Abstract
The structure of the board of directors, as an integral part of a well-organized corporate governance mechanism, plays a crucial role in monitoring and controlling the firm’s executives, as well as improving firm performance. The study investigates whether certain board characteristics affect firm performance in a developing market context. The study uses a panel data set of 24 microfinance institutions determined by a purposive sampling technique. A fixed effects regression model was performed to explain the proposed relationships. Dynamic panel data using the generalized method of moments (GMM) model was subsequently used to address unobservable heterogeneity and endogeneity problems. The findings exhibit that a larger board size and the presence of independent directors on the board lead to enhanced firm performance. The findings also show that board meeting frequency has a significant negative relationship with firm performance. Again, the presence of females on the board of directors is not effective in the context of Ethiopian microfinance institutions, as we found board gender diversity does not significantly correlate with firm performance. Moreover, the results indicate that firm growth has a significant positive impact on firm performance, while firm age and leverage do not affect firm performance. Given the overall importance of corporate governance attributes, this study enables decision-makers and regulatory authorities to redefine the structure of the board of directors so that firms promote their board of directors’ effectiveness and, in turn, enhance firm performance.
Introduction
The separation of ownership and management in today’s widely held companies creates a competing interest among shareholders and management, which has prompted the development of numerous concepts to minimize the costs of such conflicts (Pavić Kramarić et al., 2018). As per the author, corporate governance is one of these suggested techniques. A generally agreed definition of corporate governance is the mechanism by which companies are directed and managed (Cadbury, 1992). This definition focuses on a board of directors’ roles in effectively governing the firm and its interactions with its owners and other interested parties. Again, corporate governance is concerned with how suppliers of capital guarantee that their investment will provide a return. Therefore, the primary concern of the corporate board is to properly monitor and exert control over managers to guarantee that they behave in the best interests of owners and other interested parties of the company (Banik & Bhaumik, 2010). Besides, the board of directors, as an essential mechanism of corporate governance, establishes the arrangements by which the firm’s objectives are set, along with the ways in which they will be achieved and performance will be determined (Pucheta-Martínez & Gallego-Álvarez, 2020).
The shareholders hire the agents, who give them the power to govern the business and maximize the shareholders’ return. However, agents may primarily focus on realizing their own benefits at the cost of owners’ interests (Wakaisuka-Isingoma et al., 2016). Consequently, when ownership and management of a company are separated, owners lose their ability to control managerial decisions effectively, and the well-known principal-agent problem is likely to arise (Jensen & Meckling, 1976). Again, Fama and Jensen (1983) stated that when principals and agents have divergent interests, agents are more likely to engage in insider dealings when there are no systems to monitor and ratify managerial decisions effectively. Moreover, Kyereboah-Coleman (2008) explains that the separation of management and ownership in contemporary companies causes agency problems because agents follow a set of goals separate from the owners, which is one of the fundamental rationales for corporate boards, as an essential component of corporate governance mechanisms.
The board of directors is responsible for formulating policy, offering strategic direction and making sound decisions on important matters pertaining to the organization (Sari & Tjoe, 2017). Similarly, the board of directors bears the responsibility of monitoring the agents and making sure that the appropriate controls over the operations of their firms are established and operational (Napitupulu et al., 2020). Moreover, proponents of agency theory contend that boards of directors should be concerned with balancing the interests of managers and shareholders and ensuring that companies are operated in the best interests of shareholders (Arora & Bodhanwala, 2018).
On the one hand, a well-defined corporate board structure provides a reasonable foundation for balancing ownership and control (Sanda et al., 2010), allowing for strong monitoring that minimizes conflicts among stakeholders (Doku et al., 2023). This, in turn, minimizes agency costs and protects shareholder interests, ultimately leading to improved firm performance (Banik & Chatterjee, 2021; Jensen & Meckling, 1976). Similarly, a workable board structure can establish suitable guidelines that acknowledge and safeguard the rights, connections and interests of all stakeholders in the corporation (Maher & Andersson, 1999). This structure fosters an environment of trust, transparency and accountability, which is crucial for promoting investment, upholding financial stability and maintaining the integrity of the business (Boshnak et al., 2023; OECD, 2016). Additionally, according to viewpoints of resource dependency, the board of directors is viewed as a nexus between the business and vital external resources, which are necessary to function well and can result in better firm performance (Goel & Sharma, 2020). Therefore, improving effective board practices is a required ingredient for enhancing firm performance and contributing to the nation’s overall economic growth (Fariha et al., 2022).
On the other hand, the existing literature highlights that the absence of effective board characteristics in corporate governance frameworks is one of the most obvious reasons for the massive corporate collapse in the 1990s and 2000s worldwide, such as in the USA, Europe and Asia (Otman, 2014). Moreover, failure to establish and enforce sound corporate governance structures might be a tangible threat to maximizing firm performance (Farhat, 2014).
As a result, this has become a priority agenda for researchers in many countries in recent years. Accordingly, researchers have evidenced how board characteristics, among others, affect firm performance (Berhe, 2023; Borlea et al., 2017; Fariha et al., 2022; Hordofa, 2023; Murtaza et al., 2021; Nepal & Deb, 2022; Nguyen & Huynh, 2023; Pucheta-Martínez & Gallego-Álvarez, 2020). However, the majority of research has been conducted in the context of developed countries, and their findings remain inconsistent. Again, Heenetigala (2011) documented that the results of previous research done in developed countries cannot be applied equally well in developing countries. This is mainly due to variations in how corporate governance is organized among countries based on their political, economic, legal and institutional settings.
More specifically, to the best of the researcher’s knowledge in Ethiopia, prior studies on the issue under study were conducted by Zelalem et al. (2022), taking data from insurance companies, and by Berhe (2023) and Hordofa (2023), taking data from commercial banks. However, these studies exhibit inconsistent findings; for example, Zelalem et al. (2022) found that the size of the board and performance have a significant positive correlation, while Berhe (2023) revealed that the size of the board has a significant negative association with performance. However, Hordofa (2023) does not find any significant correlation between board size and performance. The authors recommend that future empirical investigations consider data from other sectors, such as microfinance institutions (MFIs), non-financial companies and cooperative unions. This implies that there is a huge gap in the corporate governance-firm performance literature in Ethiopia. Therefore, the researchers are motivated to address this gap by empirically examining how board characteristics (precisely, board size, board meeting frequency, board independence and board gender diversity) affect firm performance using data from Ethiopian MFIs.
Consequently, the current study hopes to add the following contributions to the existing literature: First, this empirical study investigates the links between board characteristics and firm performance attributes in developing countries, particularly Ethiopia, which are quite limited. Hence, this study broadens the present body of knowledge by providing empirical evidence on the issue under study from developing countries’ perspectives, and this highlights the importance of the board characteristics-performance nexus in comprehending and investigating different contexts. Second, the current study addresses the endogeneity issues in panel data set analysis by employing a robust regression model, the generalized method of moments (GMM), to produce reliable and accurate estimation findings among board structure-performance attributes (Arellano & Bond, 1991). Third, within a developing country context, the current study contributes to the body of knowledge by adopting multiple theoretical frameworks to provide a holistic understanding of the nexus between board characteristics and firm performance. Finally, the findings of this study provide empirical evidence concerning the effects of the structure of the board of directors and offer suggestions that regulatory bodies, shareholders, executives and other stakeholders can consider when evaluating and revising corporate governance policies.
The remainder of the article is arranged as follows: Section 2 provides the existing literature review. Section 3 presents research materials and methods. Section 4 presents and discusses the results of the study. Section 5 provides the conclusion.
Literature Review
A theoretical framework is required to explain the nexus between corporate governance and performance attributes. Most of the previous empirical studies regarding the issue had adopted a single theoretical framework-predominantly agency theory and often reported inconsistent findings (Akram & Abrar Ul Haq, 2022; Jensen & Meckling, 1976; Pucheta-Martínez & Gallego-Álvarez, 2020). Again, Hung (1998) and Hordofa (2023) state that a single theoretical perspective cannot fully enable a comprehensive examination of corporate governance concerns because each theory has some limitations. For example, the provision of resources by the board is ignored or not explained in agency theory (Akram et al., 2020).
In this regard, a systematic literature review conducted by Nguyen et al. (2020) and Lu et al. (2022) indicated that adopting an integrated multiple theoretical perspective provides a profound understanding of the complex correlation between corporate governance attributes and firm performance. Moreover, the existing literature makes evident that, considering the limitations of each theory, a multiple theoretical approach has the potential to provide holistic insight. Therefore, the current study has adopted multiple theoretical frameworks to explain and understand the nexus between board characteristics and firm performance. Specifically, this study is grounded in the perspectives of agency, resource dependence and stewardship theories.
Agency theory occurs when ownership is separated from management since the beginning of publicly owned companies, in which the principals assign authority to agents to accomplish certain tasks in the hopes that the agents will work in the best interests of the owners (Eisenhardt, 1989). However, agents are mainly focused on the advancement of their personal benefits. The theory’s fundamental premise is that principals and agents are reasonable individuals who strive to increase their own utility, and thereby, there is solid evidence to suggest that the agent will not always operate in the best interests of shareholders (Jensen & Meckling, 1976). In the same vein, the underlying assumption of this theory is that conflicts of interest arise in business interactions because agents’ and owners’ interests do not align (Fama, 1980).
Agency theory again concentrates on identifying the most effective contract regulating principal–agent interactions and characterizing the governance procedures that address the agency problem (Eisenhardt, 1989). Besides, this theory seeks to minimize the agency cost that principals incur since interest divergence by enforcing internal control arrangements that maintain the manager’s self-interested conduct (Davis et al., 1997). Therefore, Fama and Jensen (1983) documented that the board provides a system of information that owners of widely held corporations can utilize to maintain the opportunism of agents. Similarly, proponents of this theory argued that outside directors ought to be a part of corporate boards since they are free from conflicts of interest and less susceptible to the influence of corporate insiders (Jensen, 1993). Furthermore, agency viewpoints claim that having small boards enhances firm performance since they make it easier to implement control and monitoring measures (Fama, 1980).
On the other hand, stewardship theory assumes that managers are stewards whose goals are not limited by their own interests but rather aligned with those of their principals (Davis et al., 1997). According to stewardship perspectives, stewards act in a communal and pro-organizational way since they want to achieve organizational objectives (Choi et al., 2021). As stated by the authors, stewards put the organization’s and the principals’ interests ahead of their own, even when their interests conflict with the principals. Again, Davis et al. (1997) argued that a steward maximizes the steward’s utility functions by operating the business to safeguard and optimize the owners’ wealth. Besides, stewardship theorists believe that when stewards’ interests coincide with their principals’ best interests, agency costs will be reduced, and ultimately, the goals of both parties will be achieved (Zelalem et al., 2022).
Additionally, advocates of the stewardship perspective argue that the theory substitutes the agency theory’s reference to a lack of trust in authority and a propensity for moral activity (Kyereboah-Coleman, 2008). The emphasis of this theory, therefore, is on organizational arrangements that enable and give executives and directors more power than those that monitor and regulate. Consistent with the extant literature, this theory advocates that executive directors constitute a substantial portion of the board of the company and have been proposed as beneficial governance characteristics that improve the performance of the company (Alsahafi, 2017). As stated by the author, this is because executive directors are more knowledgeable about the business and can thus make better and more informed decisions that will boost the firm’s performance.
Resource dependency theory mainly focuses on the board’s function in granting the organization the necessary resources (Abdullah & Valentine, 2009). Proponents of this theory argue that it encourages the nomination of many board members due to their various opportunities to gather information and build relationships with the company’s suppliers in various ways, and it brings a bundle of capabilities. The theory further pushes the appointment of experts to a company’s board and highlights the need for independent directors because they can provide connections and best practices from other companies (Kiptoo et al., 2021).
Resource dependency theorists believe that a firm’s competitive advantage stems from possessing resources that are scarce or difficult for competitors to acquire (Fulgence, 2021). This scarcity requires organizations to work hard to mitigate the unpredictable impacts of outside factors to guarantee that resources are accessible for their success and survival (Goel & Sharma, 2020). As a result, boards are viewed as a nexus between the business and the vital external resources necessary to function well. Similarly, Temba et al. (2023) argued that boards connect the company with other organizations so that the company can have access to information expertise, the backing of significant groups and the establishment of the company’s legitimacy. Therefore, consistent with the existing literature, the theory promotes the appointment of non-executive directors and sizeable boards to include individuals from different backgrounds and experiences (Rutledge et al., 2016).
Previous studies have investigated the relationship between corporate board characteristics and firm performance; however, the overall results are mixed. Pucheta-Martínez and Gallego-Álvarez (2020) researched the relationship between board characteristics and firm performance using a sample of 10,314 firms from 34 countries. The authors, among others, documented that board size, board independence and board gender diversity are positively associated with firm performance. Arora and Bodhanwala (2018) also evidenced that, in the Indian context, the corporate governance index has a positive correlation with firm performance. Again, Naciti (2019), among others, indicated that the structure of the board of directors influences the profitability of firms. Moreover, a well-organized corporate governance mechanism reduces agency problems, improves stakeholder interest (Murtaza et al., 2021), and enhances firms’ performance (Napitupulu et al., 2020). Recent research by Zelalem et al. (2022) in the Ethiopian context also concludes that all corporate governance attributes have a significant relationship with insurance companies’ performance.
Board size is one of the most important characteristics of the corporate board. The existing empirical study indicates mixed findings regarding the relationship between the size of the board and firm performance. On the one hand, some studies argue that a large board size provides a wider spectrum of know-how for better decision-making, stronger monitoring and advising capacities, access to valuable external resources, and ultimately, improved firm performance (Al-Matari, 2019; Choi et al., 2021; Goel & Sharma, 2020; Murtaza et al., 2021; Napitupulu et al., 2020; Pucheta-Martínez & Gallego-Álvarez, 2020; Tjahjadi et al., 2021; Zelalem et al., 2022). Some researchers, on the other hand, argue that having too many directors makes it more challenging to reach an agreement and makes meaningful discussions of important topics less effective, resulting in free-rider problems between directors in their managerial supervision and thereby negatively affecting firm performance (Berhe, 2023; Gohar & Batool, 2015; Guney et al., 2020; Jensen, 1993; Pavić Kramarić et al., 2018; Shan & Xu, 2012). However, Sanda et al. (2010), Pamburai et al. (2015) and Hordofa (2023) all concluded that the size of the board does not affect corporate performance.
Board independence is another important board characteristic. Prior researchers documented that external boards are supposed to be independent of the company’s management, allowing them to effectively monitor executives and protect owners’ interests (Fama, 1980; Fama & Jensen, 1983; Jensen & Meckling, 1976). This, in turn, minimizes agency costs and ultimately enhances firm performance (Al-Matari, 2019; Arora & Bodhanwala, 2018; Berhe, 2023; Choi et al., 2021; Pucheta-Martínez & Gallego-Álvarez, 2020; Shu & Chiang, 2020). Some studies, on the other hand, believe that executive directors are better positioned to monitor top management since they are more knowledgeable about the company’s operations and can thus result in making better decisions and boosting firm performance than independent directors (Donaldson & Davis, 1997; Fariha et al., 2022; Muth & Donaldson, 1998; Naciti, 2019; Nepal & Deb, 2022). However, Pamburai et al. (2015), Borlea et al. (2017) and Murtaza et al. (2021) do not find any significant correlation between independent directors and firm performance.
The concern about gender diversity on boards has recently attracted increased attention from many stakeholders, with the introduction of policies to encourage the involvement of females on the boards (Dang et al., 2023). A systematic literature review conducted by Hossain et al. (2024) on the nexus between board gender diversity and firm performance is mixed. On the one hand, studies exhibit that firms with a female on their board may experience several advantages: the ability to take their boardroom duties more seriously (Adams & Ferreira, 2009), an increased favourable image of the organization and access to capital (Kılıç, 2016; Reguera-Alvarado et al., 2017), and a more cooperative decision-making strategy that produces informed decisions even when conflicting interests are involved (Post & Byron, 2015). These factors, in turn, can contribute to improved board effectiveness and, ultimately, enhanced firm performance (Abdullah et al., 2016; Berhe, 2023; Hordofa, 2023; Isidro & Sobral, 2015; Meah & Chaudhory, 2019; Naciti, 2019; Pucheta-Martínez & Gallego-Álvarez, 2020; Scholtz & Kieviet, 2017). On the other hand, some studies exhibit a negative association between board gender diversity and firm performance (Adams & Ferreira, 2009; Fariha et al., 2022; Pavić Kramarić et al., 2018). However, Gohar and Batool (2015), Sanan (2016) and Simionescu et al. (2021) do not observe any significant correlation between board gender diversity and firm performance.
The board meeting is a forum for board members to discuss critical issues and make crucial decisions for the firm’s advancement and growth (Eluyela et al., 2018). On the linkage between board meeting frequency and firm performance, the extant empirical research indicates mixed findings (Tanwer & Garg, 2023). On the one hand, studies show that boards of directors who meet more regularly have a greater capacity to properly monitor and advise executive officers, resulting in improved firm performance (Al-Daoud et al., 2016; Eluyela et al., 2018; Fariha et al., 2022; Vafeas, 1999; Yakob & Hasan, 2021).
However, other studies argue that directors’ most common concern is a lack of time to carry out their responsibilities, and too much of this limited time is devoted to management reports and other formalities in many boardrooms, leaving less time for meaningful discussions among board members (Jensen, 1993; Lipton & Lorsch, 1992). This can hinder effective oversight and thereby adversely affect firm performance (Al-Matari, 2019; Hanh et al., 2018; Kyereboah-Coleman, 2008; Pamburai et al., 2015). Furthermore, other empirical findings do not observe any significant linkage between board meeting frequency and firm performance (Shan & Xu, 2012; Usman, 2018).
Hence, upon review, the existing empirical literature exhibits mixed findings, which leaves room for future examinations of the issue under study, especially in the context of a developing economy like Ethiopia, where the corporate governance framework is still weak. These inconsistencies in findings may arise due to methodological differences adopted in explaining the relationship between corporate governance and firm performance attributes or considering different corporate governance and firm performance variables. Thus, the current study aims to explain the linkage between board characteristics and firm performance by taking data from Ethiopian MFIs using the GMM regression model.
Materials and Methods
Sample Selection and Data Sources
In Ethiopia, 39 MFIs were licensed by the National Bank of Ethiopia (NBE) at the end of 2020/2021. Out of the entire population, five MFIs were excluded from the study due to missing data, even though they have been in operation for more than ten years. Again, the fact that 10 of the 39 MFIs had fewer than 10 years of operation excluded them from the sample. As a result, out of the total population, the remaining 24 MFIs that met the criteria of complete required data for the study period were selected as the final sample.
The data regarding firm performance, leverage and growth were collected from MFI’s financial reports submitted to the NBE. This is because MFIs are required to submit their financial reports to the NBE in the form and manner set by the NBE, ensuring the comparability of the data (National Bank of Ethiopia, 2012). Again, the researchers obtained a consolidated financial report of the MFIs from the NBE for the study period. However, the data regarding board characteristics were extracted manually from the published annual reports of the respective MFI. This is because MFIs are not forced to submit board-related issues such as board meeting frequency and board independence, and thereby, we cannot obtain all board characteristics data from the NBE.
Measurement of Variables
The measurement of variables is adopted from the extant related research. This study employed accounting-based performance measures because market information regarding MFIs is unavailable due to the absence of a capital market in Ethiopia. Thus, accounting-based performance proxies of return on assets (ROA) were used because it is a standard and widely used performance measure in corporate governance literature (Meah & Chaudhory, 2019). Again, in the domain of MFIs, ROA gauges how well the MFI utilizes its resources to ensure shareholders, donors and other money providers that their money will be employed for the desired reasons.
Therefore, the current study employed ROA as the dependent variable, while board size, board independence, board meeting frequency and board gender diversity were used as independent variables. The MFIs’ ages, growth and leverage served as the control variables. According to the existing empirical review, Table 1 presents a summary of the operational definition, measurement of variables and hypotheses formulated for this study.
Operational Definition and Measurement of Variables.
Operational Definition and Measurement of Variables.
The researchers performed the Hausman model specification test to determine which model was the most appropriate for estimation. The Hausman test results indicated that the fixed effects estimation model was appropriate for this study. Again, certain assumptions must be met before empirically testing hypotheses. Accordingly, this study has identified the endogeneity problems as the value of the R-squared (R2 = 0.1513) exhibits that about 15.13% of the total change in the dependent variable (ROA) is explained by changes in the values of the explanatory variables, and the remaining change in the ROA is supposed to be explained by unobservable variables.
In this case, the GMM is recommended as an appropriate method compared to fixed and random effect methods since it has two fundamental advantages (Arellano & Bond, 1991). First, the GMM method enables us to overcome the potential problem of endogeneity of the explanatory variables by using instruments. Second, the method also allows us to accurately exploit unobservable heterogeneity. Ultimately, the GMM method provides consistent and efficient parameter estimates, producing stable and accurate results. Banik and Chatterjee (2021) also confirmed that the GMM model has the advantage of exploiting unobserved individual-specific effects and the time series variation in the data, thereby providing good control for the endogeneity of all the explanatory variables. Hence, this study employed the GMM method to estimate the nexus between variables considered to obtain precise and reliable results. Thus, the regression equation for this study is as follows:
Model:
where:
Descriptive Statistics
The results of this study’s descriptive statistics for the variables under consideration are presented in Table 2. The findings showed that Ethiopian MFIs realized an average ROA of 3.80%. This implies that the sector generates an estimated 3.8 cents for every dollar invested in an asset. The ROA minimum and maximum values of –127.8% and 71.7%, respectively, imply considerable gaps exist in MFI performance. The mean board members in the sampled MFIs was 7 (7.013), with a range of 5–11. This suggested that MFIs had complied with the NBE’s proclamation that share companies were to have 3–12 board members. Results also indicate that independent directors make up, on average, 90.0% of the board members of the sampled MFIs. This implies that outside directors make up most MFI boards of directors.
Summary Statistics.
Summary Statistics.
The results, again, evidence that boards of the selected MFIs meet 9.342 times on average per year, with a range of 5–17. This suggests that board meeting frequency varies across MFIs and over time. Besides, the results reveal that, on average, female directors make up 20.8% of the board of sampled MFIs in Ethiopia. This implies that in the sampled MFIs, women are underrepresented on the corporate boards. Moreover, the results showed that MFIs in Ethiopia are, on average, 16.25 years old. This suggests that MFIs operating in Ethiopia are quite young. Again, the results documented that MFIs in Ethiopia are, on average, 62.6% of their assets financed by debt. Finally, the average sales growth rate of sampled MFIs is 39.8% per year.
Table 3 presents the results of the correlation matrix for the variables. Results show a positive correlation between the number of boards of directors and MFI performance. The result suggests that a higher ROA correlates with an increase in the number of boards of directors. The result also indicates that board independence and ROA are negatively correlated. This implies that when the percentage of outside directors increases, ROA decreases. Besides, the correlation results show a positive association between ROA and board meeting frequency. This implies that having more board meetings leads to a higher ROA. Moreover, the correlation result reveals a positive correlation between the gender diversity of the board and ROA. This suggests that ROA increases as the percentage of female board members increases. Again, the correlation outcome reveals a positive correlation of ROA with MFI age, leverage and growth rate. Besides, the correlation matrix indicated that all the correlation coefficients are below the acceptable values of 0.8 for a further statistical test (Farrar & Glauber, 1967), which proves that this study is free from multicollinearity issues.
Correlation Matrix.
Correlation Matrix.
Table 4 depicts the regression results of random effects, fixed effects and GMM to show their differentiation and variations. However, the GMM regression model was performed to estimate the relationship between variables considered in this study, as dynamic panel data using GMM addresses endogeneity problems and gives precise and accurate results. Therefore, the researchers selected and used GMM regression model results for analysis.
Regression Results: Relationship between Board Characteristics and Return on Assets (ROA).
Regression Results: Relationship between Board Characteristics and Return on Assets (ROA).
The regression findings evidenced a positive and significant relationship between board size and the performance of MFIs measured by ROA in the Ethiopian context (Z-value = 0.039 < 5%). The result suggests that MFIs with larger boards outperform their counterparts with smaller board sizes. More specifically, taking other explanatory variables constant, the result shows that the signs of the coefficient (β1 = 0.086) indicated that a one-unit increase in board size would induce an 8.6% increase in ROA. The findings are consistent with the view that a larger board will improve a firm’s performance because it accommodates a variety of professionals with a variety of experiences and backgrounds to participate in informed decisions, and it is harder for a powerful leader to monitor (Zelalem et al., 2022). The results of the present study corroborate the results of Napitupulu et al. (2020), Choi et al. (2021), Murtaza et al. (2021), Tjahjadi et al. (2021) and Nguyen and Huynh (2023), who claim that larger boards sharing different skills will induce better interest alignment of agents with a corporate goal and higher supervision, thus improving performance.
Moreover, the results are confirmed with resource dependency theoretical viewpoints, which stipulate that corporations with large boards are better for their performance since they have a wider spectrum of know-how that helps them make better decisions and are associated with sufficient capacity to monitor and guide the company. Again, the study found that the sampled MFIs had an average board size of seven, confirming the view that an optimum number of board sizes proposed by agency theorists ranged from seven to eight (Jensen, 1993) and is limited to ten directors being the maximum (Lipton & Lorsch, 1992). This is because optimal board members can effectively communicate with one another and work well together towards the best interests of shareholders. The hypothesis that the size of the board of directors significantly and positively impacts the performance of MFIs in Ethiopia is thus accepted.
The results also found that board independence has a positive and significant correlation with ROA (Z-value = 0.018 < 5%). This implies that when outside directors serve on MFIs’ boards, performance improves. The findings are consistent with the studies of Arora and Bodhanwala (2018), Pucheta-Martínez and Gallego-Álvarez (2020), Shu and Chiang (2020), Choi et al. (2021) and Berhe (2023). This finding implies the view that independent directors exhibit a considerable firm performance enhancement because they are performing as per the interests of stakeholders, see the realization of the established objectives (Pucheta-Martínez & Gallego-Álvarez, 2020), and are expected to assess managers’ performance with greater objectivity and independence (Fariha et al., 2022).
Besides, the results are corroborated by agency theoretical perspectives, which stipulate that independent directors are supposed to be independent of the company’s management, allowing them to perform their duties more efficiently (Napitupulu et al., 2020), and are viewed as a way to improve board effectiveness through checks and balances, thereby resulting in minimized agency costs and enhanced firm performance (Fama, 1980; Jensen & Meckling, 1976). The descriptive statistics indicate that board independence makes up the majority of MFI boards of directors (90%), which confirms that the presence of independent directors is effective in the context of Ethiopian MFIs. Hence, the hypothesis that board independence has a positive and significant impact on the performance of MFIs in Ethiopia is accepted.
Moreover, the results documented that the frequency of board meetings significantly and negatively affects MFI performance (Z-value = 0.042 < 5%). Keeping other explanatory variables constant, the result implies that the signs of the coefficient (β3 = –0.040) show that a unit increase in board meeting frequency will induce a 4.0% decline in the ROA. The findings corroborate the results of Vafeas (1999), Bathula (2008), Kyereboah-Coleman (2008), Pamburai et al. (2015) and Hanh et al. (2018), who widely believed that holding board meetings more frequently increased the possibility of information overload, compromised resources and reduced decision-making efficiency.
Again, the findings are in agreement with the view that more frequent board meetings do not enhance shareholder protection because directors are only able to devote a limited amount of time to performing their roles (Lipton & Lorsch, 1992) and perform an excessive number of pointless regular tasks during board meetings in order to comply with corporate policies, which reduces the effectiveness of board responsibilities (Jensen, 1993). Besides, Vafeas (1999) revealed that frequent board meetings are not always advantageous because most of the limited time that external directors spend together is not meaningfully exchanging ideas among themselves or with management; rather, a large portion of the meeting time is devoted to routine activities. Therefore, the hypothesis that the frequency of board meetings has a positive and significant impact on MFI performance in Ethiopia is rejected.
Once again, the regression result indicated a positive correlation between the gender diversity of board members and MFI performance in Ethiopia. This suggests that having more female directors serve on an MFI’s board enhances performance. Indeed, a higher proportion of female directors may indicate that they take their boardroom responsibilities more seriously and use a cooperative decision-making approach that produces sound decisions even in situations where competing interests are present, both of which improve corporate governance and performance. Again, Adams and Ferreira (2009) found that boards with a higher percentage of female directors put more effort into monitoring functions and that female directors have better attendance records than their male counterparts.
However, it is important to note that the performance of MFIs in this study is not significantly impacted by the higher proportion of females on the board of directors. This might be because the female board members, who do not belong to the traditional ‘old boys club’, have chosen to assimilate into the old-style circles by hiding any unique characteristics resulting from the board members’ non-traditional background. The findings are corroborated by the study of Gohar and Batool (2015), Sanan (2016) and Simionescu et al. (2021), who showed that there is no significant association between board gender diversity and corporate performance. The hypothesis that increasing female representation on the board has a positive and significant impact on the performance of MFIs in Ethiopia is therefore rejected.
Finally, the findings regarding control variables find no evidence of a significant impact of firm age and leverage on MFIs’ performance. Among the control variables, firm growth has a positive and significant impact on MFIs’ performance. The study’s results confirm the results of Meah and Chaudhory (2019), which support the view that a firm’s growth improves its performance.
The purpose of this study is to examine the impact of board characteristics on the performance of MFIs in Ethiopia, as measured by ROA. The findings indicated that board size has a positive and significant impact on the performance of MFIs. The average board size of about seven in this study implies that MFIs in Ethiopia maintained the optimum board size recommended by Jensen (1993)—seven or eight and Lipton and Lorsch (1992)—limited to a maximum of ten directors (seven to nine). Therefore, MFIs operating in Ethiopia should keep their board-size positions since it can help improve their performance. Moreover, the findings evidenced, as expected, that the presence of highly independent directors improves the performance of MFIs. Accordingly, from the regression results of board size and independence, the researchers conclude that the number of outside directors should be kept to a maximum as the number of board members increases.
Furthermore, the presence of female directors is not effective in the context of Ethiopian MFIs, as the regression results found that board gender diversity has no significant relationship with the performance of MFIs. Again, the results showed that the frequency of board meetings negatively and significantly affects MFIs’ performance. This suggests that the performance of MFIs holding board meetings frequently is not superior to that of MFIs with fewer board meetings. Hence, MFIs should take fewer board meetings to ensure the boards’ functions of advice and oversight, thereby boosting their performance. Besides, the results indicate that MFIs’ performance was positively and significantly impacted by their growth rate. Finally, the results also find no evidence of a significant impact on firm age or leverage on MFI performance.
Hence, given the overall importance of corporate governance arrangements in the performance of MFIs, the findings of the study enable policymakers, boards and executives to critically scrutinize significant board characteristic variables affecting MFIs’ performance and take corrective actions accordingly. This suggestion implies that boards, managers, policymakers and other stakeholders should put in place workable policies and regulations to guarantee that firms adopt appropriate board characteristics of corporate governance frameworks to improve firm performance.
Despite the contribution, the findings of the study exhibit some limitations that could be the motives for future research. First, the study suggests that future studies consider data from different industries to shed light on their comparability. Again, the study is limited to only board characteristic governance variables. Therefore, the study suggests that other corporate governance variables that may affect firm performance, such as ownership structure, capital adequacy requirements and financial policies, should be considered in future research for a more enhanced result.
Footnotes
Authors’ Contributions
Mohammed Adem: Contributed to the conception, study design, data acquisition, analysis and interpretation, drafted and submitted the article for publication in Global Business Review journal, revised all versions of the article during all stages of the publication, agreed to take responsibility and be accountable for the article’s contents and agreed to be the corresponding author of the article.
Preethi Keerthi Dsouza: Contributed to the conception, design, execution and interpretation of the study, critically reviewed and revised the article before submission, agreed to submit the article for publication in Global Business Review journal, reviewed all article versions during all stages of the publication and approved the final version to be published and take responsibility.
Acknowledgement
The authors would like to thank the study participants.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Ethical Declaration
The authors abide by all the ethics involved in this academic work and have not submitted it to any other journal.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.
