THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE
PRACTICES AND FINANCIAL PERFORMANCE OF SAVINGS AND
CREDIT CO-OPERATIVE SOCIETIES (SACCOs) IN UGANDA
A CASE OF ADJUMANI TOWN COUNCIL (ATC) SACCO
AJUGO RICHARD SEVERY
2017-M102-20138
SUPERVISORS;
PROF. WANYAMA SIMEON
MR. LUGEMWA PETER
CHAPTER ONE
GENERAL INTRODUCTION
1.1.Introduction
The study aims at studying the relationship between corporate Governance and the financial
performance of Savings and Credit Cooperatives Organisations (SACCOs) in Uganda. The major
dimensions of Corporate Governance include Board structure, Board composition and Board
committees. SACCO include loan size, the interest rates and the level of savings by the members.
The dimension of financial performance of SACCO’s include; profitability, loan portfolio and
liquidity. The Key writers on Corporate Governance include, Wanyama (2015), Wanyama et al
(2014), Cadbury Committee Report (1992), Organisation for Economic Co-operation and
Development (OECD), Mugenyi (2010) among others. The key writers on SACCOs include
Ondieki et al. (2013), Galor (2010), Ukhevi (2013), Bwama and Mwcokujonga (2013),
Association of Microfinance Institutions in Uganda (AMFIU) Reports (2007, 2008, 2010, 2012,
and 2015) among others.
1.2. Background to the study
The foundation of corporate governance can be traced to the pioneering work of Berle and Means
(1932) who observed that once modern corporations have grown to very large sizes, they could
establish a separate system of control from that of direct ownership. This observation created
interest in the behavioral dimension of firms. As a term, governance, originated from the work of
Chaucer, where ‘governance’ was associated with being “wise and responsible” or doing that
which is appropriate.
Corporate governance gained prominence in the 1980s and 90s due to stock market crashes and
general corporate failure across the world (Dagli, Eyuboglu, & Ayadin, 2012). According to
Cutting and Kouzim (2000) as cited in Ruparelia and Njunguna (2016), these crises led to the
realization that for managers to run effectively and in the right direction, there must be an effective
board. A long history of company failures such as the collapse of Bank of Credit and Commerce
International, Enron, WorldCom, and Parmalat among others also created renewed focus on
corporate governance (La Porta, et al., 1999).
Following the financial crisis that swept the world in 1997/98, the world Bank and the Organisation
for Economic Co-operation and Development (OECD) joined forces to create a formal programme
(the Global Corporate Governance Forum) which would assist in the development of corporate
governance standards worldwide (Wanyama, 2015, p.75). He continues and says that, in 1999, the
OECD published its principles which were intended to act as guidelines for individual countries
when drafting their own standards of good governance.
For SACCOs the nature of the boards poses many challenges, specifically because of their
institutional structure (Mugenyi, 2010). A strand of literature identifies that governance remains
the prime weakness in SACCOs (Branch and Baker, 2000; Cornforth, 2004; Cuevas and Fischer,
2006) as cited in Mugenyi (2010). Labie and Périlleux (2008) as cited in Mugenyi (2010) highlight
four critical governance issues in SACCOs; first is the conflict between net borrowers and net
savers, second is the conflict between owners and managers, third is the conflict between members
and the elected board of directors and finally the conflict between paid employees and volunteers.
Africa has also not been left behind in the development of corporate governance discussions.
Godfrey, (2002) notes that the King's Committee Report and codes for corporate governance in
South Africa continues to ignite the spirit of corporate governance in Africa. For instance, the Pan
African Consultative Forum on corporate governance was established in Johannesburg, South
Africa in 2001 with an aim to raise awareness of the significance of corporate governance to
economic development in Africa. Consequently, as in other business sectors, improving
governance for cooperatives is now becoming a priority. The OECD (2003) pointed out that the
three East African countries resolved that each member state be encouraged to develop both a
framework and code of best practice to promote national corporate governance. The NEPAD
Business group and its member companies support the development of improved standards of
corporate governance as core business drivers.
In Kenya, some related research has been carried out with some findings of interest. Agumba
(2008) asserted that in SACCOS the governance is concerned with allocation of power and
authority between the clients, the board, committee and management. He noted that the governance
in SACCOS focuses on four areas which are leadership, stewardship, monitoring and reporting
where the six governance models which are democratic or association perspective, agency theory
(a compliance model), stewardship theory (a partnership model), resource dependency theory (a
co-optation model), stakeholder theory (a stakeholder model) and managerial hegemony theory (a
rubber stamp) models are applied. He summarized that application of these theories and models in
SACCOS are related with good credits risks management practices and fosters the SACCOs
performance. For example if the SACCOs management acts as leaders and stewards, they will
make sure loans are issued according to regulations and are collected and repaid according to
contracts and by doing so they promote the effective credit risks management in the SACCOS.
Proponents of corporate governance say there is a direct correlation between good corporate
governance practices and long-term shareholder value. There is no uniform set of governance
practices, (Keyes, 2014). These governance best practices will positively impact every company’s
performance and long-term viability. According to him some of the best governance practices are:
building a strong qualified board of directors and evaluating performance, defining roles and
responsibilities, emphasizing integrity and ethical dealing and evaluating performance and making
principled compensation decisions, as well as engaging in effective risk management.
Delegates at the Pan-African Consultative Forum (PACF, 2001) as cited in (Wanyama, 2015)
agreed that improvements in corporate governance should benefit all types and sizes of enterprises
in Africa-not just the few large publicly listed companies, but also: unlisted private companies;
family firms; state-owned enterprises; small and medium –sized enterprises (SMEs); and local
subsidiaries of multinational companies.
Traditionally, corporate governance has been associated with larger companies and the existence
of the agency problem. Agency problem arises as a result of the relationships between shareholders
and managers. As part of this arrangement, the owners must delegate decision making authority to
management (Wanyama et al, 2014). This is mainly due to the separation between ownership and
control of the firm. It is tempting to believe that corporate governance would not apply to SACCOs
since the agency problems are less likely to exist. In many instances, SACCOs are made up of
managers who also happen to be shareholders (members) of the same (Mudibo 2005) as cited in
Omollo (2015).
Basically, SACCOs tend to have a less pronounced separation of ownership and management than
larger firms. Some argue that the question of accountability by SACCOs to the members is
doubtful (Mugenyi, 2010). As a result, provision of loan facilities to the members, increasing
dividend payment and minimizing cost are the common aims of the members.
In spite of these arguments, there is a global concern for the application of corporate governance
to SACCOSs (Ndiwalana et al, 2014). It is often argued that similar guidelines that apply to listed
companies should also be applicable to SACCOs.
For SACCOs the nature of the boards poses many challenges, specifically because of their
institutional structure (Mugenyi, 2010). A strand of literature identifies that governance remains
the prime weakness SACCOs (Branch and Baker, 2000; Cornforth, 2004; Cuevas and Fischer,
2006) as cited in Mugenyi (2010). Labie and Périlleux (2008) as cited in Mugenyi (2010) highlight
four critical governance issues in SACCOs; first is the conflict between net borrowers and net
savers, second is the conflict between owners and managers, third is the conflict between members
and the elected board of directors and finally the conflict between paid employees and volunteers.
Corporate governance in SACCOs is a fairly touchy and much more complex issue as cooperatives
are based on the principle of democracy in regards to decision making with much more spread
ownership than classical firms (Labie and Perilleux, 2009). According to Wanyama et al (2014),
Microfinance institutions in Uganda face several challenges, including lack of adequate skills, poor
infrastructure, poor corporate governance, inadequate regulation and supervision, and limited
financial intermediation capacity.
AMFIU Report (2015) stated that governance challenges among MFI’s was still in existence
particularly in SACCOs where risk was highest compared to other MFI’s, given that they collected
and intermediated members’ savings and, inherent risks emanating from poor management.
Cuevas & Fischer (2006) observed that SACCOs had a high exposure to credit risk (the risk that
borrowers are unable to pay or risk of delayed payments) as well as operational risks (the risk of
direct or indirect loss resulting from inadequate or failed internal processes, people and systems or
from external events) (Basel Committee report, 2001).
Poor governance and regulatory issues within the Savings and Credit Cooperatives (Sacco)
movement in Uganda have emerged as the focal points as the government moves in to audit their
performance (Kairu, 2009). Donnas Okello, a member of the defunct Konye Keni savings and
cooperative society that had branches in all the sub-counties of Kitgum and Lamwo district is one
of the affected residents and he blames the collapse of the groups on poor management and
corruption by both the employees and board members of the SACCO (Draku, 2011).
There has been massive fraud of funds by SACCO leaders/managers (Mugisha, 2010) and that
delinquency in SACCOs had increased (CGAP report, 2006); for instance, Alut Kot SACCO in
Lira loaned out Ugx 841,000,000 since 2002 but had only recovered 26% of the amount by 2010
(Ojwee, 2010). Failure to control these risks, especially credit risk, could lead to insolvency
(Wenner, Navajas, Trivelli & Tarazona, 2007). Corporate governance appeared to matter for
corporate performance (Mohd, 2008). According to the AMFIU report (2007) about 2 out of 3
SACCOs initially formed were not operational (either dormant or collapsed) or for some reasons
ceased operations.
1.3. Problem statement
Governance is a key component in any development endeavor as it is believed to be the surest
way of providing the structure through which the objectives of the organization are set, and
the means of attaining those objectives and monitoring performance are determined. The
contribution of corporate governance in effective running and attaining the de-sired
performance standards of SACCOs is yet to be utilized in a wider extent (Flaviana, 2015).
According to Fin Scope Uganda survey (2007), 62% of Uganda’s population had no access to
financial services. Since the government introduced the policy to promote SACCOs as a
strategy for increasing financial outreach in rural areas, the number of SACCOs has grown
with cooperative department of Ministry of Trade, Industry and Cooperatives (MTIC) putting
the figures at 2,176 SACCOs registered (AMFIU report (2015), MTIC (2015),
www.ucscu.co.ug). This is so because SACCOs present one of the most appropriate ways and
in some places the only alternative (SNV report, 2010). In order to implement the above, the
government of Uganda initiated a rural financial services strategy through which the Rural
Finance Services Program (RFSP) was ‘born’ in order to build a strong and vibrant SACCO
movement (http://www.ucscu.co.ug/data/smenu/21, Ndiwalana et al, 2014, MTIC, 2015). The
focus of RFSP is building a SACCO movement that is financially self-sustainable. Good
corporate governance and managerial competency have been the focal point for building
profitable and self-sustaining SACCOs (http://www.rfspug.org)
Despite their potential to enhance financial access for the low income population, the
performance of SACCOs has been greatly affected by poor management (AMFIU, 2015),
fraud and mismanagement by board executives and management (AMFIU, 2007, Mugisha,
2010, Mugenyi, 2010). The purpose of this study is therefore to establish whether there is a
relationship between corporate governance practices and financial performance of SACCOs in
Adjumani District.
1.4. General Objective
To establish whether there is a relationship between Corporate Governance Practices and
Financial Performance of SACCOs
1.5. Specific Objectives
i.
To establish whether there is a relationship between board composition and financial
performance of SACCOs.
ii.
To assess whether there is a relationship between board structure and financial
performance of SACCOs.
iii.
To establish whether there is a relationship between board committees and financial
performance of SACCOs.
1.6. Research Questions/hypothesis
i.
Is there a relationship between board composition and financial performance of
SACCOs?
ii.
Is there a relationship between board structure and financial performance of
SACCOs?
iii.
Is there a relationship between board committees and financial performance of
SACCOs?
1.7.
Scope of the study
1.7.1 Geographical scope
The study will be carried out in the northern part of Uganda in Adjumani district. Adjumani district
is 219 miles approximately 352.45km from the capital city Kampala. The study will be carried out
in this area because there have been reported corporate governance problems among the SACCOs
in the district.
1.7.2 Content and subject scope
The subject of the study is the relationship between corporate governance practices and financial
performance of Savings and Credit Co-operative Organizations. The dimensions of the study
include board composition, board structure and board sub-committees as the independent variables
and the dependent variables include profitability, loan portfolio and liquidity. The study also
includes a moderating variable that is to say legal environment, Articles of Association and
Memorandum of Understanding.
1.7.3 Time scope
This study will gather data ranging from 2010 to 2018 as this will provide the researcher with the
most updated information.
1.8.Justification
The following reasons prompted the researcher to develop this topic;
i.
The Failure by the past scholars to identify the relevance of board committees towards
the financial performance of SACCOs in Uganda.
ii.
The need to explain clearly how the different roles of the board committees and the
CEO duality of SACCOs may affect their financial performance.
iii.
Need to combine the different literatures on Corporate Governance and the financial
performance of SACCOs and relating the variable to one another.
Your justification is very weak and makes sweeping statements without references.
1.9. Significance of the study
i.
To management; this study is intended to come up with information on the best
practices on corporate governance applied by SACCOs in enhancing their
performance. The findings of this study will provide the necessary information to the
SACCO movement and the management for purposes of meeting their current and
long-term shareholder value.
ii.
To academicians; it will also enhance on the existing information and enable further
research in the various sectors of the economy. This study will as well bridge on the
knowledge gap.
iii.
To government and policy makers; this study will also help the stakeholders of the
sector in formalizing governance policies (codes and guidelines), improve functioning
of the board of directors and relations with executive management, strengthening of
shareholder rights, improving the control environment, improve the process of
transparency and disclosure of information and ensuring the sustainability of the
SACCOs.
1.10 Conceptual Framework
Miles and Hurberman (1994) as cited by Vaughan (2008) defined conceptual framework as a
visual or written products, one that explains, either graphically or in a narrative form, the main
things to be studied- the key factors, concepts or variables- and the presumed relationship
among them. William et al, (2001), asserted that a conceptual framework contributes to a
research report because it identifies research variables and clarifies relationships among the
variables.
Fig 1.1
Conceptual Framework
Independent Variable
Dependent Variable
Corporate Governance Practice
Financial Performance
Board composition
Profitability
Board structure
Loan Portfolio
Board committees
liquidity
Moderating Variable
Memorandum of understanding
Legal environment
Articles of Association
Source: Omolo, J.O (2015) as modified by the researcher
Discussion of the relationship between the variables in the conceptual framework. this should be
2 to 3 pages.
1.11
Operational Definition of key terms
1.11.1 SACCOS
Savings and credit cooperatives (SACCOs) are user - owned financial intermediaries with
members who typically share a common bond base on geographical area, employer, community,
or other affiliation and have equal voting rights.
1.11.2 Corporate Governance
Corporate governance is the system by which companies are directed and controlled (Cadbury
Committee, 1992).
1.11.3 Savings
Savings is the amount left over when the cost of a person’s consumer expenditure is subtracted
from the amount of disposable income that is earned in a given time. It is the money one has saved
especially through a bank or a scheme. References.
1.11.4 Performance
Performance is taken to be the functions of an organization’s ability to meet its goals and
objectives by exploiting the available resources in an effective and efficient manner. References.
Summary of chapter and introduction of next chapter.
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter reviews literature related to the research problem. It first reviews the theories on
which this study will be based and the key concepts of the study. It then shows how this research
relates to the existing body of knowledge and identifies the gaps existing in the current body of
knowledge.
2.1 Theoretical Review
2.1.1 Agency Theory
The agency theory which arises from the separation of ownership and control was first articulated
by Michael Jensen and William Meckling in 1979 when they characterized the relationship
between shareholders and managers as an agency relationship whereby the owners/shareholders
are the principal and the managers the agent (Wanyama et al 2014).
Corporate governance is based on agency theory, which is the relationship between agents and
principals. Agency theory explains how best the relationship between agents and principals can be
tapped for purposes of governing a corporation to realize its goals. Interest on agency relationships
became more prominent with the emergence of the large corporation. There are entrepreneurs who
have a knack for accumulation of capital, and managers who had a surplus of ideas to effectively
use that capital. Since the owners of capital (principals) have neither the requisite expertise nor
time to effectively run their enterprises, they hand them over to agents (managers) for control and
day-to-day operations, hence, the separation of ownership from control, and the attendant agency
problems. In an agency relationship, principals and agents have clearly defined responsibilities:
Principals are select and put in place governors (directors and auditors to ensure effective
governance system is implemented, while agents are responsible for the day-to-day operations of
the enterprise.
Historically, definitions of corporate governance also took into consideration the relationship
between the shareholder and the company, as per “agency theory”, i.e. director-agents acting on
behalf of shareholder-principles in overseeing self-serving behaviors of management. However,
broader definitions of corporate governance are now attracting greater attention (Solomon and
Solomon, 2004) as cited in Mutuku (2016).
Indeed, effective corporate governance is currently understood as involving a wide number of
participants. The primary participants are management, shareholders and the boards of directors,
but other key players whose interests are affected by the corporation are employees, suppliers,
customers, partners and the general community. Therefore, corporate governance, understood in
these broadening social contexts, ensures that the board of directors is accountable not only to
shareholders but also to non-shareholder stakeholders, including those who have a vested interest
in seeing that the corporation is well governed. Some corporate governance scholars (Carter and
Lorsch, 2004; Leblanc and Gillies, 2005) also argue that at the heart of good corporate governance
is not board structure (which receives a lot of attention in the current regulations), but instead board
process (especially consideration of how board members work together as a group and the
competencies and behaviors both at the board level and the level of individual directors). As a
result, the current scholarly discuss about the nature of corporate governance has come to reflect
this body of research. A SACCO, being an artificial person, interacts and enters into contracts with
other entities. The entities could be: suppliers; creditors; employees and the government among
others. This brings about an agency relationship between the Sacco and the entities (Omollo,
2015).
2.1.2 Stakeholder Theory
The stakeholder theory argues that the purpose of corporate governance is to satisfy, as far as
possible, the interests of all stakeholders (Ibid. p.9 as cited in Wanyama et al, 2014). Companies
should act as good corporate citizens, acting in ways that benefit society as a whole. The board in
making decisions should give priority to those stakeholders who are the most important to the
company, for example, employees, investors, customers, suppliers, creditors, and the public
(Wanyama et al, 2014)
This theory centers on the issues concerning the stakeholders in an institution. It stipulates that a
corporate entity invariably seeks to provide a balance between the interests of its diverse
stakeholders in order to ensure that each interest constituency receives some degree of satisfaction
(Abrams, 1951). Stakeholder theory has become more prominent because many researchers have
recognized that the activities of a corporate entity impact on the external environment requiring
accountability of the organization to a wider audience than simply its shareholders. For instance,
Donaldson & Davis (1991) proposed that companies are no longer the instrument of shareholders
alone but exist within society and, therefore, has responsibilities to that society. One must however
point out that large recognition of this fact has rather been a recent phenomenon.
These definition were formulated from the base that modern corporation is affected by a large set
of interest groups, including, at a minimum, shareholders, lenders, customers, employees,
suppliers and management, which are often referred to as the primary stakeholders, who are vital
to the survival and success of the corporation. From this perspective, corporate governance debates
often proceed with a fixation on the relationship between corporate managers and shareholders,
which presupposes that there is only one right answer. In fact, shareholders are difficult and
reluctant to exercise all the responsibilities of ownership in publicly held corporations, whereas
other stakeholders, especially employees, may often too easily exercise their rights and
responsibilities associated as owners. This is a compelling case for granting employees some form
of ownership.
Communities are interested in SACCO society’s governance as key stakeholders as they derive
benefit from being employees, suppliers, customers of quality products and beneficiaries of
corporate social responsibility policies of SACCOs. Employees would like to get assurance that
they are working in a SACCO that will sustain itself thus securing their employment. Suppliers
want to be sure of payment after delivery of goods and services. Customers are looking for
affordable goods and services (Agumba, 2008).
2.1.3 Stewardship Theory
In contrast to agency theory, stewardship theory presents a different model of management, where
managers are considered good stewards who will act in the best interest of the owners (Donaldson
& Davis 1991). The roots of the stewardship theory are stemmed out from organizational
psychology and sociology and defined by Davis, Schoorman, and Donaldson (1997) as cited in
(Talat and Mian, 2014) as “a steward protects and maximizes shareholders’ wealth through firm
performance, because by so doing, the steward’s utility functions are maximized”. Stewardship
theory articulates that managers are hired for handling the firm’s operations in a well manner and
a manager’s achievement and success is measured by satisfaction he gets from the performance of
the firm; therefore the manager’s primary objective is to maximize the firm value (Talat and Mian,
2014).
According to Smallman (2004), stewards balance tensions between different beneficiaries and other
interest groups. Therefore stewardship theory is an argument put forward in firm performance that
satisfies the requirements of the interested parties resulting in dynamic performance equilibrium
for balanced governance. Stewardship Theory argues and looks at a different form of motivation
for managers drawn from organizational theory. This theory stipulates that a manager’s objective
is first to maximize the firm’s performance because a manager’s need of achievement and success
are met when the firm is doing well (Coleman, 2008). The dominant motive, which directs
managers to accomplish their job, is their desire to perform excellently.
Which Theory or theories will you use in your research and why?
2.2 Corporate Governance
Corporate governance in the SACCOs has many facets. These include the board structure, board
membership tenure, membership procedures and similar aspects. There are specific internal
aspects that can distinguish the performance of one SACCO to the other. Some of the operational
issues that are of interest in this study are the relationship between the board management and
stakeholders, and how the managers implement the directives from the board of directors. To provide the good overview of the corporate governance in SACCOs, one has to provide a general
view of corporate governance and then link it with its application in SACCOs (Flaviana, 2015)
Corporate governance has come to underpin systematically the work of many business, academics
and practitioners alike, and their information and research needs pre-sent challenges not only for
them, but also for the information professionals who assist them. Governance refers to the manner
in which power is exercised in the management of economic and social resources for sustainable
human development initiative (Flaviana, 2015)
According to Wanyama et al (2014 p.3), the term governance refers to the way in which something
is governed and to the function of governing. Corporate governance is concerned with the processes
and structures through which members interested in the overall wellbeing of the firm take measures
to protect the interests of the stakeholders. Good corporate governance is centered on the principles
of accountability, transparency, fairness and responsibility in the management of the firm (Otieno,
2013). Corporate governance is the system by which companies are directed and controlled
(Cadbury Committee, 1992).
Corporate Governance exists to resolve the conflict of interest between managers and shareholders
which is purely a principal-agent problem arising out of separation of ownership and control
(Bushman & Smith, 2003) as cited in (Ndiwalana G, et al 2014). The central function of corporate
governance structure is the Board of Directors (BOD). The study of the institution of boards of
directors is a difficult task and requires answering two intertwined questions of what determines
their makeup, and what determines their actions (Adams et al., 2008) as cited in Mugenyi, 2010.
Corporate governance practices refer to the principles of governance as highlighted by
Cadbury report, Sarbanes-Oxley Act, OECD (as cited in USAID leadership, management, and
governance project, 2011) and the center for corporate governance (CCG) the former private sector
initiative for corporate governance. The corporate governance principles include respect for the
rights of shareholders, equitable treatment of all stakeholders in corporate governance,
responsibilities of the board, transparency and disclosure (Sanda et al., 2003). Good corporate
governance practices dictate that the board of directors governs the corporation in a way that
maximizes shareholders value and in the best interest of society (Cornelius, 2005).
2.3 Savings and Credit Cooperatives Organisation (SACCOs)
SACCOs are user owned financial intermediaries. They have many names around the world
including credit unions, SACCOs, COOPECs. The members typically share a common bond based
on geographic area, employer, community or other affiliation. Members have equal rights
regardless of how many shares they own (CGAP, 2005) as supported by AMFIU report 2012/2013.
SACCOs in Uganda operate under the national apex of Uganda Credit and Savings Cooperative
Union (UCSCU) as the umbrella body. UCSCU is formed, financed and controlled by SACCOs.
The supervisory committee checks both the board and management of UCSCU to ensure that they
are running the union well and in the best interest of the SACCOs (UCSCU, 2014). SACCOs are
part of the financial system in Uganda which falls under tier IV as grouped by Bank of Uganda.
The other participants in this sector includes the tier I (banks), tier II (credit institutions) and tier
III (micro finance deposit taking institutions) as classified by Bank of Uganda (Okwee, 2011). Tier
4 Institutions share two key features: first; the BoU does not exercise prudential supervision over
them, secondly, they are forbidden to mobilize deposits from the general public. They can accept
only member savings (voluntary deposits and share capital).
2.4 Financial Performance
Armstrong (2005) states that performance is a multidimensional construct that relates to the
outcomes of work done by an individual or institution. He further states that performance is a
matter of not only what people achieve but how they achieve it. Available research studies on
Corporate Governance and Financial performance indicate that firms with better corporate
governance tend to enjoy lower cost of capital (Black et al.2006), lower Cash Operating Expenses
(COE) (Ashbaugh, Collins, & LaFond 2004). Lower COE improves the profitability of a firm. In
Piprek (2007), the main constructs of financial performance are portfolio quality and profitability
as cited in Ndiwalana et al., 2014.
2.5 Board structure and Size and Financial Performance of SACCOs
The Board of directors of an organization is a key mechanism to monitor manager’s behavior and
to advise them. The largely shared wisdom regarding the optimal board size is that the higher the
number of directors sitting on the board the less is performance. This leans on the idea that
communication, coordination of tasks, and decision making effectiveness among a large group of
people is harder and costlier than it is in smaller groups, (Belkhir, 2006).
Similarly, it is argued that although larger board size initially facilitates key board functions, there
comes a point when larger boards suffer from coordination and communication problems and
hence board effectiveness and firm performance declines (Lipton and Lorsch, 1992; and Jensen,
1993) as cited in Omollo (2015). Lipton and Lorrch (1992) argue that a board size of eight to nine
directors is optimal, while Jensen (1993) as cited in Omollo (2015) argues that the optimum board
size should be around seven or eight. The size of the board should be between 5 and 9 directors
depending on size of the Sacco, in order to facilitate maximum efficiency and effectiveness. The
CEO shall be an additional director without voting rights (i.e. ex-official director). Like all boards,
Sacco boards require a broad mix of skills and competencies tailored to meet the skills and
competencies required to drive forward the goals and strategy of the Sacco (SASRA,
2012).Ministry of Trade, Industry and Co-operatives of Uganda also provides that Cooperatives
should be composed of 5 - 9 members with women and youth representatives.
Limiting board size to a particular level is widely believed to improve the performance of the firm
at all levels. Benefits arising from increased monitoring by larger boards are outweighed by poorer
communication and cumbersome decision –making. Empirical studies on board size seem to
provide the same conclusion (Oguku and Olweny, 2016). A big board is likely to be less effective
in substantive discussions of major issues among themselves in monitoring management (Oguku
and Olweny, 2016). This is in agreement with the findings of Wasike (2014) that a large board
could be dysfunctional and that smaller board sizes are better than larger ones because large boards
may be plagued with free rider and monitoring problems. Additionally, the interviewee said that
smaller boards are more effective since they experience fewer communication and coordination
problems.
Generally, Empirical evidence on the relationship between board size and firm performance
provide mixed results .While, Ahmadu et al. (2005), Chan and Li (2008), De Andres et al. (2005)
and Mustafa (2006) as cited in Oguku and Olweny (2016) found that larger boards are associated
with poorer performance, Beiner et al. (2004), Bhagat and Black (2002) and Limpaphayom and
Connelly (2006) as cited in Oguku and Olweny (2016) found no significant association between
board size and firm performance.
2.6 Board Composition and Financial Performance of SACCOs
The UK Combined Code (2003) as cited in Wanyama (2015) states that: the board should not be
so large as to be unwieldy. The board should be of sufficient size that the balance of skills and
experience is appropriate for the requirements of the business and that changes to the board’s
composition can be managed without undue disruption.
Furthermore, the same code recommends that there should be a strong presence on the board of
both executive and non-executive directors and that undue reliance should not be placed on
particular individuals (wanyama, 2015).
According to Branch and Baker (1998) as cited in Okwee (2011) it is important that Board
members be qualified as unqualified board members may be unable to make proper decisions. Bald
(2007) agrees with Branch and Baker (1998) and suggest that elected officers should have financial
and technical skills roughly on par with management so that they can engage management in a
meaningful debate and at times challenge the interpretation of certain results.
Similarly, SASRA (2012) guideline stipulates that the composition of the Board takes into account
gender balance, geographical distribution, ethnicity, age, occupation, experience and education of
the directors. Ministry of Trade, Industry and Cooperatives of Uganda guideline for cooperatives
provides that Two or three people elected by the AGM. The members must not be members of
other committee(s) or any of its sub-committees nor members of the management staff. They must
have strong financial skills with a deeper understanding of the co-operative and its business. The
Audit Committee members should preferably include one woman and youth.
Globalization and liberalization of financial markets, corporate governance scandals and
increasing demands of stakeholders for accountability and transparency of organizations, brought
the roles and tasks of board of directors (BODs) to the center of corporate governance debate
(Ingley and Van der Walt, 2005) as cited in Oguku and Olweny(2016) BODs have various and
important roles (Finkelstein and Money, 2003).
The combined code on corporate governance developed by the financial Reporting Council in
2003 suggests that every company should be headed by an effective board of directors, which is
collectively responsible for the success of the company .The board should include a balance of
executive and non-executive directors so that no individual or a small group of individuals can
dominate decision making (Njoroge, 2015).
Staikouras et al. (2007) found out that board composition does not affect firm performance
although its relationship with performance was found to be positive. According to Jensen and
Meckling (1976), boards dominated by outsiders or NEDs may help to mitigate the agency
problem by monitoring and controlling the opportunistic behavior of management. The results of
previous studies that investigated the relationship between board composition and firm
performance are inconsistent.
CMA (2002) recommend that the board should compose of a balance of directors and non-directors
(including at least one third independent and non-executive directors) of diverse skills or expertise
in order to ensure that no individual or small group of individuals can dominate the board's decision
making processes. Solomon(2007) notes that the presence of inside directors helps in achieving
the appropriate balance between outside and inside directors on boards which is an essential
ingredient for an efficient board.
2.7 Board sub-committees and Financial Performance of SACCOs
Board committees are an important component of the board structure in affecting firm
performance. The areas considered important are the quality of financial reporting, director
remuneration and appointment of directors (Spira & Bender 2004) as cited in Omollo (2015).
Therefore, the Cadbury Committee (1992) recommended establishing oversight committees for
remuneration of executive directors, the auditing of financial statements and appointment of
directors, initiatives supported by agency theory, because independent monitoring alleviates
agency problems. They considered board committees were an additional control mechanism that
increased accountability and ensured the interests of the shareholders were safeguarded.
Researchers on agency theory have recommended the creation of compensation and appointment
committees, audit committees and shareholder relation committee that would protect shareholders
rights (Demisetz and Lehn, 1985) as cited in Asiimwe (2015). According to Smith (1996) as cited
in Omolo (2015), public companies usually have the following committees: Audit committees;
compensation committee; Governance committee; Nominating Committee; Disclosure committee
and other standing or special committees. Similarly, The Ministry of Trade, Industry and
Cooperatives of Uganda guideline stipulates that Depending on the size of the co-operative and
the nature of its business, the committee may with the authority of the AGM create a number of
sub-committees like Loans, Planning/Evaluation, supervisory/audit committee, Human Resource;
Business Development and Disciplinary sub-committees to enable it do a better job.
The establishment of board committees is expected to have a positive influence on the motivation
of the directors and provide confidence in the financial reports of the firm. Spira and Bender (2004)
as cited in Omollo (2015) reported that the companies, which introduced board committees to the
board structure, performed better than those without them, and showed a significant improvement
in firm performance by firms which have introduced audit and remuneration committees. Given
the recommendation in the codes of practice, monitoring by board sub committees is expected to
have a positive influence on firm performance.
The lack of involvement of the membership in the affairs of the institution regularly provides
opportunities for the board, management and their friends to take loans without living up to their
repayment duties (the IMF Report, 2001). In addition, some SACCOs had illiterate committee
members who lacked basic skills to effectively supervise operations and were defrauded by
management who took advantage of their ignorance (AMFIU report, 2007). Many SACCOs also
report concerns about connected party loans. These are loans to officers themselves or their close
relatives and business associates. It is therefore not practical to entirely rule out loans to board
members and their families and associates because of the nature of SACCOs (Bald, 2007).
2.4 Conclusion
The section covered the different scholars who have tried to establish the relationship between
corporate governance practices and financial performance of SACCOs. However, most of the
scholars have failed to clearly establish the relationship between board composition, board
structure and size and board sub-committees as dimensions of corporate governance practices and
the financial performance of SACCOs in Uganda. The researcher therefore has noted this gap and
will try to clearly establish the relationship between corporate governance practices and the
financial performance of SACCOs.
You have not discussed the dependent variables and moderating variables.
You need to clearly outline what other scholars have covered (with references) and what has not
been covered. Stating that other scholars have failed is not appropriate. You have not reviewed all
the research reports in the world. The research gap has to be brought out clearly so that you show
the contribution that your research will make to the body of knowledge.
Introduce the next chapter.
CHAPTER THREE
RESEARCH METHODOLOGY
3.0
Introduction
This chapter focuses on the techniques that will be used to collect and analyse data. It describes
the study design, sampling design, and instruments and procedures that will be used in collecting
and analyzing data.
3.1
Research design
The researcher used a case study design. This gives numeric description of a part of the population
called the sample on the basis of the data to be collected. Bell (1989) says a case study aims at
obtaining information that can be analyzed, patterns extracted and comparisons made for the
purpose of clarification and provision of basis for making decision. Quantitative approach was
adopted in this study. Quantitative approach is adopted in this research because it will enable the
researcher to present data in a descriptive manner and generate a list of figures and tables in the
study. Onchangwa, G and Memba, F (2012) also used descriptive statistics with only quantitative
approach in their study and were able to get the data required from the respondents.
Cross sectional time dimension has been adopted for this study because the study is expected to
take a short period of time and data collection, analysis and reporting is done in a single period
and therefore cross sectional time dimension is ideal.
3.2
Study population
The study will be heterogeneous covering both the male and female board members, management,
staff and, ordinary members (those who save and borrow) of Adjumani Town Council SACCO.
The unit of analysis for the study will be the financial performance of the SACCO. The unit of
inquiry will include the respondents to the research tools for example the board members,
management, staffs and ordinary members of ATC SACCO. The study population for this study
will be 329.
3.3
Study area
The study will be conducted in Adjumani district located in the northern part of Uganda. It is about
352.45km north from the capital Kampala. The case study will be at Adjumani Town Council
SACCO which is next to Adjumani District police station along Adjumani-Moyo road.
Adjumani Town Council SACCO is a service providing organization offering services like
savings, credit provision, business management and skill training, safeguarding all kind of
documents, advisory services and mobile money services.
The study will be based in this area because the researcher wants to interact with the board
members, management, staffs and members of the SACCO in regards to the governance and
financial performance of the Organisation. Since Adjumani is the home district of the researcher,
this will also help minimize other costs like transport and accommodation.
First discuss the Population before discussing the sample size
3.4
Sample size
Scientific model developed by Krejcie and Morgan (1970) for determining sample size will be
used in this study. Where N is the total population and S is the sample size which will be estimated
and read from the table that the two has developed which is composed of population size and their
corresponding sample size.
Table 3.1: Population and the sample size for the study
Categories
Population(N)
Sample size (S)
Sampling strategy
Staff members
15
14
Stratified
Manager of SACCOs
1
1
Purposive
Directors
3
3
purposive
Committee members
10
10
purposive
Members
300
169
Stratified
TOTAL
329
197
Source: Adjumani Town Council SACCO (2012).
How did you determine the sample size for the respective categories of the population?
3.5
Sampling techniques
Both random and non-random sampling techniques will be used to select a representative sample.
Random sampling strategies give every individual in the population a chance to be part of the
sample. This reduces bias and increases the representativeness of the sample. On the other hand,
Amin (2005, p. 56) states that non-random sampling strategies enable the researcher to select
respondents who have the information. Stratified random sampling will be used to select staffs and
members of the SACCO. This method will be used in order to give more respondents in the
population a chance to be part of the sample. This technique increases representativeness, which
enables the collection of a cross section of data. Purposive sampling will be used to select SACCO
directors and committee members and manager. This sampling method will be used for this subsample in order to collect in-depth responses from respondents who are well informed about the
research problem.
Sources of Data
3.6
Methods of data collection
3.6.1 Questionnaires
Questionnaires will be used so as to measure the variables of the study. As advised by Bush and
Ortinau (2000), the questionnaire will have items derived from the study objectives and Likert
scale responses. The respondents will tick the responses that best describe the relationship between
corporate governance practices and financial performance of the SACCOs.
3.6.2 Interviewing
Data will also be collected through interviewing the Board of directors, Management and staff as
well as different committee members. This method is preferred because it enables the collection
of reliable, in-depth information. With the use of the interview guide, the researcher will ask key
informants selected from top management individually questions derived from the study
objectives.
Measurement of variables
3.7
Data Management and analysis
3.7.1 Quantitative data
The quantitative data will be collected using questionnaire. The collected data will be sorted,
coded, entered into SPSS 19.0 software and analyzed. Descriptive statistics, correlation and
regression analysis methods will be used to analyze the data. Kyokutamba (2011) also used SPSS
for quantitative data analysis and was able to obtain the required results.
3.7.2 Qualitative data
Qualitative responses will be analyzed using thematic analysis. Using the procedure recommended
by Trochim (2006, p. 36) as cited in Asiimwe (2015), interview data will be examined and
classified in terms of themes derived from the objectives. Clusters of text with similar meaning
will be presented together and analyzed in relation to the study Using Madill and Gough’s (2008,
p. 185) suggestions, qualitative responses will be identified as R1, R2,…..R 23.where R refers to
respondents.
3.8
Reliability and Validity
3.8.1 Reliability of instruments
Data from the pilot study will be entered in the Statistical Package for Social Sciences (SPSS) and
Cronbach’s alpha coefficient test of reliability will be calculated. The data collection instrument
will be tested on 5% of the sample of the questionnaires to ensure that it is relevant and effective.
According to Patton (2002) as cited in Moshi (2011), a good research study must pay careful
attention on how measurement is being done and therefore test and re-test method should be used
in order to ensure reliability in research.
3.8.2 Validity of instrument
The researcher will subject the draft tool such as questionnaires to experts, his fellow students and
to the supervisor. The instruments will first be pre-tested to ensure their face and content validity.
To do this, item interpretation and consistency will be analyzed. The questions found vague will
be eliminated or rephrased. Any ambiguities, misunderstanding and inadequacies shall be
eliminated (Amin, 2005). With regard to face validity, the words that will be used in the
instruments are simple, clear and related to the research problem.
What test will you use to establish validity and what will be the minimum value for validity?
3.9
Ethical considerations
The researcher will ensure that the privacy of the respondents will be respected. The Researcher
will only visit respondents after making appointments with them at the appropriate working hours
and days. This is to ensure that the privacy of all the respondents is respected.
Permission will be sought from the Management team of SACCOs in order to get access to their
information. Consent of the Respondents of SACCOs will first be sought before being subject to
interviews and giving questionnaires to them. Oral consent will be obtained from the respondents
before inquiring any data from them as per the study is concerned. The researcher will secure
voluntary participation in providing responses to the research tools. A statement requesting the
compliance of the respondents will be clearly stated on top of each research tool.
Unauthorized people will not have access to the data and word of assurance of confidentiality that
the data being accessed shall be kept confidential to the researcher will be given to the respondents.
The respondents will have the freedom to ignore items they wish not to respond to.
3.10
Limitations to the study
The research design used may not be appropriate design required for this study and this therefore
implies that the data analysis and presentation may not be accurate as well and therefore will lead
to wrong conclusion and findings. However the researcher intends to minimize this by doing a
pilot study and find out if the design employed is also appropriate.
The targeted sample population may not be found due to unavoidable circumstances. However the
researcher intends to get alternative options to cater for that. For example if the General Managers
are away, the head of credit/loans may be used instead.
The targeted data analysis software SPSS version 19.0 may not be available. This therefore implies
that the researcher will use STATA to analyse the data.
Will you be able to generalize your findings based on the fact that you will be using a sampling
methodology?
3.11 Conclusion
This chapter looked at the research design, study population and sample size, sampling techniques,
data management, data analysis, ethical considerations and limitations to the study
Introduce the next chapter.