things are (Gay, 1992). According to Polit et al (1995), descriptive survey aims at primarily 28 University of Ghana http://ugspace.ug.edu.gh describing, observing and documenting an aspect of a situation as it naturally occurs rather than explaining it. The descriptive sample survey has been recommended by Babbie (1990) for purpose of generalizing from a sample to a population so that inferences can be made about some characteristics, attributes, or behaviour of the population. 3.4 Research Strategy Research strategy has been defined by Saunders, Lewis & Thornhill (2009) as the general plan of how the researcher goes about answering the research questions. Bryman (2008) similarly defines it as a general orientation to the conduct of research. Research strategy, according to Remenyi et al (2003), provides the overall direction of the research including the process by which the research is conducted. Saunders et al. (2009) mentioned that appropriate research strategy has to be selected based on research questions and objectives, the extent of existing knowledge on the subject area to be researched, the amount of time and resources available, and the philosophical underpinnings of the researcher. Easterby-Smith et al. (2008), Collis & Hussey (2009), and Saunders et al. (2009) have identified some of the common research strategies used in business and management as experiment, survey, case study, action research, grounded theory, ethnography, archival research, cross sectional studies, longitudinal studies and participative enquiry. From these various strategies, this research sought to adopt the survey research strategy as the appropriate strategy for research. 3.5 Study Population The population of a research refers to the collection of all possible individuals, objects or measurements of interest (Mason et al, 1999). The identification of the population of the research in question will help in narrowing down to the specific objects that are the subject 29 University of Ghana http://ugspace.ug.edu.gh matter of the investigation. For the purposes of this research, the study population comprised of all microfinance institutions in Ghana. 3.6 Study Sample A study sample refers to a subset of the population that the researcher is interested in. In other words, a sample describes the participants selected for a research project. A sample is selected with care to first and foremost ensure that the population under study is fairly represented. In the words of Saunders et al. (1997), the size of the sample and the way in which it is selected will definitely have implications for the confidence one can have in the data collected and the extent to which one can generalize. For the purposes of this study, the sample was made of microfinance institutions in the Greater Accra region. It was further delimited to those whose financial records were avaialble at the time of the data collection. 3.6.1 Sampling Design Samples are very often drawn from a population to make estimates of population parameters from the corresponding sample statistics. The selection of a sample size is necessary since total enumerations of the study population are influenced by factors such as limited time and finance. The core principle is that the sample size should have features which reflect the entire population, such that conclusions can be generalized for the entire population. Among the several sampling methods, the purposive sampling technique was used to select the microfinance institutions. This sampling method was used so as to purposefully select MFIs with up to date financial reports. In all a total of 25 microfinance companies were used in the study. 30 University of Ghana http://ugspace.ug.edu.gh 3.7 Type and Sources of Data The study used both secondary and primary data in its analysis. Secondary data was obtained from the Ghana Association of Microfinance Companies (GAMC). The governance data was also obtained through the administration of questionnaire to the individual microfinance institutions. The data spans the period between 2013 and 2017. 3.8 Definition of Variables The following variables were used for the study: Performance Acronyms Definition Tobin’s Q T OB The ratio of market value to replacement value of a firm’s assets. Return on Assets R OA Return on assets is computed by dividing profits before interest and tax payments by total assets. Governance Variables Board Size BSZ Number of members serving on a firm’s board. CE O Duality CDUA It takes the value of 1, if CE O combines as the board chair and 0 if there are different people occupying the two positions of CE O and board chairman. Board Diversity BDIV Number of female directors on the Board. Board Composition BC OM The ratio of outside directors to the total number of directors of the firm. Control Variables Firm Size FMS Size of the firm measured by the value of its asset base (log of the assets). Fixed Asset/Total FASTA Ratio of fixed assets to total assets. Asset Debt Structure DSTR Debt structure of a firm measured by the total of debts (both short and long term) divided by the total assets. 3.9 Hypotheses Development For the activities of microfinance to be more transparent and sustainable, there is the need for the adoption of good corporate governance practices (Barry & Tacneng, 2014; Caudill 31 University of Ghana http://ugspace.ug.edu.gh et al., 2009). The reason adduced by the above authors is that good governance is able to increase the level of efficiency of monitoring activities of the firm. In this regard, the importance of the board cannot be overemphasized due to its role in rectifying and monitoring critical decisions, ensuring controls are put in place to minimize the potential abuse of power by management. A number of previous studies have identified several board characteristics that are seen to be promoters of good governance. These board characteristics include board size, board composition, board diversity and CE O duality (de Andres et al., 2005; Kiel & Nicholson, 2003; Dey et al., 2011). It is therefore important to look at how these board characteristics impact on the performance of MFIs. There is the possibility of a positive, a negative or no impact at all and therefore, a study such as this is very important. The following board characteristics have been modelled to be examined so as to identify how they impact on the performance of MFIs. 3.9.1 Board Size Evidence from the literature indicates a mixed result when it comes to the relationship between board size and firm performance. There are researchers who contend that a larger board increases firm performance because a larger board is able to provide better monitoring and advice and also are able to foster a stronger linkage with the external environment of the firm (Adams & Mehran, 2003; Coles et al., 2008; Hillman & Dalziel, 2003; Klein, 1998; Pfeffer, 1972). However, a contrary assertion has been posited by Yermack (1996), where a study of USA firms reported of an inverse relationship between board size and firm performance. There is yet another study by Hermalin & Weisbach (1991) which could not establish any relationship between board size and firm performance. Given the positive relationship between board size and MFIs performance predicted by resource dependency theory, this study proposed the following hypothesis: 32 University of Ghana http://ugspace.ug.edu.gh H1O: There is a positive relationship between board size and the financial Performance of MFIs. 3.9.2 Board Composition Board composition refers to representation of executive and non-executive directors on the board. The independence of a board is dependent on the number of non-executive directors. Pearce & Zehra (1992) report a positive association between non-executive directors dominated board and performance of firms. However, empirical studies on board composition and its relationship with company financial performance by Bhagat & Bolton (2005), Weir & Laing (2001), and Daily & Dalton (1992) found no association between the two variables. Board composition is negatively related to company performance as reported by Hutchinson & Gul (2004) in a study of 437 listed companies on Australian Stock Exchange between 1998 and 1999. The study made the following hypothesis: H2O: There is a positive and significant relationship between MFIs’ board composition and financial performance. 3.9.3 Board Diversity Studies on board structure have established that a more diverse board membership increases discussion, novel ideas and group performance (Van Knippenberg, De Dreu, & Homan, 2004). One of the most contested diversity concern on a board is gender and is highly considered when selecting board of directors (Kang et al., 2007). There has been a lot of emphasis on the need for gender diversity in the board room. When there are more women on boards it has been found to bring a different perspective to decision making that may improve performance, as they have better understanding of the needs of customers (Brennan & McCafferty, 1997; Campbell & Mínguez-Vera, 2008). Adams and Ferreira (2004) concluded that the relationship between female on boards and corporate performance appears more complex than what previous findings have asserted. They found 33 University of Ghana http://ugspace.ug.edu.gh that female on boards positively affect performance in firms that have weak governance and were measured by firm’s abilities to resist takeovers. Whilst in firms with strong governance, however, increasing female quotas in the boardroom lead to a reduction in shareholder value. The study therefore made the following hypothesis: H3O: There is a positive and significant relationship between MFIs’ board diversity and financial performance. 3.9.4 CE O Duality Duality is where the positions of Chief Executive Officer and board chairperson are occupied by one person. This has been identified as one of the important practices in corporate governance. Ryan & Wiggins (2004) posit that in firms where CEOs are not the chairpersons of the board, the percentage of executive directors are also reduced, and the probability that the shareholders’ interest would be protected from agency problems would be high in firms where there are separate individuals controlling the firm and the board.  Other studies, such as that of Chen et al. (2006), have, however, reported of no relationship between CE O duality and performance. Pandya (2011) also found no relationship between the separation of CE O and chairman roles and performance of banks in terms of R OA and R OE. The study made the following hypothesis: H4O: There is a negative relationship between CEO duality and the financial performance of MFIs. 3.10 Model Specification In understanding and identifying the relationship between corporate governance variables and the performance of the microfinance institutions, the study used panel regression. The equation is derived as follows: 34 University of Ghana http://ugspace.ug.edu.gh Yi,t = β0 + β1Gi,t + β2Ci,t + ei,t Where, Yi,t - Denotes firm performance variables, that is, Tobin’s Q, and Return on Assets for firm i in time t. Gi,t - This is a vector of corporate governance variables, that is, Board size, CE O duality, board composition and board diversity firm i in time t. Ci,t - This represents the vector of control variables of firm size, ratio of fixed assets to total assets and debt structure of firm i in time t. 𝑒i,t = ƛi + 𝜀t + μi,t ƛi is a proxy for cross sectional heterogeneity 𝜀t is a proxy for time specific effect ᴪi,t is a proxy for random effect i = 1….25 ; t = 1……5 35 University of Ghana http://ugspace.ug.edu.gh CHAPTER FOUR ANALYSIS AND DISCUSSION OF RESULTS 4.1 Introduction This chapter has been used to present and analyze the data as well as discuss the results obtained. The comprehensive presentation of the data delivered the evidence for accepting or rejecting each hypothesis. 4.2 Descriptive Statistical Analysis Table 4.1 presents the results of the descriptive analysis test, detailing the minimum, maximum, mean values, standard deviation, Jarque-Bera and Kurtosis. Table 4.1: Descriptive Statistics of Variables Min Mean Std. Dev. Max. Jarque-Bera Kurtosis BSZ 5.0 7.45 1.69 11.0 36.72725 4.248571 BC OM 0.095 0.258 0.1128 0.41 21.27343 1.481221 BDIV 0.0 1.0 0.03 1 1.3200 1.3033 CDUA 0.0 0.28 0.471 1.0 45.22222 2.433333 T OB 0.130 0.682 0.436 1.566 8.184265 2.510295 R OA -0.75 0.211 0.189 0.78 24.55090 4.662505 FASTA 0.012 0.188 25.446 0.364 274641.4 190.9821 FMS 11 14.34 5.13 33 416.471 9.484385 DSTR 0.087 1.129 6.037 71.197 279706.2 174.3957 According to the results, the mean board size is about seven, implying that boards of MFIs in Ghana have a relatively moderate size. This is in line with the assertion made by Thrikawala (2016) that a minimum of seven is an ideal board size. The maximum number 36 University of Ghana http://ugspace.ug.edu.gh of board members is 11 and a standard deviation of 1.69 makes it explicit that boards of microfinance companies are similar in terms of sizes. As has been indicated by Ciecero et al. (2008) and Jensen (1993) that small board size has positive impact on firms, then it is a good omen that MFIs in Ghana have small board size since it would impact positively on their performance. In terms of board composition, the result indicates boards of MFIs are less independent since only 26% of the directors are appointed from outside the firms. It can also be seen that only 28% of the MFIs have boards where one person plays the dual role of chairman and CE O. Also, in respect to Gender diversity a mean value of 1.0 was observed, indicating that at least a female director was present on the MFIs boards. The implication is that opportunity for agency problems resulting from conflict of interest are highly minimised among MFIs in Ghana. According to the results, the mean ratio of Tobin’s Q is 0.682, implying that on the average a lot of the microfinance firms are not doing well at all. The suggestion here is that these firms are barely breaking even. The maximum Tobin’s Q indicating performance is shown to be 156% and the minimum as low as 13%. The Return on Assets (R OA) shows a wide variation between firms. The mean performance of MFIs relative to R OA is shown to be 21%, with the minimum being -75%, with the maximum being 78%. There is a high standard deviation of 0.189 between firms. Table 4.1 also shows result for the ratio of fixed assets to total assets. According to the results, most of the microfinance companies do not have their assets in fixed assets. There is a minimum of 0.013 and a maximum of 0.364, and mean of 0.188. With the standard deviation of 24.57, the implication is that most of these MFIs are widely dispersed in terms of their proportion of fixed assets composition of total assets. 37 University of Ghana http://ugspace.ug.edu.gh The results also indicate that most of the MFIs are relatively small in size with relation to their assets base and that most of the firms rely on debt in their capital structure to finance their assets. There is a mean of 1.129 for total debt to total assets of MFIs. In terms of distribution, the values of board composition, CE O duality and Tobin’s Q are shown to be normally distributed. This is based on the values indicating the Jarque-Bera and Kurtosis. The remaining variables however show a leptokurtic distribution. 4.3 Relationship Between Variables and Tobin’s Q (Regression Analysis) The results of the regression analysis test of the relationship between governance variables and Tobin’s Q has been presented in Table 4.2. The results depict mixed findings between the two sets of variables. Table 4.2: Independent Variables and Tobin’s Q Dependent Variable: T OB White Herteroskedasticity-Consistent Standard Errors and Covariance Variable Coefficient Std.Error t-statistic Prob. BSZ 0.088221 0.002927 26.81615 0.0000 BC OM -0.014846 0.110014 -0.136052 0.8006 BDIV 0.009317 0.002238 -1.275237 0.0000 CDUA -0.255750 0.045871 -6.471231 0.0000 L OG (FMS) -0.002754 0.002238 -1.075237 0.3867 FASTA 0.000142 3.68E-05 6.113696 0.0000 DSTR 0.009317 0.000836 12.29666 0.0000 C 0.075855 0.087156 0.942179 0.5064 Weighted Statistics R-squared 0.973357 Mean dependent var 1.059009 Adjusted R-squared 0.960071 S.D dependent var 0.934732 38 University of Ghana http://ugspace.ug.edu.gh S.E of regression 0.413370 Sum squared resid 19.03863 F-statistics 197.5375 Durbin-Watson stat 0.832216 Prob(F-statistic) 0.000000 4.3.1 Board Size The result as shown above in Table 4.2 showed that board sizes are positively and significantly related to the Tobin’s Q of MFIs. This means that performance of MFIs measured by Tobin’s Q increases as their board sizes increase. This result, however, showed that the larger the board size, the better the Tobin’s Q. This is in line with studies that make the assertion that larger board sizes enhance firm performance due to vast amount of expertise and knowledge these many board members bring to bear on the decisions of the firm. Again, not even very powerful CE Os can dominate a large board. Therefore, the larger the size of the board, the better the performance of microfinance firms. The size of the board is highly significant in explaining Tobin’s Q of MFIs in Ghana. This result is contrary to the findings obtained by Jensen (1993), Lipton & Lorsch (1992) and Yermack (1996). Their finding was that the larger the size of the board, the worse the Tobin’s Q. 4.3.2 Board Composition The result as shown above indicates that there is a negative relationship between board composition and Tobin’s Q of MFIs. This implies that the more independemt MFIs are, the less they perform in terms of Tobin’s Q. The implication is that more external board members have worse or negative effect on the performance of the firm. The suggestion has been made that boards that have been expanded unnecessarily due to other reason apart from expertise and depth of knowledge often results in too many outside members leading to poor performance (Agrawal & Knoeber, 1996). It should be indicated however that, the 39 University of Ghana http://ugspace.ug.edu.gh negative relationship is not statistically significant. This result confirmed the findings of Weir & Laing (2001) and Bhagat & Black (1998). 4.3.3 Board Diversity With respect to the relationship between gender diversity of MFIs on Tobin’s Q, a positive significant relationship was observed. This imply that the number of women on MFI boards positively and significantly affect performance. This finding is also corroborated by (Shafique, Idress & Yousaf, 2014). They argue that investors do not penalise firms which increase their female board membership and that greater gender diversity may generate economic gains. 4.3.4 CEO Duality The result further establishes the case that CEO duality (two-in-one CE O/Chairman role) has a negative relationship with Tobin’s Q, implying that in cases the CE O performs the role as chairman of the board, Tobin’s Q of the firm decreases. This result is in line with findings of Millstein & Katsh (2003), who assert that the independence of the board is restricted when there is duality. And also, the board’s ability to perform their oversight and governance roles is also reduced. There is the propensity for conflict of interest and agency problems to increase under this kind of one-tier board structure (Berg & Smith, 1978). Other studies that support the separation of the two roles is that of Sandra et al. (2003), Lam & Lee (2008), Fama & Jensen (1983) Ryan & Wiggins (2004), Heenetigala (2011), and Heenetigala (2011). 4.3.5 Control Variables The result also shows that firm size (FMS) is negatively impacting on Tobin’s Q even though it is not statistically significant. This is contrary to what this study expected. The 40 University of Ghana http://ugspace.ug.edu.gh reason could be that no matter the size of a firm if it is not put to efficient use, it would not in any way enhance performance. What this result implies is that microfinance firms in Ghana do not utilise their sizes to improve performance.  On the other hand, result obtained for Asset structure (FASTA) gives a suggestion of the fact that most MFIs in Ghana have more current assets on their asset portfolio. The reason is that the more fixed asset there are, the better the performance of Tobin’s Q. This is a confirmation of values obtained for asset structure in the descriptive statistics analysis, where the asset structure was found to be widely dispersed, with only a few of the firms having a higher proportion of fixed assets. In terms of debt structure, the results of the regression analysis indicate that firms with higher proportion of debt in their asset portfolio perform better in terms of Tobin’s Q. The table shows a positive and significant coefficient indicating that an increase in firms’ debt position increases performance. Researchers who have arrived at the same conclusion that profitable firms use more debts include Halock & James (2002), Peterson & Rajan (1994) and Lewellen (1995). 4.4 Relationship between Variables and Return on Assets (R OA) (Regression Analysis) Another way of measuring firm performance is the use of the Return on Assets which is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources. It is commonly defined as net income divided by total assets. The results of the regression analysis showing the relationship between the independent variables and R OA is presented in Table 4.3. 41 University of Ghana http://ugspace.ug.edu.gh Table 4.3 Independent Variables and R OA Dependent Variable: R OA White Herteroskedasticity-Consistent Standard Errors and Covariance Variable Coefficient Std.Error t-statistic Prob. BSZ 0.050104 0.005462 9.584524 0.0000 BC OM -0.061255 0.106587 -0.573566 0.5014 BDIV 0.029332 0.022238 -1.275237 0 .0001 CDUA -0.002780 0.023192 -0.160330 0.0449 L OG (FMS) -0.000532 0.003725 -0.163752 0.8790 FASTA 8.030000 7.34001 1.488720 0.1633 DSTR -8.03000 0.000305 -0.4346810 0.7315 C -0.108760 0.071510 -1.650518 0.0965 Weighted Statistics R-squared 0.178621 Mean dependent var 0.329453 Adjusted R-squared 0.151982 S.D dependent var 0.198785 S.E of regression 0.183978 Sum squared resid 7.251852 F-statistics 6.705172 Durbin-Watson stat 1.172837 Prob(F-statistic) 0.000002 Results of the regression analysis show that all the independent variables, except board size, board diversity and CE O duality, are statistically not significant in how they affect performance proxied by R OA. 4.4.1 Board Size The study found that the size of the board is positively related to R OA implying that boards should have large board sizes, just as it was obtained under the Tobin’s Q. This means that performance of MFIs measured by ROA increases as their board sizes increase. This finding is in variance with studies by Jensen (1993), Lipton & Lorsch (1992) and 42 University of Ghana http://ugspace.ug.edu.gh Eisenberg et al. (1998). Does this result indicate that the sizes of boards can be increased ad-infinitum? This is obviously not the case. 4.4.2 Board Composition The result also shows board composition to be having a negative impact on the profitability of firms. This is a confirmation of what was obtained for the Tobin’s Q. The implication of this result is that the board’s independence is not a prerequisite for firm performance. This view is contrary to findings put forth by Fama & Jensen (1983), Baysinger & Butler (1985), and Baysinger & Hoskinsson (1990). Baums (1994) for instance makes the point that a board can be effective when there is mixture of both inside and outside directors. However, what determines the optimal board composition has not been widely studied (Hermalin & Weisbach (2002). 4.4.3 Board Diversity Regarding the relationship between board diversity of MFIs on ROA, a positive significant relation is observed. This implies that the number of women on MFIs boards positively and significantly affect performance. This finding is also corroborated by (Shafique, Idress & Yousaf, 2014). They argue that investors do not penalise firms which increase their female board membership and that greater gender diversity may generate economic gains. 4.4.4 CEO Duality  On the variable of CE O duality, the result shows a negative impact of CE O doubling as board chairman on firm performance. This result is in consonance with the popular assertion that this kind of duality creates conflict of interest and increases agency cost (Berg & Smith, 1978; Bickley & Coles, 1997). This happens when decision management and decision control is concentrated in one individual which eventually reduces the board’s effectiveness and efficiency in the monitoring of management. This according to Fama & 43 University of Ghana http://ugspace.ug.edu.gh Jensen (1983) poses negative impact on firm profitability. The implication of the result for this variable is that the positions of CE O and chairman of the board must be separated in order for an MFI to increase performance. 4.4.5 Control Variables Both the firm size and debt structure exhibit a negative and insignificant impact on R OA. However, asset structure shows a positive impact on firm performance. They do not show a significant impact in determining the performance of MFIs’ profitability using R OA as proxy. The results obtained for the three variables go contrary to the study’s expectation. 44 University of Ghana http://ugspace.ug.edu.gh CHAPTER FIVE SUMMARY OF FINDINGS, C ONCLUSI ON AND REC OMMENDATI ONS 5.1 Introduction This chapter summarizes the findings of the study, draw the conclusion of the study as well propose recommendations for future research. 5.2 Summary of Findings Based on the results of the analysis, the following were the findings from the discussion of the results. After an extensive review of literature, the study identified board size, CE O duality, board diversity and board composition to be the dominant corporate governance characteritics of microfinance firms in Ghana. It was found that board sizes of microfinance companies in Ghana were relatively moderate and that there were a lot of similarities among MFIs in terms of board sizes. It was also found that boards of microfinance companies were less independent since majority of the directors were not outsiders. Another finding was that only few of the CE Os doubled as board chairpersons. Using the Tobin’s Q as a proxy for performance, the study identified that most of the MFIs were not doing well. A very wide variation was identifed among MFIs using R OA as a proxy for firm performance. 45 University of Ghana http://ugspace.ug.edu.gh In terms of assets composition, the study found that most of these MFIs are widely dispersed in terms of their proportion of fixed assets composition of total assets. The asset base of many of the MFIs was found to be relatively small. In terms of the effect of corporate governance characteristics on Tobin’s Q, the study found that board size had positive impact on Tobin’s Q. In terms of return on assets (R OA), the study again found a positive impact of board size on R OA. Therefore, the null hypothesis that “there is a positive relationship between board size and the financial Performance of MFIs” has been confirmed.  On the effect of CE O duality on Tobin’s Q, the study found a negative and significant impact of CE O duality on Tobin’s Q, indicating that when the CE O doubles as board chair, it impacts negatively on firm performance. There was also a negative and significant impact of CE O duality on R OA. Therefore, the null hypothesis that “there is a negative relationship between CEO duality and the financial performance of MFIs” has been confirmed. For board composition, the study found that there was a negative impact of board composition on Tobin’s Q. The same negative impact was found on R OA, implying that the presence of more outside directors does impact on the profitability of firms. Therefore the null hypothesis that “there is a positive and significant relationship between MFIs’ board composition and financial performace” has been rejected in favour of the alternate hypothesis. The control variables were firm size, asset structure and debt structure, the study found firm size to be impacting negatively on Tobin’s Q. Asset structure impacted positively on Tobin’s Q, and there was also a positive impact of debt structure on Tobin’s Q. 46 University of Ghana http://ugspace.ug.edu.gh With regards to the effect of board diversity on MFIs performance, the study found a positive significant effect of board diversity on Tobin’s Q. The same positive significant effect was found on ROA, signalling that the number of women on MFIs boards positively and significantly impact performance. Therefore, the null hypothesis that “there is a positive and significant relationship between MFIs’ board diversity and financial performance” has been confirmed. 5.2 Conclusions The purpose of this study was to examine the effect of some corporate governance characteristics on the performance of microfinance institutions (MFIs) in Ghana. For some time now, firms have come to the realisation of how good governance promotes higher returns and consequently improving on the level of confidence of these firms. It has also been identified that the nature and characteristics of corporate governance structures does have a strong effect on both internal and external factors that seek to affect the performance of the firm. The general objective of the study was to examine the relationship between corporate governance and performance of the microfinance industry in Ghana. However, the specific objectives were to identify the key corporate governance components within the microfinance sector, analyse the effect of recognised corporate governance practices on Tobin’s Q of MFIs, and also to analyse the effect of recognised corporate governance practices on R OA of MFIs. The corporate governance characteristics identified were board size, board composition, board diversity and CEO duality. The study found that in Ghana the size of MFIs boards were moderate and that there is a positive and significant relationship between board size and performance of MFIs. This suggests that MFIs in Ghana should utilise this strength by optimally expanding their boards to bring on board people with expertise and experience to enhance performance. 47 University of Ghana http://ugspace.ug.edu.gh The study also found a negative insignificant relationship between the composition of MFIs boards and performance, which implies that the more MFIs are independent, the less they perform. However, because this relationship is insignificant it implies that MFIs should not really pay attention to the independence of their boards so far as performance is concerned. The study also found that a positive significant relationship exists between board diversity and performance, suggesting that the more women on the boards of MFIs, the higher the performance of MFIs. This presents an opportunity for MFIs to seize by increasing their performance through higher representation of women on their boards. Again, the study found a negative significant relationship between CEO duality and MFIs performance. This suggests that one person holding the positions of CEO and board chairperson represents a major weakness in MFIs as this practice reduces performance. Furthermore, the study found that most of the MFIs in Ghana are relatively small in size with relation to their assets base and that most of the firms rely on debt in their capital structure to finance their assets. The study also found a positive significant relationship between the debt structure of MFIs and Tobin’s Q, but found a negative insignificant relationship between debt structure and ROA. This suggests that the use of debts presents an opportunity that MFIs could capitalize on to enhance performance. Lastly, the study found that most MFIs in Ghana have few fixed assets on their asset portfolio, and that there is a positive relationship between fixed assets and MFIs performance. This suggests that there is an opportunity for MFIs to enhance performance by increasing their fixed assets on their assets portfolio. The study found mixed results with regards to corporate governance characteristics and the performance of MFIs in Ghana, but it is undoubtedly clear that corporate governance structures have impact on the performance of MFIs in Ghana. 48 University of Ghana http://ugspace.ug.edu.gh 5.4 Recommendations Based on the research results and the implication for the development of microfinance sector in Ghana, the study recommends the following: 1. A comprehensive and detailed study that considers a broader set of corporate governance variables as well as microeconomic and legal variables could be undertaken to establish a relationship between both the internal and external factors that influence MFI performance. 2. 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