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Archives of Business Research – Vol. 12, No. 10
Publication Date: October 25, 2024
DOI:10.14738/abr.1210.17705.
Namagwa, S. W., Nyamute, W., & Okiro, K. (2024). Corporate Governance, Industry Regulation and Efficiency of Retirement Benefit
Schemes in Kenya. Archives of Business Research, 12(10). 137-152.
Services for Science and Education – United Kingdom
Corporate Governance, Industry Regulation and Efficiency of
Retirement Benefit Schemes in Kenya
Sylvester Willys Namagwa
Department of Finance and Accounting,
Faculty of Business and Management Science,
University of Nairobi, Kenya
Winnie Nyamute
Department of Finance and Accounting,
Faculty of Business and Management Science,
University of Nairobi, Kenya
Kennedy Okiro
Department of Finance and Accounting,
Faculty of Business and Management Science,
University of Nairobi, Kenya
ABSTRACT
The significance of retirement benefits arrangements has emerged in the wake of
the waning traditional methods of caring for the elderly and the expected surge in
the aging population, especially in developing economies. Despite the key role that
retirement benefit arrangements play, there has been limited research on how
corporate governance and industry regulation influence their efficiency. This study
sets out to investigate the relationships among corporate governance, industry
regulation and efficiency of retirement benefit schemes in Kenya. The study is
grounded in several theoretical frameworks, including agency theory, stewardship
theory, and financial distress theory. The study employs a quantitative research
design, utilizing panel regression analysis to test the hypotheses. Data was collected
from 896 observations across 128 retirement benefit schemes in Kenya, covering a
seven-year period from 2015 to 2021. The results reveal that employee
representatives on the board significantly and positively influence the efficiency of
these schemes. Conversely, independent board members are found to have a
negative effect on efficiency, suggesting potential challenges such as conflicts or
slower decision-making processes. The study concludes that while corporate
governance and industry regulation play significant roles in influencing the
efficiency of retirement benefit schemes, their effects are interdependent and
context specific. This study contributes to agency theory by providing empirical
evidence that highlights the complexities of board composition in aligning the
interests of managers and stakeholders within retirement benefit value-chain. The
study reflects the importance of stakeholder-inclusive governance, particularly
employee representation, as a means of aligning interests and enhancing
organizational efficiency.
Keywords: Corporate governance, Efficiency, Fund managers, Industry regulation,
Retirement benefits schemes.
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Archives of Business Research (ABR) Vol. 12, Issue 10, October-2024
Services for Science and Education – United Kingdom
INTRODUCTION
Background
Industry regulation is a system that prescribes compliance with requirements applicable to
stakeholders in a given industry for purposes of safeguarding the interests of the very
stakeholders. Industry regulation streamlines the administration of retirement benefit
schemes through the payment of benefits, asset valuation, financial reporting, and investment
guidelines. Regulation provides some flexibility in allowing retirement benefit schemes to set
their own governance rules in a Trust Deed with a caveat that they do not prejudice the
interests of their members. In this manner, they reinforce corporate governance by ensuring
that firms commit to universally recognized behaviour while at the same time allowing
stakeholders to make meaningful scrutiny of the firm’s actions, its economic fundamentals, and
any other information useful to their business. An effective regulation model should anticipate
turbulence that comes with financial crises or disruptive technology as a form of risk
management, indeed Tricker [16] holds that rigid regulation regimes deny firms the flexibility
to accommodate the changing market environment which can easily result into opportunity
costs. Drahos [5] observes that transparency as a regulatory requirement helps in bolstering
risk management regimes and efficiency, as operations of the firm are opened up for public
scrutiny and eventual market response.
Industry regulation ensures stability, order, and predictability of the business, thus building
confidence among stakeholders to freely entrust their assets to the industry. It creates
mechanisms to level-out market imperfections, discourage moral hazard, eliminate consumer
myopia, and encourage fair competition. In this way, it reinforces corporate risk management
such that schemes enjoying good corporate governance would prioritize risk mitigation to
comply with regulatory requirements. Trustees in the course of their fiduciary duties carefully
select consultants based on the scheme’s risk management framework and in compliance with
the guidelines of the regulator, thus, avoiding the costs of non-compliance. This interplay shows
the moderating effects of industry regulation to the relationship between corporate governance
and efficiency of retirement benefits schemes. The trend of corporate governance among
retirement benefit schemes determines the approach taken by the regulator to supervise them.
This means that well governed schemes would have fewer compliance inspections from the
regulator and therefore concentrate on value adding business activities [8].
Efficiency would be an optimization solution, resulting from value adding activities, consisting
of favourable firm activities that draw the highest value of human, economic, social, and
environmental sustainability from a given set of inputs. A firm achieves efficiency when it keeps
its administrative costs at the lowest level possible while maximising its returns. This
arrangement guides investors in appraising opportunities across firms such that the most
efficient firms attract better prospects than the less efficient ones would. According to Shabbir
et al. [13], efficiency is an important predictor of productive performance for firms and has a
more realistic approach to measuring performance of a firm since its ratios capture the effect
of unproductive decisions that singular financial ratios ignore. A firm is an assemblage of
contracts among factors of production within which every factor has its own interests and thus
runs to meet the relevant marginal conditions to maximize profits [7]. Good corporate
governance with regulatory initiatives reduce agency costs to promote firm efficiency [17].
Retirement benefit schemes need to be efficient to guarantee better returns to their members’