Impacts of Corporate Governance Mechanism on Financial Performance of

Selected Insurers in Ethiopia

Bonsa Mitiku

A Thesis Submitted to

The Department of Accounting and Finance

Presented in Partial Fulfillment of the Requirements for the Degree of Master

of Science in Accounting and Finance

Addis Ababa University

Addis Ababa, Ethiopia

June 2015
 Addis Ababa University

College of Business and Economics

Department of Accounting and Finance

This is to certify that the thesis prepared by Bonsa Mitiku entitled: Impacts of Corporate

Governance Mechanism on Financial Performance of selected Insurers in Ethiopia and submitted in

partial fulfillment of the requirements for the degree of Master of Science in Accounting and

Finance complies with the regulations of the University and meets the accepted standards with

respect to originality and quality.

Signed by the Examining Committee

Internal Examiner: Dr.venkati.P Signature______________ Date _________

External Examiner: Dr. zinegnaw. A Signature______________ Date _________

Advisor: Dr. Degefe. D Signature______________ Date _________

____________________________________________________________
Chair of Department or Graduate Program Coordinator

i|Page
 Abstracts

Corporate governance has become an issue of global significance and has received new urgency due
to various corporate scandals and failure. This study seeks to see impacts of corporate governance
mechanism on financial performance of Insurers in Ethiopia. In order to achieve this objective,
the study uses mixed research approach. Panel data covering ten year period from 2005 – 2014
are analyzed for nine insurance companies. Also in-depth interview was conducted with selected
company board chairmen. The study analyses a range of internal corporate governance
variables board size, chief executive compensation, educational qualification of directors
,presence of female directors, frequency of board meeting, other business management
experience of directors, industry specific experience of directors and the study also controls the
effect of premium growth of Insurers. The Fixed effects technique has been applied to find out
the most significant variables from considered internal corporate governance variable. The
regression results show that, chief executive compensation, educational qualification of
directors, other business management experience of directors, and industry specific experience
of directors has positive and significant effects on financial performance of Insurers’ proxy by
ROA. On the other hand, board size and presence female directors don’t have statically
significant impacts on Insurers’ performance. In addition Contrary to theoretical prediction
frequency of board meeting does not have significant effects on Insurers performance. So,
stakeholders should give consideration to chief executive compensation, educational
qualification of directors, other business management experience of directors, and industry
specific experience of directors when they set governance policy for industry as general and for
the company specifically.

Keyword: Corporate Governance mechanism agency theory Insures, financial performance and
Ethiopia

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 Acknowledgements

I wish to first and foremost express my profound gratitude to the son of Almighty God Jesus

Christ who has blessed me with opportunity, resource and will to pursue my studies I say thank

you. This thesis is also as a result of help from many people: First and foremost I am grateful to

my advisor, Degefe Duressa (PhD), whose encouragement, guidance, and support from the initial

to the final level enabled me to develop an understanding of the subject and complete the thesis.

Secondly, I would like to extend grateful acknowledgement to the officials of insurance

companies for their understanding and for providing me with all the necessary information and

documents required to carry out this study.

Thirdly, I would like to express my deepest gratitude to National Bank of Ethiopia, my

employer, for the sponsorship and financial support. In addition, I would like to thank Addis

Ababa University for the financial support provided to me during my thesis work through the

Department of Accounting and Finance. And I shall not forget to register my appreciation to my

colleagues and friends, as they have always been collectively, an inspiration for my success.

Last but not least, I extend my special appreciation to my Father...Baba… you are most special

man for me you thought me persevere and never give up I say thank you and my Mother. Ayyoo

… who always taught me that sweet always comes from sweet; I would never be a fruitful boy

without your counseling. I say thank you for the counsel thought out my life. And all our family

member brother and sister, Wasihun Tamasgen ,Gemachu ,Ayantu, Game and Ashu all

respected Brother and Sisters ,Friends I never forget your moral support , appreciation and for

all your understanding while I was busy to my school and work to you I am heavily indebted.

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 Table of Contents
List of Table……………………………………………….…….….……………………..……..…Vii
List of Figures…………………………………………….……….…………….…………………vii
List of Acronyms……………………………………….……….…………………………………vii
Chapter One: Introduction …………………………………...…………………………………..1
1.1.Back ground of the study………………………………………………….………………1
1.2.Overviews of Ethiopia Insurance Industry…...………………………..….……….……3
1.3.Statement of the Problem……………….…………………….…………….…….…….…4
1.4.Objectives of the Study………………….………………………………………..…….…7
1.5.Significance of the Study……………………….…………………….……….…….…….8
1.6.Scope of the study……………………………….……………………………..…….……9
1.7.Limitation of the study……………………………………………………….…….……..9
1.8.Structure of the Study…………………………………………………………….……..10
Chapter Two: Literature Review…………………..……………………………………………..10
2.1. Corporate Governance Theories………….…...……………………………………….10
2.1.1. Agency Theory………………………..…………………………………………11
2.1.2 Stakeholders Theory…………………...……….………………………………..14
2.1.3 Resource Dependency Theory….…………………...…………….……………16
2.2. Empirical studies on Corporate Governance and organizational Performance....18
2.3. Corporate Governance and In Insurance Sector………...…………..………………25
2.4. Corporate Governance in Ethiopia…………………..….…………………………….26
2.5. Summary and Research Gaps……………………….……………….………………..28
Chapter Three: Research Methodology…………………………….………..…………………30
3.1. Research Hypotheses …………………….……………………………………………30
3.1.1. Board size…………………………………………………………………...…...31
3.1.2. Chief Executive Compensation………………………………………………..32
3.1.3. Educational Qualifications of Directors……..…………...…………………..33
3.1.4. Female Director Proportion……………………………………………………34
3.1.5. Frequency of Board Meeting…………………………………………………..34
3.1.6. Other Business Management Experience of Directors……….……………..35
3.1.7. Industry Specific Experience……………………….………………………….36
3.2. Control variables……………………………………………….….…………………….38
3.3. Research Approach………………………………………….…………………………..38
3.4. Research Method Adopted…………………………………………….……………….38
3.4.1 Quantitative Aspect of Research Method……….……………….……………39
3.4.2. Qualitative Aspect of the Study…………………..…….…...…………………40
3.5. Data Analysis Method…………………..……………….…………………………….41

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 3.6. Conclusions and the Relationships between Research Hypotheses and the
data......................................................................................................................................45
Chapter Four Results and Discussions………………………………………………………….47
4.1. Tests for the CLRM assumptions………...……………………….………………………47
4.1.1. Errors have zero mean………………………………….……………………47
4.1.2. Homoscedasticity……………….……………………………………………47
4.1.3. Autocorrelation……………………………….………..……………………..48
4.1.4 Normality……………………….…………….…………..……………………48
4.1.5. Multicollinearity Test……………………………….………………………..49
4.2. Results…………………………………………..……………………...……………………50
4.2.1. Descriptive Statistics ……………………………………….…...…………………. 51
4.2.2. Correlation Analysis of the Study Variables.…………….……………………….55
4.2.3. Results of Regression Analysis………...…………………………………………..57
4.2.4. In-Depth Interview Results………………...……………………………………….60
4.3. Results and Discussion…………………………………….………………………………63
4.3.1. Board size …………………………………………………………………………..63
4.3.2. Frequency of board Meetings………………………………….……..…………..64
4.3.3. Chief Executives compensation ………………………………………………….65
4.3.4. Female Director Proportion…………………………………….…………………66
4.3.5. Educational Qualifications of Directors…………………………………………66
4.3.6. Other Business Management Experience of Directors…………………………67
4.3.7. Industry Specific Experience………………………………………...……………68
4.3.8. Result of Controlling Variable …………………………………….….………….69
Chapter Five Conclusions Summary and Recommendations………………………………..71
5.1. Conclusions……………………………………………….…..……………………….71
5.2. Summary of Finding …………………………………………………………………72
5.2. Recommendation ………………………………………….…...…………………….73
5.3. Avenues for Future Research and Improvements…………………………………74
Reference
Appendix

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List of Table
Table 3.1: Description of the Variables used in the Regression Model………………………37
Table 3.2: Linkage between hypotheses and data source…….……………………………….46
Table 4.1. Heteroskedasticity Test: White………..…………………………..…..…………..47
Table 4.2: Correlation Matrix between independent variables…………...….………………..50
Table 4.3. Descriptive Statistics of Regression Variables………………..………….… …….52
Table 4.4: Correlation Matrix of Dependent and Independent Variables…….…..….. ……..56
Table 4.5: Correlated Random Effects Hausman Test…………………………...….… …….58
Table 4.6 Regression Result for Model………………………………………..…...…………59
Table 4.7 Summary of Test Result …………………………………..…..…..….…………….70

List of Figure
Page
Figure.2.1. conceptual frame work of the study …………………………………………..…18
Figure: 3.1: Rejection and Non-Rejection Regions for DW Test….……………….……..… 44
Figure 4.1: Normality Test Result……………………………….…….….…………...…..….49

List of Acronyms
AIC: Awash Insurance Company S.C
AIG: American Insurance Group
CLRM: classical linear regression model
DW: Durbin-Watson
EIC: EthiopiaInsurance Corporation
GDP. Growth domestic products
Global: Global insurance company s.c
IMF: International Monitory Fund
MIS: Management information system
NBE: National Bank of Ethiopian
NIB: Insurance company S.C
NICE: National Insurance Company of Ethiopia S.C
NOSFA: No-One-Size-Fits-All

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NSE: Nigerian Stock Exchange
NISCO: Nyala Insurance company S.C
NILE: Nile Insurance Company s.c
OECD: The Organization for Economic Cooperation and Development
OLS: Ordinary Least Squares
ROE: Return on equity
ROCE: return on capital employed
ROA: Return on Asset
ROI: Return on Investments
UNIC: United Insurance Company S.C

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Chapter One: Introduction
1.1. Background of the study
The intractable problem of risks and uncertainties has been the greatest challenge to
humanity on this planet from time immemorial. This problem has remained unresolved
despite the great advances that we have witnessed in the areas of science and
technology over the years. From the social and economic viewpoint, insurance was the
most ingenious creation of the human mind in response to this risk problem. Insurance
plays a very significant role in economic growth. It contributes to the growth of the
asset base in the economy through insurance savings which transform to investments
(Swiss Re 2011). For the aforementioned benefits of insurance to be realized placing
sound corporate governance in the sectors plays pivotal role. Governance is
increasingly recognized by the business community, regulators and capital market
authorities as a fundamental driver of corporate performance. Corporate governance is
thus framed to perform a system of supervision that uses techniques like board
structure, duality, reporting, and remuneration to provide shareholders with the
necessary information necessary to hold management liable for their decisions Husam
et’al (2012).
According to Edwards & Clough (2005) corporate governance involves an organizations
dedication to adopt fair and ethical practices across its whole system and in all of its
associations with an extensive group of stakeholders consisting of customers, suppliers,
government, and shareholders. It is about the structures and processes in place to
facilitate and monitor effective management of an organization including mechanisms
to ensure legal compliance and prevent unlawful and improper behavior.
Cadbury (2003) echoed add the fact of corporate governance as it is all about
maintaining a balance between social and economic goals and is concerned with
holding the balance between economic and social goals and between personal and
shared goals. The structure of governance is mainly present to inspire the optimum use
of resources to hold accountable the stewards of those resources. The Organization for
Economic Cooperation and Development’s [OECD] also define corporate governance as

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the full set of relationships among a company’s management, its board, its shareholders and
other stakeholders. It provides the structure through which the objectives of the company are set,
and the means of attaining those objectives and monitoring performance determined.
From the global perspective, the history of corporate governance systems is now well
documented. According to Gomez (2005), the past two decades have however,
witnessed significant transformations in corporate governance structures, leading to
increased scholarly interest in the role of board of directors in driving corporate
performance. Arising from many high profile corporate failures, coupled with generally
low corporate profits across the globe, the credibility of the existing corporate
governance structures has been put to question. Subsequent research (Shleifer and
Vishny 1997) has thus called for an intensified focus on the existing corporate
governance structures, and how they ensure accountability and responsibility.
The well-publicized cases of Enron Corporation, Adelphia, Health South, Tyco, Global
Crossing, Cendant and WorldCom, among others, have repeatedly been put forward as
typical scandals that justify corporate governance reform and the need for new
mechanisms to counter the perceived abuse of power by top management Ongore and
K’Obonyo (2011).
The last decade has witnessed a marked increased in multi-disciplinary empirical
research investigations on the effect of alternative corporate governance mechanisms on
firm performance. In accounting and finance literature, studies of corporate governance
issues have received great attention and have been used as indicators for firms'
successes or failures. Further, they document that firm with robust corporate
governance mechanisms seem to be more successful compared with those companies
having weak corporate Governance mechanisms Khaled et’al(2007).
A number of studies have proposed that firms should operate in the interests of
shareholders when markets are perfect. However, in emerging markets, which are
imperfect and incomplete, this is not the case. Researchers in corporate governance
(Huse, 1995, Gomez (2005) have reported that there is still lack of concurrence on the

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ideal corporate governance structure that could safeguard shareholders assets while
promoting wealth creation ventures.
On a positive note, there was a growing acknowledgement that improved corporate
governance was crucial for the growth and development of the whole economy of a
country (Clarke, 2011). Other studies established strong links between the performance
of corporations and the governance practices of their boards (Tornyeva et al 2012, Nasar
Najjar 2012; Almanasser et al 2012; OECD, 1998). Nevertheless, David et al (2013) did
not find any significant relationship between the performance of firms and the
governance practices of their boards.
Specifically in Ethiopia, though few studies have been conducted on corporate
governance and financial performance, for example studies by Ferede (2012) and
Srmolo (2012) are focusing banking industry but to the best of researcher’s knowledge,
no prior study has focused on Insurance industry in Ethiopia.
To this end, this study examines the impacts of corporate governance mechanism and
financial performance of insurance companies in Ethiopia. This will not only add to
existing literature but also it will serve stakeholders to handle potential multi conflicts
in the sectors.
The remainder of this chapter is organized as follows. Section 1.2 presents the over
views of Ethiopia insurance industry, section 1.3 presents statement of the problem.
Section 1.4 presents objective, of the study. Section 1.5 presents the significance of the
study and 1.6 present’s scope of the studies. More additionally, Section 1.7 introduces
limitation of the study. Finally, Section 1.8 presents structure of the study.
1.2.Overviews of Ethiopia Insurance Industry.
Insurance industry in Ethiopia does not have a long history of development despite the
countries long history of civilization. Schaefer (1992) indicated that the emergence of
modern insurance in Ethiopia is traced back to the establishment of the Bank of
Abyssinia in 1905. The Bank began to transact fire and marine insurance as an agent of a
foreign insurance company. Imperial Insurance Company was the first domestic private
insurance company that was established in 1951. In the 1960s domestic private

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companies started to increase in number. In 1962, according to the survey of the Central
Statistical Agency (CSA), there were 34 insurance companies in Ethiopia, of which two
were domestic and the rest were foreign represented by agents. In other words, the
origin of Ethiopia insurance industry is linked to expatriates and foreign insurance
companies (Zeleke, 2007).
Following the overthrow of the imperial regime by the Marxist Military government,
private insurance companies were nationalized in 1975.A sole public insurance
company was established under the name Ethiopia Insurance Corporation (EIC), which
had a monopoly in the insurance industry for 19 years. Following the regime change in
1991, there was a shift to a market economy and a new insurance proclamation
Licensing and Supervision of Insurance, No. 86/1994, was issued in 1994. The law
allowed private sector participation in the insurance business (Mihretu, 2010).
Considering the regulation and proclamation the sector have been broadly stable and
growing in terms of expanding its services and increase its premium, total asset, total
liabilities as well as capital in relative to previous years. However the sector still
contributed less than 1% to country’s GDP.
1.3. Statement of the Problem.
The subject of corporate governance has assumed critical significance in the present
juncture of the business world. The law and finance literature has documented that
good corporate governance generally pays for firms, for markets, and for countries. It is
associated with a lower cost of capital, higher returns on equity, greater efficiency, and
more favorable treatment of all stakeholders; although the direction of causality is not
always clear Claessens (2006). Corporate governance, a phrase that not long ago meant
little to all but a handful of scholars and shareholders, has now become a mainstream
concern a staple of discussion in corporate boardrooms, academic meetings, and policy
circles around the globe. Claessens (2006).
Corporate sector was sapped by corporate governance scandals in the United States and
Europe that triggered some of the largest insolvencies in history. In the aftermath, not
only has the phrase corporate governance become nearly a household term, but

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economists, the corporate world, and policymakers everywhere have begun to
recognize the potential macro economic consequences of weak corporate governance
systems Claessens (2006).
More specifically, corporate governance issues have been raised in the regulation of all
financial institutions. The motivation for strengthening corporate governance in the
financial sector is well-established. Unlike other industries, the financial sector plays an
important intermediary role that relies heavily on public trust and confidence. Being
highly visible entities, any lapse or failure in the governance of financial institutions,
whether real or perceived, would attract adverse public reaction and could severely
affect their reputation and public confidence. The failure of a systematically important
financial institution may also result in serious ramifications and costs to the economy,
given their roles and inter-linkages within a country’s economy. For this reason, they
are subjected to a higher standard of integrity and professionalism. In recognition of
this, statutory responsibility is entrusted to the board and senior management to steer
the institution and to safeguard its safety, integrity and reputation at all times. As
public interest entities, actions by financial institutions have far reaching implications
for a wide range of stakeholders (Ibrahim 2014).
When it comes to the insurance sector the industry was not immune to the most riveted
crisis, and the bailout of the "giant" American Insurance Group (AIG) by the U.S.
government, was equally blamed on excessive risk taking. More precisely, following the
crisis, questions pertaining to executive compensation packages, board of directors
duties, the importance of risk management within the firm, and the impact of
regulation (among others) have surfaced, leading to a large debate on the type of
effective monitoring mechanisms that could curtail managers excessive risk-taking
behavior in the industry Narjess (2011).
Past empirical Studies examining the relationship between governance and firm
performance produce mixed result. Some studies have shown no significant
relationship between governance and firm performance (see for example Ibrahim, et al.
2010).

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More additionally, there is no clear evidence to suggest that better corporate
governance enhances firm performance in different market settings. Further, there is no
unequivocal evidence that governance practices are endogenous (Klein et al 2005) and
investors are still much skeptic about the existence of a link between good governance
and performance indicators and for many practitioners and academics in the field of
corporate governance, this remains their search for the Holy Grail the link between
returns and governance (Bradley, 2004).
However, there were studies done which claims that good corporate governance
enhances firm’s performance. For instance, Klapper and Love (2002) report that better
corporate governance is highly correlated with better operating performance. They
document that firm level corporate governance provision matter happens more in
countries with weak legal environments.
Coming back to the case of the Ethiopia, prior studies conducted in the area of
corporate governance are very few. For instance, Minga (2008) explores the legal and
other external institutional frameworks of corporate governance in Ethiopia and
concluded that the overall standard of corporate governance was disappointing in the
country. Fekadu (2010) also analyzed the ownership structure of corporations in the
country and determined that the separation between ownership and control (or
shareholders and management of the corporations) is growing in Ethiopia. However,
there are weaknesses in the Commercial Code to protect minority shareholder rights. In
addition, Ahemad (2012) studied on Ethiopia company law and found that the Ethiopia
company law does not have adequate legislative provisions on governance issues
related to the separation of supervision and management responsibilities, and on the
composition, independence and remuneration of board of directors in share companies.
Generally earlier studies in developed countries have made immense contribution to
the corporate governance mechanism and financial performance. However, developing
countries received little attention in various literatures on this issue. However, many of
these studies were in banking industry. Consequently, a design feature that works well
in one country/industry may not work in another. As Bird (2005) noted this may be

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referred to as the No-One-Size-Fits-All (NOSFA) principle, i.e. the best policy and
administrative design for each country/industry has to be determined carefully in light
of the conditions and objectives of that country/industry. Specifically in Ethiopia,
though few studies have been conducted on corporate governance and financial
performance, no prior study has focused on insurance industry in Ethiopia. Therefore
current study seeks to see impact of corporate governance mechanism on financial
performance of Insurers that operate in Ethiopia to fill this left knowledge gap. Thus the
next section presents objectives of the study.
1.4. Objectives of the Study
In light of the problems stated in the preceding discussion, the intent of this concurrent
mixed methods study is to examine the impact of corporate governance on financial
performance of Ethiopia insurance industry in controlling the influence of some
selected Insurers specific variables using ten years data 2005-2014.
1.4.1. Specific objectives of the study
Given the overall objective of examining the impact of corporate governance mechanisms on
firms' financial performance using some selected Insurers in Ethiopia, this study had several
specific objectives. Specifically, the study sought to:
 Investigate the relationship between board size and Insurer performance
 Examine the association between board frequency of meeting and Insurer
performance
 Examine the association between board gender diversity and Insurer
performance
 Ascertain the influence of the directors’ educational qualification on Insurer
performance
 Identify whether directors business management experience affect Insurer
performance
 Find out the influence of industry specific experience of directors on Insurer
performance
 Ascertain influence of chief executive compensation on Insurers performance

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1.5. Significance of the Study
The findings of this study are expected to be of particular value to a number of players
in the various sectors in Ethiopia notably.
The result of this study will contribute to Insurance industry by identifying relevant
internal corporate governance mechanism and how this governance affects financial
performance. The result of this study contributes to the existing literature by providing
evidence on the relation between internal corporate governance mechanism and
Insurer’s financial performance.
The empirical results would also be the general indicators of corporate governance
mechanism that are useful for National Bank of Ethiopia, and Insurers’ shareholders in
making policies and decisions.
More additionally, study serve as a stepping stone for future researchers and suggests
areas where gap in literature exist, where further research studies are required so that
scholars in the field of finance and Economics can do further studies of them.
1.6. Scope of the study
The scope of the study is restricted to examine impacts of internal corporate governance
mechanism on financial performance of Insurers that are registered by the NBE and that
has operated at least ten year. To this end, this study were limited to internal corporate
governance mechanism variable (board size, Frequency of board meetings, Existence of
female directors in the board, director’s educational qualification, director’s industry
specific experience, directors other business management experience and Chief
executive compensation) as explanatory variable and the controlling variable were
delimited to premium growth rate to see their impacts on financial performance. The
dependent variables were delimited to return on asset .The secondary data used were
collected for the period of 2005-2014.The sample include one state owned (EIC) and
eight private insurance companies NIB, NISCO, UNIC, NICE, GLOBAL, AIC AFRICA
and NILE.

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1.7. Limitation of the Study
As with any other study, this study has its own limitations. In this study the considered
sample Insurance companies were on bases of purposive sample method based on the
companies’ age. This may introduce bias inherent with non-probability sampling
method. Another limitation of that hamper current study were unavailability of active
secondary market which forced the researcher to consider dependant variable as
accounting based measure performance (ROA) and at the same time thus dependant
variable are measured in terms of book values rather than market values.
1.8. Structure of the Study
Structure of the thesis report was divided into five chapters. Chapter one is the
introduction part which contains background of the study, over views of Ethiopia
insurance industry, statement of the problem, research objective, significance of the
study, scope of the study , limitation of the study and structure of the research thesis.
Chapter two presents a discussion on literature review. Chapter three outlined the
research methodology followed in the study. Chapter four reports the results and a
discussion thereon. In the final chapter, conclusions, summary recommendations and
suggestions for further research and improvements were forwarded.

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Chapter Two: Literature Review
The term corporate governance is a relatively new one both in the public and academic
debates, although the issues it addresses have been around for much longer, at least
since Berle and Means (1932) and even earlier Smith (1776) cited on (Claudiu 2007).
Hence, chapter two serves as background for this study by describing concepts of
corporate governance mechanism and organization performance. The remainder of the
chapter builds on following sections. In Section 2.1 theories related to corporate
governance is presented this is followed by section 2.2 which presents empirical review
of the previous studies conducted in relation to corporate governance mechanism and
organizational performance and section 2.3 introduce corporate governance and
insurance sectors and finally section 2.4 presents corporate governance in Ethiopia
context.
2.1.Corporate Governance Theories.
Corporate governance is the relationship among shareholders, board of directors and
the top management in determining the direction and performance of the corporation.
It includes the relationship among the many players involved (the stakeholders) and the
goals for which the corporation is governed (Kim & Rasiah, 2010). According to Imam
and Malik (2007) the corporate governance theoretical framework is the widest control
mechanism of corporate factors to support the efficient use of corporate resources. The
challenge of corporate governance could help to align the interests of individuals,
corporations and society through a fundamental ethical basis and it fulfills the long
term strategic goal of the owners. It will certainly not be the same for all organizations,
but will take into account the expectations of all the key stakeholders (Imam & Malik,
2007). So maintaining proper compliance with all the applicable legal and regulatory
requirements under which the company is carrying out its activities is also achieved by
good practice of corporate governance.
There are a number of theoretical perspectives which are used in explaining the impact
of corporate governance mechanism on firm’s financial performance. The most

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important theories are the agency theory, stakeholder’s theory and resource
dependency theory (Maher & Andersson, 1999).
2.1.1. Agency Theory
According to Habbash (2010) agency theory is the most popular and has received
greater attention from academics and practitioners. The agency theory is based on the
principal agent relationships. The separation of ownership from management in
modern corporations provides the context for the functioning of the agency theory. In
modern corporations the shareholders (principals) are widely dispersed and they are
not normally involved in the day to day operations and management of their companies
rather they hire mangers (agent) to manage the corporation on behalf of them
(Habbash, 2010).
The agents are appointed to manage the day to day operations of the corporation. The
separation of ownership and controlling rights results conflicts of interest between
agent and principal. To solve this problem or to align the conflicting interests of
managers and owners the company incurs controlling costs including incentives given
for managers.
According to Bowrin and Navissi (n.d.) agency theory refers to a set of propositions in
governing a modern corporation which is typically characterized by large number of
shareholders who allow agents to control and manage their collective capital for future
returns. The agent, typically, may not always own shares but may possess relevant
professional skills and competence in managing the corporation. The theory offers
many useful ways to examine the relationship between owners and managers and
verify how the final objective of maximizing the returns to the owners is achieved
particularly when the managers do not own the corporation’s resources. Agency theory
identifies the role of the monitoring mechanism of corporate governance to decrease
agency costs and the conflict of interest between managers and owners. It is clear that
the principal-agent theory is generally considered as the starting point for any debate
on the issue of corporate governance.

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Agency theory having its roots in economic theory was exposited by Alchian and
Demsetz (1972) and further developed by Jensen and Meckling (1976). Jensen and
Meckling (1976) defined agency relationship as a contract under which the principal
engage another person or the agent to perform some service on their behalf which
involves delegating some decision making authority to the agent. If both parties to the
relationship are utility maximizes, there is good reason to believe that the agent will not
always act in the best interests of the principal. The principal can limit divergences from
his interest by establishing appropriate incentives for the agent and by incurring
monitoring costs designed to limit the irregular activities of the agent.
Control of agency problems in the decision process is important when the decision
managers who initiate and implement important decisions are not the major residual
claimants and therefore do not bear a major share of the wealth effects of their
decisions. Without effective control procedures, such decision managers are more likely
to take actions that deviate from the interests of residual claimants. Individual decision
agents can be involved in the management of some decisions and the control of others
but separation means that an individual agent does not exercise exclusive management
and control rights over the same decisions (Fama & Jensen, 1983 p.304).
According to agency theory the agent strive to achieve his personal goals at the expense
of the principal. Managers are mostly motivated by their own personal interests and
benefits, and work to maximize their own personal benefit rather than considering
shareholders interests and maximizing shareholders wealth. To reduce agency problem
there must be better monitoring and controlling mechanisms which helps to ensure that
managers pursue the interests of shareholders rather than only their own interests.
The agency problem can be set out in two different forms known as adverse selection
and moral hazard. Adverse selection can occur if the agent misrepresents his ability to
perform the functions assigned and gets chosen as an agent. Moral hazard occurs if the
chosen agent shirks the responsibilities or underperforms due to lack of sufficient
dedication to the assigned duties. Such underperformance by an agent, even if acting in
the best interest of the principal, will lead to a residual cost to the principal. These costs

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resulting from sub-optimal performance by agents are termed as agency costs (Bathula,
2008, p.62).
The concept of corporate governance presumes a fundamental tension between
shareholders and corporate managers (Jensen & Meckling, 1976). While the objective of
a corporation’s shareholders is a return on their investment, managers are likely to have
other goals, such as the power and prestige of running a large and powerful
organization, or entertainment and other perquisites of their position. Managers’
superior access to inside information and the relatively powerless position of the
numerous and dispersed shareholders, mean that managers are likely to have the upper
hand (Fama & Jensen, 1983).
Therefore, shareholders monitor and control managers through their representatives
such as board of directors. Boards of directors are considered as an important device to
protect shareholders from being exploited by managers and help to effectively control
managers when they try to maximize their self interest at the expense of the company’s
profitability. Fama and Jensen (1983) argues that in order to minimize agency problem
that emanates from the separation of ownership and control the corporations need to
have a mechanisms that enables to separate the authority of decision management from
decision control. This would reduce agency costs and ensures maximization of
shareholders wealth by effectively controlling the power and self-centered decisions of
management.
From agency theory view point, corporate governance improves corporate performance
by resolving agency problems through monitoring management activities, controlling
self-centered behaviors of management and inspecting the financial reporting process
(Habbash, 2010). Moreover, corporate governance is able to alleviate agency costs by
aligning the conflicting interests of management and shareholders through monitoring
management and using different corporate governance mechanisms. Therefore,
corporate governance mechanism such as boards of directors and audit committees
enables shareholders to closely monitor the activities of managers. Ineffective board and
audit committee may give confidence for managers to pursue their own interests but

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effective board and audit committee can reduce deceptive behavior of managers by
detecting fraudulent financial report and actively monitoring.
According to the assumptions of agency theory corporate governance affect financial
performance. As a consequence, enhancing corporate governance should result in
improved financial performance. Taking agency theory into consideration, the study
variables were identified with the aim of examining the impacts of corporate
governance mechanism on financial performance.
Board structure has relied heavily on the concepts of agency theory, focusing on the
controlling function of the board (Habbash, 2010). The corporate governance
mechanism variable considered in this research include board size, board frequency of
meeting, board gender diversity, educational qualification of board members, other
general and industry specific experience of board members and chief executive
compensation.
2.1.2. Stakeholders Theory
Stakeholder theory is an extension of the agency theory, where the agency theory
expects board of directors to protect only the interests of shareholders. However,
stakeholder theory extends the narrow focus of agency theory on shareholders interest
to stakeholders to take into account the interests of many different groups and
individuals, including interest groups related to social, environmental and ethical
considerations (Freeman et al.2004).
According to Freeman et al. (2004), stakeholder theory begins with the assumption that
values are necessarily and explicitly a part of doing business. It asks managers to
articulate the shared sense of the value they create, and what brings its core
stakeholders together. It also pushes managers to be clear about how they want to do
business, specifically what kinds of relationships they want and need to create with
their stakeholders to deliver on their purpose. According to stakeholder theory the
purpose of the firm is to serve and coordinate the interests of its various stakeholders
such as shareholders, employees, creditors, customers, suppliers, government, and the
community.

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According to Habbash (2010), stakeholder refers to any one whose goals have direct or
indirect connections with the firm and influenced by a firm or who exert influence on
the firms goal achievement. These include management, employees, clients, suppliers,
government, political parties and local community.
According to this theory, the stakeholders in corporate governance can create a
favorable external environment which is conducive to the realization of corporate social
responsibility. Moreover, the stakeholders in corporate governance will enable the
company to consider more about the customers, the community and social
organizations and can create a stable environment for long term development. The
benefit of the stakeholder model emphasis on overcoming problems of
underinvestment associated with opportunistic behavior and in encouraging active co-
operation amongst stakeholders to ensure the long-term profitability of the business
firm (Maher & Andersson, 1999).
According to Kyereboah-Coleman (2007) management receive capital from
shareholders, they depend upon employees to accomplish the objective of the company.
External stakeholders such as customers, suppliers, and the community are equally
important, and also constrained by formal and informal rules that business must
respect. According to stakeholders theory the best firms are ones with committed
suppliers, customers, and employees and management. Recently, stakeholder theory
has received attention than earlier because 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
(Kyereboah-Coleman, 2007).
Companies are no longer the instrument of shareholders alone but exist within society.
It has responsibilities to the stakeholders. However, most researchers argue that it is
unrealistic task for managers (Sundaram & Inkpen, 2004b, Sanda et al. 2005). The
stakeholder theory has not been subjected to much empirical study. The common
criticisms for stakeholder theory is that how to align the stakeholders conflicting
interests since the difficulties result from how to administer different stakeholders with

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various needs and demands. It is not possible to treat all stakeholders equally
(Habbash, 2010).
Moreover, it is not practical for all stakeholders to be effectively represented in
corporate governance recommendations as this may undermine the welfare of company
(Habbash). The other critique of the stakeholder model is that managers or directors
may use stakeholder reasons to justify poor company performance (Maher &
Andersson, 1999).
2.1.3. Resource Dependency Theory
Whilst the stakeholder theory focuses on relationships with many groups for individual
benefits, resource dependency theory concentrates on the role of board directors in
providing access to resources needed by the firm (Abdullah & Valentine, 2009).
According to this theory the primary function of the board of directors is to provide
resources to the firm. Directors are viewed as an important resource to the firm. When
directors are considered as resource providers, various dimensions of director diversity
clearly become important such as gender, experience, qualification and the like.
According to Abdullah and Valentine, directors bring resources to the firm, such as
information, skills, business expertise, access to key constituents such as suppliers,
buyers, public policy makers, social groups as well as legitimacy. Boards of directors
provide expertise, skills, information and potential linkage with environment for firms
(Ayuso & Argandona, 2007).
The resource based approach notes that the board of directors could support the
management in areas where in-firm knowledge is limited or lacking. The resource
dependence model suggests that the board of directors could be used as a mechanism to
form links with the external environment in order to support the management in the
achievement of organizational goals (Wang 2009).
The agency theory concentrated on the monitoring and controlling role of board of
directors whereas the resource dependency theory focus on the advisory and
counseling role of directors to a firm management. Recently, both economists and

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management scholars tend to assign to boards the dual role of monitors and advisers of
management.
However, whether boards perform such functions effectively is still a controversial
issue (Ferreira, 2010). Within a corporate governance framework, the composition of
corporate boards is crucial to aligning the interest of management and shareholders, to
providing information for monitoring and counseling, and to ensuring effective
decision-making (Marinova et al.2010). The dual role of boards is recognized. However,
board structure has relied heavily on agency theory concepts, focusing on the control
function of the board (Habbash, 2010).
Each of the three theories is useful in considering the efficiency and effectiveness of the
monitoring and control functions of corporate governance. But many of these
theoretical perspectives are intended as complements to, not substitutes for, agency
theory (Habbash, 2010).
Among the various theories discussed, agency theory is the most popular and has
received the most attention from academics and practitioners. According to Habbash
(2010), the influence of agency theory has been instrumental in the development of
corporate governance standards, principles and codes. Mallin (2007) provides a
comprehensive discussion of corporate governance theories and argues that the agency
approach is the most appropriate because it provides a better explanation for corporate
governance roles (as cited by Habash, 2010).
Generally in relation to the research objectives, this study adopted the agency theory
because, it focuses on the board of directors as a focal point which dominates the
corporate governance literature. Unusual agency problems in insurance sector, the lack
of Competitive pressure and the special nature of insurance sectors suggest that
Insurers need stronger corporate governance practices than do the other. Taking agency
theory into Consideration, the study variables were identified accordingly based on
identified studies variable conceptual framework of the paper where developed since
conceptual framework is the schematic diagram which shows the variables includes in
the study. It is system of concepts assumption, expectation belief and theories that

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support and inform research. It explains either graphically or in narrative form the main
things to be studies, the key factors concepts or variable, and the presumed relationship
between them (miles and humberman 1994).

Fig 2.1 Conceptual frame work of the paper

Explanatory variable Dependant variable Controlling
Variable
Board size

Chief Executive Compensation

Educational qualification of board
member
Female directors in board Premium
ROA
Frequency of board meeting Growth Rate
rate
Directors other Business Management
experience

Directors’ industry specific

experience

Fig .1 Researchers own design.

2.2.Empirical Studies on Corporate Governance and organizational Performance.
This section of literature review concentrates on previous studies that have been
conducted in relation to this study. There were mixed results concluded by previous
studies pertaining to the relationship between corporate governance mechanisms and
firms’ financial performance. The important empirical studies are summarized below in
this section.
Uadiale (2010) examines the impact of board structure on corporate financial
performance in Nigeria. He found as the existence of strong positive association
between board size and corporate financial performance. It investigates the composition
of boards of directors in Nigerian firms and analyses whether board structure has an
impact on financial performance, as measured by return on equity and return on capital
employed. Based on the extensive literature, four board characteristics (board

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composition, board size, board ownership and CEO duality) have been identified as
possibly having an impact on corporate financial performance and these characteristics
are set as the independent variables. The Ordinary Least Squares (OLS) regression was
used to estimate the relationship between corporate performance measures and the
independent variables. Further he noted as exists of positive association between
outside directors sitting on the board and corporate financial performance. However, a
negative association was observed between directors’ stockholding and firm financial
performance measures. In addition, the study reveals a negative association between
return on capital employed (ROE) and CEO duality, while a strong positive association
was observed between ROE and CEO duality. The study suggests that large board size
should be encouraged and the composition of outside directors as members of the
board should be sustained and improved upon to enhance corporate financial
performance.
Ibrahim et al. (2010) examined the role of corporate governance in firm performance.
Their study was a comparative analysis between chemical and pharmaceutical sectors
of Pakistan using a sample of five companies from each sector from the year 2005 to
2009. Multiple linear regression models with panel data methodology were used.
Return on asset and return on equity was used as a measure of performance and they
used three corporate governance variables; board size, board independence and
ownership concentration. They found that in both sectors, the impact of corporate
governance on return on equity is significant but there is no significant impact on return
on asset. In case of sector analysis, there is an insignificant impact of corporate
governance on return on asset for chemical and pharmaceutical. On the other hand,
there is a significant impact of corporate governance on return on equity in chemical
sector, but in pharmaceutical the impact is insignificant.
Aldamen et al. (2011) conducted a study on the effect of audit committee characteristics
and firm performance during the global financial crisis. The researchers used logit
model analysis with a sample of 120 firms listed on the S&P300 during the period of
2008 and 2009. The study revealed that smaller audit committees with more experience

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and financial expertise are more likely to be associated with positive firm performance
in the market. It also found that longer serving chairs of audit committees negatively
impacts accounting performance. However, accounting performance is positively
impacted where audit committees include block holder representation, the chair of the
board, whose members have more external directorships and whose chair has more
years of managerial experience.
Amran (2011) empirically studied the association between Corporate Governance
Mechanisms and Company Performances. It was expected that corporate governance
mechanisms affect company performance. The hypothesis was tested on 424 public
listed Malaysian Companies (233 family controlled firms and 191 non-family controlled
firms) and the data about corporate governance mechanisms and company's
performance was collected from Sultanah Bahiyah Library database from the year 2003
to 2007. Board size, board independence director's professional qualification, leadership
structure were used as a corporate governance mechanisms, debt, firm age and firm
size were used as a control variable while Tobin's Q were used as a measure of
company performance. Panel data methodology with generalized least square
estimation method was used to test the hypothesis. The analysis has been done by
classifying the sample as family controlled firm and non-family controlled firm. The
researcher revealed that director’s qualification measured as the percentage of directors
with degree and above divided by total directors helps to enhance the performance of
non-family controlled firms but insignificant for family controlled firms. Board size and
leadership duality was a significant negative influence on family controlled firms
performance but insignificant for non-family controlled firms. Firm age was a
significant negative and positive association between the performance of family
controlled and non-family controlled firms respectively. On the other hand, there was a
significant negative relationship between firm size and performance of both family
controlled and non-family controlled firms. The other variables such as board
independence and director's professional qualification were insignificant for both
classes of firms.

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Al-Manaseer et al. (2012) empirically investigated the impact of corporate governance
on performance using 15 Jordanian banks listed at Amman Stock Exchange from the
year 2007 to 2009 with a total of 45 bank-year observation. The study employed pooled
data, and OLS estimation method with panel methodology. Return on asset, return on
equity, profit margin (measured as net interest income divided by total asset) and
earnings per share were the dependent variables of the study and board size, board
composition (independence), chief executive officer status, foreign ownership and bank
size were the independent variables of the study. The study revealed a significant
negative relation between board size and banks performance as measured by return on
equity and earnings per share but insignificant negative association of board size with
return on asset and profit margin was found. Bank size was negatively related with
return on asset, return on equity and profit margin but only significant with profit
margin. The study also reveals a positive association between board composition and
foreign ownership and bank performance. In addition, chief executive officer status has
a negative influence. Finally, the researchers suggest extending the study period.
When we see empirical evidence on insurance sectors there is rare international
evidence on corporate governance mechanism impact on performance in the insurance
industry compared to the literature on international corporate governance of typical
public firms. One recent exception relates to the risk-taking behavior of European
insurance companies from the United Kingdom and Germany. Specifically, Eling and
Marek (2011) are able to provide evidence that controls for the differences between the
market-based U.K. corporate governance environment and the control-based system
that prevails in Germany. Using a sample of 276 firms between 1997 and 2009, they
proxy risk taking by asset risk and product risk, and focus on stock insurance
companies. Their corporate governance indicators include executive compensation,
supervisory board compensation, and independence, as well as the number of board
meetings and ownership structure. The study concludes that U.K. insurance firms
engage in more risk taking than their German counterparts and that large
shareholdings and concentrated ownership contribute to increase risk taking.

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Lai and Lee (2011) exploit the particular organizational structure of the U.S. property
and causality insurance industry to assess the link between corporate governance and
risk taking (captured by underwriting risk, leverage risk and investment risk, in
addition to a measure of total risk). According to the authors stock organizational
structure may provide incentives for risk taking to increase the wealth of shareholders.
Indeed, shareholders who have limited liability are more likely to take risk in order to
maximize firm value and hence directly benefit from increased earnings Najjar (2012)
examine the impact of corporate governance mechanisms on firm’s performance of the
insurance industry in Bahrain, to understand how to minimize the agency costs
effectively and design the appropriate organizational structure. Also, to distinguish
between good and bad corporate governance which is a crucial step in building the
market’s confidence and attracting positive investment flows to the institution and the
economy. Pooled data method was used for Five insurance companies listed in Bahrain
stock exchange for the period of 2005-2010 year and he conclude that there is no
statistically significant impact of corporate governance expressed by CEO status,
ownership concentration, the number of employees, industry performance, and number
of shares traded on firm’s performance in the insurance industry expressed by the
dependent variable - return on equity (ROE).On the other hand board size, firm size,
number of block-holders found to have statistically significant impact on firm’s
performance in the insurance industry expressed by the dependent variable return on
equity (ROE). This result, confirms the importance of good governance structure on the
firm and the whole economy in the long run. The researcher suggests that every
insurance firm should properly define corporate governance and its mechanisms and
implement them effectively in order to reach the firm’s long-term goals, build
stakeholders’ confidence and generate positive investment flows.
Tornyeva et al (2012) undertake study is to investigate the relationship between
corporate governance and the financial performance of insurance companies in Ghana.
Both primary and secondary data was used and secondary data was collected from the
national insurance commission and the primary data was collected through the

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administration of interview questionnaires. Panel Data Methodology was used for the
data analysis. The findings shows that large board size, board skill, management skill,
longer serving CEOs, size of audit committee, audit committee independence, foreign
ownership, institutional ownership, dividend policy and annual general meeting are
positively associated with the financial performance of insurance companies in Ghana.
The authors argue as the insurance companies are encouraged to adopt good corporate
governance practices to improve their financial performance and also to protect the
interest of the shareholders. Most importantly the regulatory authorities must ensure
compliance with good governance and apply the appropriate sanctions for non
compliance to help the growth and development of the insurance industry.
Jackson (2012) did studies to examine the relationship between executive compensation,
ownership structure, and firm performance for Chinese financial corporation’s during
2001-2009. The results reveal that executive compensation in Chinese banks follows a
relation-based rather than a market-based contract. There is little evidence in support of
the pay-for-performance setting for Chinese executive compensation. Ownership
concentration has significantly negative impacts while firm size has significantly
positive impacts on CEO compensation. Further, the involvement of state ownership
tends to limit executive compensation, while the compensation committee is friendly
and enhances management compensation. The results suggest that the government or
regulation may ensure efficient corporate governance in business activity as a helping
hand when corporate governance is weak.
Fadun (2013) Examines challenges and opportunities associated with corporate
governance and insurance company growth. It advocates the imperative of good
corporate governance in the insurance industry and he examines corporate governance
theoretical perspectives, highlights the challenges of corporate governance in Nigeria,
and explores the relationship which exists between corporate governance and insurance
company growth in Nigeria. The study is an empirical designed using the responses of
survey, structured questionnaires, of 112 respondents. Pearson product coefficient of
correlation(r) is employed for data analysis and hypotheses testing. The findings reveal

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that good corporate governance promotes safe and sound insurance practice effective
supervision promotes good corporate governance and the new code of good corporate
governance for the Nigerian insurance industry enhances insurance companies’ growth
in Nigeria. The implication for practice suggests that effective corporate governance is
necessary for proper functioning of insurance companies in order to promote growth
and secure public confidence. The paper highlights the fact good corporate governance
practices can enable the Nigeria insurance industry to generate more resources to create
more employment opportunities and support the economy by way of prompt claims
settlement.
David et’ al (2013) undertakes study on effects of Corporate Governance on the financial
performance of listed insurance companies in Kenya. Specifically, they examine board
size, board composition, CEO duality and leverage and how they affect the financial
performance of listed insurance Companies in Kenya. They use data of all those
insurance Companies which were quoted on the Nairobi Securities Exchange as at
December 2012 by using a descriptive research design method and they noted as a
strong relationship exist between the Corporate Governance practices under study and
the firm’s financial performance and also they report as Board size was found to
negatively affect the financial performance of insurance companies listed at the NSE
more additionally they noted as a positive relationship between board composition and
firm financial performance exist. However, the most critical aspect of board
composition was the experience, skills and Expertise of the board members as opposed
to whether they were executive or non executive directors. Similarly, leverage was
found to positively affect financial performance of insurance firms listed at the Nigerian
stock exchange. On CEO duality, they found that separation of the role of CEO and
Chair positively influenced the financial performance of listed insurance firms in
Kenya.

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2.2.Corporate Governance and In Insurance Sector
Over the years a number of organizations have been involved in preparing various
guidelines and principles of corporate governance. Due to the financial scandals and
corporate collapses, there is generally the desire for transparency and accountability
which will increase investors’ confidence (Mallin 2004).
In the early stages of development, the insurance sector is often seen purely as a
commercial enterprise. The primary insured parties are industrial firms and
entrepreneurs. At this stage, relatively light regulation and oversight of the insurance
companies is all that is needed. However the situation changes once compulsory classes
of insurance are introduced When motor third party liability insurance is required for
all automobile drivers and major liability classes of business have been introduced, the
public at large starts to rely on insurers for significant sums of money in the event of an
accident or tort. At this stage high standards of governance of insurance become
necessary. The stakes rise further when life insurance and pensions become common
and the public invests its long-term savings, including retirement incomes funds. At
this latest stage, the government has an obligation to ensure that insurers and pension
providers follow high standards of corporate governance, and risk management in
particular Lester & Reichart (2009).
The establishment of adequate technical provisions and reserves is a critical element of
sound insurance risk management. For life insurers the calculations are based on
complex assumptions involving mortality rates, allowance for future expenses, lapse
and discontinuance rates and future investment yields. As a result, standard corporate
accounting and financial reporting make it difficult to gain appropriate insights into the
financial position of a life insurer. Insurance policyholders are thus largely dependent
on the ability of management and the supervisory board to take conservative and
prudent risks and have sound capital management policies. In addition policy-holders
depend on the willingness and ability of shareholders to contribute additional capital
when needed Lester & Reichart (2009).

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Strong governance in the insurance sector requires two lines of defense. The first line of
defense consists of the internal organs of the company its management, the systems of
risk management, internal audit and internal controls, the company’s actuary and the
supervisory board that should have oversight of them all. External measures provide
the second line of defense. These cover both the supervising authority that oversees the
insurance companies and market mechanisms that monitor and influence the sector.
Both lines of defense are needed to ensure a high level of transparency and
accountability in the sector. Furthermore the burden on the supervisory authority is
significantly reduced if the companies’ internal governance arrangements are strong, or
where the market provides an effective form of discipline through enhanced levels of
transparency and signaling Lester & Reichart (2009).
2.3.Corporate Governance in Ethiopia
Under this section corporate governance in the context of Ethiopia is presented.
According to NBE recent intended corporate governance guideline1 corporate
governance plays a vital role in maintaining the safety and soundness of financial
system in general and insurance sector in particular the benefit of corporate
governances gives way to balanced risk taking and enhances business prudence,
prosperity and corporate accountability with ultimate objective of realizing long term
Shareholders value, insurance consumers’ and other stakeholders interest Introduction
and development of corporate governance in Ethiopia is therefore a necessary but
revolutionary change in the ownership philosophies, management and operations of
Ethiopiacompanies. It would help to dissolve financial and market access blockages but
at the same time place far reaching requirements for revision of business practices by
companies aiming at growth and prosperity for their owners and stakeholders.
Corporate governance in Ethiopia is not improving even though the Ethiopiaeconomy
is at a stage of transformation. This is evidenced by study of Ahamed (2012) who
critically examines Ethiopiacompany law and found that the Ethiopiacompany law
does not have adequate legislative provisions on governance issues related to the

1
Available at <www.nbe.gov.et/pdf/directives/bankingbusiness/sbb-57-2014.pdf > accessed on April 7,2015

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separation of supervision and management responsibilities, and on the composition,
independence and remuneration of board of directors in share companies. Furthermore,
the author argues that there is a need to distinguish between corporate governance and
corporate management in Ethiopia company law, and that the board should be suitably
composed of non-executive and truly independent members who should be
professionally competent.
In addition, Minga (2008) states that the status of corporate governance in Ethiopia is
Disappointing and noted that the Commercial Code of 1960 does not provide adequate
legislative response to complex governance issues of the day, the new draft corporate
law has not yet been finalized; and he further states that key international conventions,
codes and standards are not ratified; political parties own substantial number of
business enterprises and operate in key sectors of the economy ownership
concentration through pyramid structure introduces particular problems of agency and
creates crony capitalism investor and creditor protection laws are inadequate; the
absence of organized equity market is a serious void. Consistently, Kiyota, Peitsch, and
Stern (2007) contended that the closed nature of the Ethiopia financial sector in which
there are no foreign banks, a non-competitive market structure, and strong capital
controls in place; and the dominant role of state-owned banks are the two major factors
that may constrain Ethiopians financial development.
Similarly, Fekadu (2010) argues that the regulation of NBE is not sufficient to protect
minority rights, because the main objective of NBE is financial regulation and which is
just one aspect of governance. The study conducted by the Addis Ababa and Ethiopia
Chambers of Commerce and Sectoral Associations (2009) on corporate governance in
Ethiopia suggests that the introduction of a voluntary code of corporate governance in
the country. It recommends that corporate governance law reform should consider key
development policy aspects which match with the countries plans for poverty reduction
and wealth creation. Good corporate reporting and disclosure are important aspects of
sound corporate governance.

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According to World Bank (2007) in Ethiopia, however, there is no particular accounting
standard regarding financial reporting and disclosure in Ethiopia. Neither are any of
the international standards officially adopted. Some of the laws indicate the use of
generally accepted accounting principles. The absence of a particular accounting
standard to be followed by all companies may be a drawback to the corporate
governance practice in Ethiopia. Nonetheless, currently National Bank of Ethiopia is
working to adopt the International Financial Reporting Standards (IFRS) to be followed
by financial institutions operating in the country.
2.4.Summary and Research Gaps
Corporate Governance is important in all organizations regardless of their industry, size
or level of growth. Good Corporate Governance has a positive economic impact on the
Institution in question as it saves the organization from various losses such as those
occasioned by frauds, corruption and similar irregularities. Besides it also spurs
entrepreneurial innovation enabling the organization to better seize the economic
opportunities that come its way. The main Corporate Governance themes that are
currently receiving attention are adequately separating management from the board to
ensure that the board is directing and supervising management, including separating
the chairperson and chief executive roles ensuring that the board has an effective mix of
independent and non independent directors and establishing the independence of the
auditor and therefore the integrity of financial reporting, including establishing an audit
committee of the board. Good Corporate aims at increasing profitability and efficiency
of organizations and their enhanced ability to create wealth for shareholders, increased
employment opportunities with better terms for workers and benefits to stakeholders.
Thus, the main tasks of Corporate Governance refer to: assuring corporate efficiency
and mitigating arising conflicts providing for transparency and legitimacy of corporate
activity, lowering risk for investments and providing high returns for investors and
delivering framework for managerial accountability.
The studies cited in the literature mostly concentrate on the developed countries whose
strategic approach and Corporate Governance systems are not similar to that of

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Ethiopia. In Ethiopia, study done on corporate governance themes are very few in
number for instance Minga (2008) explores the legal and other external institutional
frameworks of corporate governance in Ethiopia and concluded that the overall
standard of corporate governance was disappointing in the country. Fekadu (2010) also
analyzed the ownership structure of corporations in the country and determined that
the separation between ownership and control (or shareholders and management of the
corporations) is growing in Ethiopia, however, there are weaknesses in the Commercial
Code to protect minority shareholder rights. In addition, Ahemad (2012) studied
Ethiopia company law and found that the Ethiopia company law does not have
adequate legislative provisions on governance issues related to the separation of
supervision and management responsibilities, and on the composition, independence
and remuneration of board of directors in share companies More specifically research
report submitted on Ethiopia banking sectors for example unpublished master thesis
Ferede (2012) Studied to investigate the corporate governance mechanism and their
impact on performance of commercial banks in Ethiopia.
Generally, earlier studies have made immense contributions to the corporate
governance and financial performance; they were inclined towards the developed
countries. However, developing countries received little attention in various literatures
on this issue, at the same time majority of these studies were in banking industry.
Consequently, a design feature that works well in one country/industry may not work
in another. As Bird (2005) noted this may be referred to as the No-One-Size-Fits-All (the
NOSFA) principle, i.e., the best policy and administrative design for each
country/industry has to be determined carefully in light of the conditions and
objectives of that country/industry. Specifically in Ethiopia, though few studies have
been conducted on corporate governance mechanism and financial performance, to the
best of researcher’s knowledge, no prior study has focused on insurance industry in
Ethiopia thus currents study tried to fill this left research gap.

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Chapter Three: Research Methodology
The purpose of this chapter is to present the research methodology adopted in the
study. The chapter is arranged as follows. Section 3.1 presents the research hypotheses.
This is followed by the research approaches in section 3.2 under which quantitative,
qualitative, and mixed approaches are presented with their pros and cons, and the
underlying philosophies of each design. Then, section 3.3 presents the research method
adopted in the study. Finally Conclusions and the relationships between research,
hypotheses and the data are presented in section 3.4.
3.1. Hypotheses
As already shown in the first chapter, the intent of this study was to examine impacts of
corporate governance mechanism on financial performance of Insurers in Ethiopia in
order to achieve this objective seven hypotheses have been developed. Hypothesis are
constructed to see the impacts of (board size, frequency of board meeting, board
educational qualification , presence of female directors, Industry specific experience of
directors, Other business managements experience of directors and chief executives
compensation) that were selected from the literature and controlled by firm specific
variable such as Growth premium on the dependant variable measured by ROA.
In this study the dependent variables were variables that are used to measure the
financial performance of sample Insurers.
Therefore, current studies used ROA as dependant variable as one used by most
previous studies see for example David et al(2013), Tornyeva et al(2012), Najjar
(2012),Almanaseer et al(2012) and Ibrahim et al(2012)) to this end, dependant variable
were return on asset.
Return on Asset (ROA): measures the overall efficiency of management. It gives an
idea as to how efficient management is at using its assets to generate earnings.
ROA = Profit after Tax
Total Asset
Thus, some identifiable variable affecting corporate governance mechanism considered
in current study with their testable hypothesis was presented as follows:

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3.1.1. Board size
Corporate board size is considered to be one of the most important board structure
variables. As a corollary the extant literature has sought to provide a theoretical and
empirical nexus between corporate board size and firm financial performance with
mixed results (e.g Lipton and Lorsch, 1992, Yermack, 1996).
One theoretical (agency theory) proposition is that larger boards are bad, while smaller
boards are good and effective at improving financial performance (e.g., Lipton and
Lorch,1992; Sonnenfeld 2002, p.108). This is because while they plan, organize, direct
and control the business of the organization, the size of the board has also got financial
costs implications. That is, ceteris paribus larger boards consume more pecuniary and
non-pecuniary company resources in the form of remuneration and perquisites than
smaller boards.
A contrary theoretical view (agency and resource dependence) is that larger boards may
possibly be better for corporate financial performance (e.g.John and Senbet, 1998;
Yawson, 2006). Firstly, larger boards are associated with diversity in skills, business
contacts, and experience that smaller boards may not have, which offers greater
opportunity to secure critical resources (Haniffa and Hudaib, 2006, p.1038). Similarly,
larger boards offer greater access to their firm’s external environment, which reduces
uncertainties and also facilitates securing critical resources, such as finance, raw
materials, and contracts (e.g. Pearce and Zahra 1992, Goodstein et al. 1994). Secondly,
larger boards enhance the knowledge base on which business advice can be sought,
which increases managerial ability to make important and better business decisions
(Yawson, 2006, p.76). Finally, a corporate board’s monitoring capacity is demonstrated
to be positively related with board size (John and Senbet, 1998, p.385).
Empirically, the evidence regarding the association between board size and firm
financial performance is conflicting (e.g. Yermack, 1996 Adams and Mehran 2005,
Beiner et al. 2006, Henry 2008, Guest, 2009). Yermack (1996) is one of the first to
investigate the relationship between board size and financial performance in a sample
of 452 large US industrial corporations between 1984 and 1991. Generally, he reports an

31 | P a g e
inverse relationship between corporate board size and performance (Tobin’s Q). He
demonstrates that his evidence is robust to firm specific characteristics like size, growth
potential, board composition (% of outside directors), director ownership and industry.
Specifically, Yermack’s results show that investors valuation of companies’ declines
steadily over a range of board sizes between 4 and 10. Beyond a board size of 10, he
finds no relationship between board size and market valuation. Yermack’s results
support prior theoretical suggestions (e.g. Lipton and Lorsch, 1992, Jensen, 1993). By
contrast using a sample of 35 US listed Banking firms from 1959 to 1995, Adams and
Mehran (2005) report a statistically significant and positive relationship between board
size and Tobin’s Q. They demonstrate that the positive relationship remain unchanged
after accounting for potential endogeneities between board size and the Q-ratio.
By contracts to this Mangena and Chamisa (2008) examine the relationship between
board size and the incidences of listing suspensions by the JSE Ltd. Using a sample of 81
South African listed firms from 1999 to 2005, they document no significant link between
board size and incidences of listing suspension by the JSE. However, given the mixed
international evidence, the study hypothesis that:
Ho: There is no statistically significant relationship between board size and Insurers financial
performance, as proxy by ROA in Ethiopian.
3.1.2. Chief Executive Compensation.
The agency-based theory generally supports that there is a positive relationship
between executive compensation and firm performance (Haid and Yurtoglu, 2006;
Nourayi and Mintz, 2008; and Lazarides et al., 2008), although some scholars argue that
a positive relation is not well-established or is only weakly supported. For instance,
using data from the Portuguese Stock Exchange, Fernandes (2005) concludes that firm
performance has little effect on CEO compensation and he further claims that there is
no relationship between stockholders’ wealth and executive remuneration. More
recently, Jeppson et al. (2009) finds that CEO compensation is positively related to a
firm’s total revenue, but not related to the changes in total shareholders return or total
net income. In sum, the pay-for-performance setting varies with different data,

32 | P a g e
institutions, and model specifications. Comparatively, executive compensation and
CEO equity incentives have not been well studied in emerging economies (Kato and
Long, 2006). Moreover, little is known about how Chinese CEOs are compensated
compared to those in developed countries. Following traditional wisdom, this study
hypothesizes that:
Ho: There is no significant relationship between chief executive’s compensation and Insurers’
financial performance proxy by ROA in Ethiopian.
3.1.3. Educational Qualifications of Directors
It is measured by the proportion of board members who had college degree or higher to
the total number of board members. Higher education of top management directors in
organizational contexts is positively related to receptivity to innovation, creativity, and
better strategic decision making (Bantel, 1992). Therefore, innovation has become a key
firm strategy to gain competitive advantage and the qualifications of directors are
positively related to firm performance. This relationship suggests that education level
and a diverse functional background are positively related to organizational
performance (Bantel, 1992; Haniffa and Cooke, 2002), especially in business-related
background such as in Economics, Law, Marketing, Accounting, Management, or
Finance. In addition, (Poon, Heong and Lee, 2013) find that there is positive relationship
between performance and the qualifications of directors. Their finding supports the
belief that top management teams who have qualifications in business-related
disciplines such as Marketing, Management, Finance, Law or Economics, improved
higher insurer performance. These qualified directors chose to increase firm
performance to promote corporate image, and demonstrate accountability and
credibility within the management team. Hence, less qualified directors are possibly
less effective than directors with business qualifications (Ferreira, 2009). Drawing on
this strand, the study hypothesizes that:
Ho: There is no significant relationship between educational Qualification of directors with
business backgrounds and Insurers financial performance measured by ROA in Ethiopia

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3.1.4. Female Director Proportion
There have been disagreements among the scholars regarding the presence of female
directors in the board. Some have revealed positive relationships between financial
performance and presence of female directors in the board (Bonn, 2004) and other study
found that female director proportion has a negative relationship to the financial
performance of the firms (Mentes, 2011). On the other hand, recent studies conducted
by (Farrell and Hersch, 2005) did not find significant relationship between women
directors and shareholder returns. The women participation in all most all the activities
around the world is increasing. As laid out in the literature, diversity within the board
in terms of female director proportion has had a positive relationship to the
performance. It is measured as number of female directors who serve as the board
members. Therefore based on the above arguments the study hypothesizes that:
Ho: There is no significant relationship between the proportion of female directors and Insurers
financial performance proxy by ROA.
3.1.5. Frequency of Board Meeting
The association between the frequency of board meetings and firm financial
performance is another internal corporate governance issue that gives rise to concern
for policy-makers and researchers. There are two theoretical views on this issue: those
who are in favour of higher frequency of board meetings and those who are not (e.g.
Lipton and Lorsch, 1992; Jensen, 1993).
One theoretical proposition is that the frequency of board meetings measures the
intensity of a board’s activities, and the quality or effectiveness of its monitoring
(Vefeas, 1999a, p.116, Conger et al. 1998, p.142). All else equal, a higher frequency of
board meetings will result in a higher quality of managerial monitoring, which can
impact positively on financial performance. It has been contended that regular meetings
allow directors more time to confer set strategy and to appraise managerial
performance (Vafeas 1999a, p.118). It can help directors to remain informed and
knowledgeable about important developments within the firm. This will place the
directors in a better position to timely address emerging critical problems (Mangena

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and Tauringana, 2006 p.12). In fact, Sonnenfeld (2002, p.107) suggests that regular
meeting attendance is considered a hallmark of the conscientious director. Also,
frequent meetings intermingled with informal sideline interactions can create and
strengthen cohesive bonds among directors (Lipton and Lorsch 1992, p.69).
An opposing theoretical view is that board meetings are not necessarily beneficial to
shareholders. Firstly, Vefeas (1999a, p.114) argues that normally the limited time
directors spend together is not used for the meaningful exchange of ideas among
themselves. Instead, routine tasks, such as presentation of management reports and
various formalities absorb much of the meetings. This reduces the amount of time that
outside directors would have to effectively monitor management (Lipton and Lorsch
1992 p.64). Secondly, board meetings are costly in the form of managerial time, travel
expenses, refreshments and directors’ meeting fees (Vafeas 1999a, p.118).
In fact, Jensen (1993, p.866) contends that boards in well-functioning companies should
be relatively inactive and exhibit little conflicts. He suggests that rather than necessarily
organizing frequent board meetings, it will be more profitable for corporate boards to
establish a system that is responsive to their specific challenges. For example, directors
can increase the frequency of meetings during crisis or when shareholders’ interests are
visibly in danger, such as when replacing the CEO or fighting hostile takeovers.
Consistent with Jensen’s (1993) suggestions, Vafeas (1999a, p.118) argues that
companies that are efficient in setting the right frequency of board meetings, depending
on its operating context, will enjoy economies of scale in agency costs. However, given
the conflicting international empirical evidence the following hypotheses are tested.
Ho: There is no statistically significant relationship between the frequency of board meetings
and Insures financial performance, as measured by ROA in Ethiopia.
3.1.6. Other Business Management Experience of Directors
Business management experience of directors enables them to have better knowledge
and understanding about business and enable to contribute effectively in the decision
making process as well as in effectively monitoring the activities of management (Saat
et al.2011). Directors need to be competent and capable of understanding the business

35 | P a g e
operation. Kroll, et al (2008) found that boards rich in appropriate experience are
associated with superior returns. He argues that boards comprising directors with
appropriate knowledge gained through experience can be not only better monitors, but
also more useful advisors to top managers. According to Castanias et al. (2001)
differences between firms in the human capital of boards of directors are related to
differences in strategic actions and performance. However, empirical studies examining
the effect of business experience of board members on firm performance is scarce based
on the above discussion the following hypothesis were tested.
Ho: There is no significant association between board members business management experience
and financial performance of Insurers proxy by ROA in Ethiopia.
3.1.7. Industry Specific Experience
It is measured as the percentage of number of directors who served in other insurers
earlier in the same capacity divided by the total number of board members. It is
important for insurers to have skilled and experienced directors on board particularly
prior experience in the same sector and position. Directors' specialist knowledge will be
valuable to the creation of a strong and informed board (Saat et al 2011). He claimed
that experience of directors enables them to guide, steer and monitor the firm more
effectively. In other words, their knowledge of the industry, its opportunities and
threats and their connections to the industry participants based on their experience
enables them to contribute substantively in the firm performance. However, empirical
studies examining the effect of business management and industry specific experience
of board members on firm performance is scarce in the literature. Accordingly, based on
above discussion the study hypothesizes that:
Ho: There is no significant association between board members industry specific experience and
Insurers financial performance measured by ROA in Ethiopia
3.2. Control variables
In this study to reduce specification bias, the model also includes control variables
growth premium as the one used by Tornyeva and Wereko(2012) premium growth
(GP) is defined as change in annual premium growth production.

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Table 3.1: Description of the Variables used in the Regression Model
Variable Measures Notation

Dependant variable
Financial performance Net Income After Tax / Total Asset ROA

Independent variable
Board size Number of directors sitting on the board. BS

Frequency board of Number of meeting in the year. FM

meeting
Female Director Number of female who serve as board member. FD
Proportion
Educational Number of directors who had college degree or EQD
Qualifications of higher.
Directors
Industry Specific Number of directors who served in other ISE
Experience Insurers earlier in the same capacity.

Other business Number of directors who have other directorial ODS

management ship responsibility in other sectors divided by
experience of directors total number of directors

Companies’ executives’ Natural log. Of chief executives composition Ccop

compensation. in amount birr.
Controlling variable
Growth premium Percentage change in growth annual premium GP
production

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3.3. Research Approach

As noted in Creswell (2003 p.13) in terms of investigative study there are three common
approaches to business and social research namely, quantitative, qualitative and mixed
methods approach. Quantitative research is a means for testing objective theories by
examining the relationship among variables (Creswell 2009). On the other hand,
qualitative research approach is a means for exploring and understanding the meaning
individuals or groups ascribe to a social or human problem with intent of developing a
theory or pattern inductively (Creswell 2009).
Finally, mixed methods approach is an approach in which the researchers emphasize
the research problem and use all approaches available to understand the problem
(Creswell, 2003).
Generally in light of the discussions above on qualitative, quantitative and mixed
research methods, in this study, the quantitative method is predominantly used.
However, to have a better insight and gain a richer understanding about the research
problem, the quantitative method is supplemented by the qualitative method of
inquiry. That is, to get the benefits of a mixed methods approach, as presented earlier,
and to alleviate the bias in adopting only either quantitative or qualitative approach, the
current research combines both quantitative and qualitative research approaches. The
next section focuses on the description of research method used in this study.
3.4. Research Method Adopted

Decision regarding the selection of research instrument, the nature of collected data and
the analysis of collection are based on the research method used in a study. Selection of
appropriate research methods is very important because it decides the quality of study
findings. For the purpose of the present study, mixed approach which advocates the
combination of both qualitative and quantitative has proved to be ideal for the study
impacts of corporate governance mechanism and financial performance of Insurers in
Ethiopian. The central premise is that the use of quantitative and qualitative approaches
in combination provides a better understanding of research problems than either

38 | P a g e
approach alone (Creswell 2009). The following sections, thus, discuss consecutively the
quantitative and qualitative aspects of the research method.
3.4.1 Quantitative Aspect of Research Method

Quantitative research approach deals with numerical data and statistical analyses to
answer questions about relationships among measured variables. Even if there are two
strategy of inquiry under quantitative approach, this study used a survey design due to
its merit of economy and enables to gather enough information. In addition the purpose
of this study is to examine the impacts corporate governance on financial performance
of Insurers in Ethiopian. There is a need of a quantitative or numeric description of
relationship between the independent and dependent variables.
The survey, as a quantitative research strategy, can collect quantitative data by different
types. Fink (2002), as quoted in Creswell (2009 p. 146), says there are four data collection
types of survey, self-administered questionnaires, interviews; structured record reviews
to collect financial, medical, or school information and structured observations. The
survey instrument adopted in this study to collect data was a structured record review.
The following section, accordingly, reviews the issues in a sample design in respect of
the current study.
Sampling Design

The target populations of the study were all insurance companies registered by NBE
and under operation in Ethiopia. Currently, seventeen insurance companies are
working in Ethiopia (as presented in appendix 1).
However to undertake this study the researcher select nine Insurers using purposive
sampling method this is because age of the company, since cut of date for the studies
2005 therefore, those Insurers which were established after 2005 and started to provide
financial statement in the succeeding fiscal year were not included in this study.
Therefore, this study incorporated only Nine Insurance companies that have financial
statements for the year 2005 and onwards. Hence samples are chosen to represent the
relevant attributes of the whole population. Thus, to make the balanced panel data

39 | P a g e
structured, i.e. every cross-section follows the same regular frequency with the same
start and end dates. Besides, ten years is assumed to be relevant because five years and
above is the recommended length of data to use in most finance literatures.
3.4.2. Qualitative Aspect of the Study

Qualitative research approach is a means for exploring and understanding individuals

or groups scribe to a social or human problem (Creswell, 2009). Qualitative research is
typically used to answer questions of complex phenomena on which data can be
collected using instruments like unstructured interviews, group discussions,
unstructured observation and reflection field notes, various texts like reflexive Journals,
pictures, and analysis of documents and literature. Thus, in the current study to gather
the qualitative data needed for further addressing the objectives the study stated in the
preceding section in-depth interviews were used in this study.
In-depth Interviews

In-depth interviews were held with selected board chairmen sampled Insurers. They
are considered in this study because they are assumed most knowledgably part of about
the issue under investigation so three boards chair man and one delegated person
purposefully considered for discussion. Those considered board chairmen have high
understanding and well experienced expertise in the sectors. Generally, based on the
objective presented in the preceding section a number of unstructured interview
questions were asked by researcher to gain additional insight.
Since the nature of this research requires in-depth understanding of the impacts of
corporate governance mechanism on financial performance of insurance companies in
Ethiopia, an interview was suitable to uncover such information. Easterby-Smith et al.
(1991) commented that the interview method is the most fundamental of all qualitative
methods and is claimed to be the best method for gathering information.
The researcher conducted an in-depth interview in unstructured face to face interview
form. In respect of instrument, unstructured face to face interview was used because of
its flexibility and also allowing new questions to be brought up during the interview.

40 | P a g e
Regarding the sample design, non-probability purposive sampling method was
adopted. So, to explore issue of corporate governance mechanism three boards chair
men and one delegated person were interviewed by using unstructured face to-face
interviews at different times.
3.5. Data Analysis Method

In this study to analyze the collected data descriptive, correlation and multiple panel
linear regression data analysis method were employed. The descriptive statistics was
used to quantitatively describe the important features of the variables using mean,
maximum minimum and standard deviations. The correlation analysis was used to
identify the relationship between the independent, dependent and control variables
using Pearson correlation analysis. The correlation analysis shows only the degree of
association between variables and does not permit the researcher to make causal
inferences regarding the relationship between variables (Mack et al 2005). Therefore,
multiple panel linear regression analysis was also used to test the hypothesis and to
explain the relationship between corporate governance mechanism variables and
financial performance measures by controlling the influence of some selected variables.

Eviews 7 software was used for analysis and the results were presented through tables.
Beside, the panel character of the data collected allow for the use of panel data
methodology. Panel data involves the pooling of observations on a cross-section of
units over several time periods and provides results that are simply not detectable in
pure cross-sections or pure time-series studies (Freeman 1984). The general form of the
panel data model can be specified more compactly as:
Yit= α+ ∑βXit + εit
In the equation Yit represents the dependent variable in the model and Xit Contains the
set of explanatory variable in the model. The subscripts i and t denote the cross-
sectional and time-series dimension respectively. Also αi is taken to be constant over
time t and specific to the individual cross-sectional unit i. If αi is taken to be the same

41 | P a g e
across units, then Ordinary Least Square (OLS) provides a consistent and efficient
estimate of αi and β.
In the light of the above model and on the base of selected explanatory variable the
current study used econometric model as shown below.
ROAit = α + β1BS + β2Ccopit + β3EQDit + β4FDit + β5FMit + β6ODSit + β7ISEit + β8PGit +
εit
Where:
i denote insures ranging from 1 to 9 (cross-sectional dimension).
t denote years ranging from 2005 to 2014 (time-series dimension).
Dependent Variables
ROAit Return on asset for ith insurer and time period t
 Independent variables
 BSit Board size for ith insurer and time period t
 Ccopit Chief Executives compensation ith insurers and time period t
 EQDit Board member educational qualification for ith insurer and time period t
 FDit Female directors in the board for ith insurer and time period t
 FMit Frequency of board meeting for ith insurer and time period t
 ODSit Board member other business managements experience ith insurer and
time period t
 ISEit Board members industry specific experience for ith insurer and time period
t
Controlling variable
 PG it Premium Growth For ith insurer and time period t
 ε The error term
One issue that may arise from the use of panel data is whether the individual effect is
considered to be fixed or random. The Hausman test was employed to select the
appropriate method from the fixed effect model (FEM) and Random Effect Model
(REM). Since random effects estimation addresses the endogeneity issue by in

42 | P a g e
instrument potentially endogenous variables, it also assumes that the individual firm
effects are uncorrelated with the exogenous variables.

On the other hand, the fixed effect estimation deals successfully with the correlated
effects problem, yet it fails to account for potential endogeneity of regresses. As it is
mentioned above, for this study OLS were used. Therefore, before the regression was
run tests for fulfillment of the basic Classical Linear Regression Model (CLRM)
assumptions were tested. Consequently, the basic CLRM assumptions tested in this
study were errors have zero mean, homoskedasity, autocorrelation, normality and
multicollinearity.

According to Brooks (2008) when the assumptions are satisfied, it means that all the
information available from the patterns was used. But, if there is assumption violation
of that data usually means that there is a pattern of data that have not included in the
model, and could actually find a model that fits the data better.

The first assumption is the errors have zero mean. According to Brooks (2008), if a
constant term is included in the regression equation, this assumption will never be
violated. The second assumption is hetroskedasity. The assumption of homoscedasticity
is that the variance of the errors is constant or equal. If the variance of the errors is not
constant, this would be known as hetroscedacity (Gujirati, 2004 p.387). In order to test
homoscedasticity the white test was used.

The third assumption is the autocorrelation assumption that the covariance between the
error terms over time is zero; it assumed that the errors are uncorrelated with one
another. If the errors are not uncorrelated with one another, it would be stated that they
are serially correlated. Usually, Durbin-Watson (DW) value in the main regression table
is considered and used to test the presence of autocorrelation.

According to Brooks (2008), DW has 2 critical values: an upper critical value (dU) and a
lower critical value (DL), and there is also an intermediate region where the null
hypothesis of no autocorrelation can neither be rejected nor not rejected.

43 | P a g e
 Figure: 3.1: Rejection and Non-Rejection Regions for DW Test

Reject H:0 do not reject Reject H:0

positive no evidence of negative
autocorrelation
Auto
autocorrelation autocorrelation

inconclusive inconclusive

0 DL DU 2 4-DU 4-DL 4
The rejection, non-rejection, and inconclusive regions are shown on the number line in
figure 3.1. So, the null hypothesis is rejected and the existence of positive
autocorrelation presumed if DW is less than the lower critical value the null hypothesis
is rejected and the existence of negative autocorrelation presumed if DW is greater than
4 minus the lower critical value, the null hypothesis is not rejected and no significant
residual autocorrelation is presumed if DW is between the upper and 4 minus the
upper limits; the null hypothesis is neither rejected nor not rejected if DW is between
the lower and the upper limits, and between 4 minus the upper and 4 minus the lower
limits.

The fourth assumption is Normality of the error distribution that assumed the errors of
prediction (differences between the obtained and predicted dependent variable scores)
are normally distributed. Violation of this assumption can be detected by constructing a
histogram of residuals (Brooks 2008).

Finally the fifth assumption is multicollinearity assumption which refers to the situation
in which the independent variables are highly correlated. When independent variables
are multicollinear, there is overlap or sharing of predictive power. This may lead to the
paradoxical effect, whereby the regression model fit the data well, but none of the
explanatory variables (individually) has a significant impact in predicting the
dependent variable (Gujarati 2004). A Pearson correlation is used for the purpose of

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testing multicollinearity in this study. The Pearson correlation matrix is a technique of
testing multicollinearity of explanatory variables by investigating the relationship of
biviariate variables (Wooldridge 2006).

Regarding data collected through in-depth interviews, Qualitative analysis was used for
qualitative data collected and the results were analyzed and presented in separate
section and linked whenever necessary.

3.6. Conclusions and the Relationships Between, Hypotheses and the Data

This chapter discussed the research hypotheses, research methods and different data
sources which were used to address the study problem. In general basing the research
problems and objective the study seven hypotheses were tested. Similarly, based on the
underlying principles of research methods and research problem mixed method were
chosen as appropriate to this research. Specifically, a structured record review was used
to collect quantitative data whereas in-depths interviews were conducted to gather
qualitative data. Finally the research objectives and hypotheses with their respective
strategy of inquiry and data collected were summarized in table 3.2 below.
Table 3.2: Linkage between research hypotheses and data source

Research Hypothesis Strategy of Data Source

Inquiry
Ha1: There is no significant relationship between board size and Survey method Structured
performance of Insurers proxy by ROA in Ethiopia. Dependant documents
Ha2: There is no significant relationship between chief executive’sVariable reviews.
compensation and Insurers’ performance proxy by ROA in ROA(Return on
Ethiopia Asset)
Independent
Ha3; There is no significant relationship between educational
Variables
Qualification of directors with business backgrounds and Insurers
performance proxy by ROA in Ethiopia.
Ha4: There is no significant relationship between the proportions Board size Data from
of female directors and Insurers Performance proxy by ROA in Frequency of insurance
Ethiopia. meeting companies,
Female of Director Financial
Ha5:There is no statistically significant relationship between
in board. statements
Frequency of board meetings and Insurers performance, as measured
Directors and Board
By ROA in Ethiopia. educational Report of ten
H6: There is a no significant association between board members qualification consecutives
other business management experience and financial performance year (2005-
of Insurers proxy by ROA in Ethiopia.

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 Ha7: There is no significant association between board members Directors industry 2014).
industry specific experience and Insurers performance proxy by specific experience
ROA in Ethiopia
Directors other
business
management
experience.

Chief Executive
compensation

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Chapter Four Results and Discussions

This chapter presents the results and analysis of the findings of the different methods
used. The chapter is organized to have three sections. Section 4.1 presents test for five
Classical Linear Regression Model Assumptions for classical linear regression model.
Following this Section 4.2 presents the results of structured record reviews and in depth
interview. Then the results obtained under these different methods are jointly analyzed
in the discussion section presented in section 4.3

4.1. Test Results for the Classical Linear Regression Model Assumptions

This section presents the test for the assumptions of classical linear regression model
(CLRM) namely the error have zero mean, hetroskedasity, autocorrelation, normality
and multicollinearity.
4.1.1. Assumption one: The errors have zero mean (E (ε) = 0)

According to Brooks (2008), if a constant term is included in the regression equation,

this assumption will never be violated. Thus, since the regression model used in this
study included a constant term, this assumption was not violated.
4.1.2. Assumption two: homoscedasticity (variance of the errors is constant (Var (ut) = α2

< )

Table 4. 1 Heteroskedasticity Test: White

F-statistic 2.022109 Prob. F(44,45) 0.0103

Obs*R-squared 59.76998 Prob. Chi-Square(44) 0.0567
Scaled explained SS 31.30733 Prob. Chi-Square(44) 0.9247

Source: Data of sampled insurance companies and own computation

In the table 4.1 shown above the F-statistic shows as there is presence of
heteroscedasticity since the p-values were less than 0.05 but Chi-Square versions of the
test statistic and the third version of the test statistic, Scaled explained SS, which as the
name suggests is based on a normalized version of the explained sum of squares from
the auxiliary regression, gave that there is no evidence for the presence of

47 | P a g e
heteroscedasticity problem. Since both the p value was in excess of 0.05. Therefore, the
conclusion of the test is somewhat ambiguous in this case. But as noted by Wooldridge
(2002) existence of heteroskedasticity would not cause the parameter estimates to be
biased and even in the presence of heteroscedasticity, more efficient estimation is
possible provided that other assumptions are met.
4.1.3. Assumption Three: Covariance between the error terms over time is zero (cov (ui,uj)

= 0)

This is an assumption that the errors are linearly independent of one another
(uncorrelated with one another). If the errors are correlated with one another, it would
be stated that they are autocorrelated.
The DW test statistic value in the multivariate regression result was 1.93. There are 90
yearly observations in the regression. According to DW stat table, the relevant critical
values for the test were dL = 1.336, dU = 1.714, so 4 − dU = 2.664 and 4 − dL = 2.286. The
test statistic was clearly between the upper and 4 minus the upper limits (as presented
in figure 3.1) and thus the null hypothesis of no evidence of autocorrelation was not
rejected and no significant residual autocorrelation was presumed.

2
4.1.4. Assumption four: normality (errors are normally distributed (ut N (0, ))

According to Brooks (2008), if the residuals are normally distributed, the histogram
should be bell-shaped and the Jarque Bera statistic would not be significant. This means
that the p-value given at the bottom of the normality test screen should be greater than
0.05 to support the null hypothesis of presence of normal distribution at the 5 percent
level.

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Figure 4.1: Normality Test Result
16
Series: Standardized Residuals
14 Sample 2005 2014
Observations 90
12
Mean 3.08e-19
10
Median 0.003848
Maximum 0.127498
8
Minimum -0.145341
6 Std. Dev. 0.046316
Skewness -0.362110
4 Kurtosis 3.800873

2 Jarque-Bera 4.372099
Probability 0.112360
0
-0.15 -0.10 -0.05 0.00 0.05 0.10
Source: Data of sampled insurance companies and own computation.

The above diagram witnesses that normality assumption holds, i.e. the Bera-Jarque
statistic has a P-value of 0.112 implying that the data were consistent with a normal
distribution assumption. Also, it implies that the inferences made about the population
parameters from the sample parameters tend to be valid.
4.1.5. Assumption five: Multicollinearity Test

Multicollinearity in the regression model suggests substantial correlations among

independent variables. This phenomenon introduces a problem because the estimates of
the sample parameters become inefficient and entail large standard errors, which makes
the coefficient values and signs unreliable. In addition, multiple independent variables
with high correlation add no additional information to the model. It also conceals the
real impact of each variable on the dependent variable (Anderson et al.2008).
Hair et al. (2006) argued that correlation coefficient below 0.9 may not cause serious
multicollinearity problem. Also, Cooper and Schendlar (2009) suggested that a
correlation above 0.8 should be corrected for. In addition, Malhotra(2007) stated that
multicollinearity problems exists when the correlation coefficient among variables
should be greater than 0.75.

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Table 4.2: Correlation Matrix between independent variables.
CCOP EQD BS FD ODS GP FM ISE
CCOP 1.00
EQD -0.15 1.00
BS 0.36 0.56 1.00
FD 0.04 0.15 0.13 1.00
ODS 0.35 -0.06 0.21 0.16 1.00
GP -0.10 0.08 0.09 -0.02 -0.03 1.00
FM 0.42 0.52 0.58 -0.01 0.28 0.01 1.00
ISE 0.71 0.20 0.66 0.06 0.33 0.05 0.53 1.00
Source: Data of sampled insurance companies and own computation

The method used in this study to test the existence of multicollinearity was by checking
the Pearson correlation between the independent variables. The correlations between
the independent variables are shown in table 4.2 above. All correlation results are below
0.75, which indicates that multicollinearity is not a potential problem for this study. In
general, all tests illustrated above were testimonials as to the employed model was not
sensitive to the problems of violation of the CLRM assumption.
4.2. Results

In this paper the necessary data were collected mainly through review of documents
and in depth-interview. The data is used to examine the existing relationship between
the governance mechanism variable and Insurers performance. Consequently, both
governance mechanism and, performance data were collected from all the Insurers that
have been in operation from the year 2005 up to 2014 in Ethiopia. This data results in 90
yearly observations. The corporate governance mechanism data and performance data
were accessed from NBE, and Insurers head offices of the sample companies. Finally,
the data were extracted from audited annual financial statement and board of directors’
reports. With regard to in-depth interviews, the study conducted interview with three
board chairmen and one delegated person in favor of board chairmen, totally four
peoples are contacted. The summary of the collected data for each Insurers were
presented in Appendix six.

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4.2.1. Descriptive Statistics

Table 4.3 provides a summary of the descriptive statistics of the dependent and
independent variables for nine insurance companies for a period of ten years from year
2005-2014 with a total of 90 observations. The table includes the mean, median,
standard deviation, number of observations, minimum and maximum for the
independent and dependent variables of the model. This was generated to give overall
description about data used in the model and served as data screening tool to spot
unreasonable figure.

As shown in chapter three, return on asset which gives an idea how efficient
management is at using its assets to generate earnings was measured as net income
after tax divided by total asset. The average value of return on asset for the sample
Ethiopia Insures is 13 percent (mean=0.13) with a maximum and minimum value of 37
percents (0.37) and -5 percent (-0.05) respectively. At the same time, the standard
deviation is 11 percent from the average value. This result indicates that most
performing insurance among the sampled Insurers earned 37 cents of profit after tax for
a single birr invested in the assets of the firm. On the other hand, less efficient Insurer’s
during study period from the sampled Insurers incurs loss of 0.05 cents for each birr
invested in the assets of the firm.

More additional, standard deviation statistics for return on asset was 11 percents which
shows that how individual values of return on asset in a data set vary from the mean of
return on asset over the last ten years by 11 percents. Likewise the during study period
insurance companies in Ethiopia generate 13 percents income on average from
mobilizing their asset. The result implies that these Insurers need to optimize the use of
their assets to increase the return on their assets.

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 Table 4.3 Descriptive Statistics of Regression Variables

Mean Median Maximum Minimum Std. Observations

Dev.
ROA 0.13 0.10 0.37 -0.05 0.11 90.00
CCOP 5.52 5.55 6.19 4.70 0.35 90.00
EQD 6.31 6.00 9.00 2.00 2.14 90.00
BS 7.38 7.00 9.00 5.00 1.64 90.00
FD 0.86 1.00 4.00 0.00 1.10 90.00
ODS 0.77 0.80 1.00 0.29 0.23 90.00
GP 0.25 0.21 1.49 -0.10 0.23 90.00
FM 18.04 16.00 66.00 2.00 14.91 90.00
ISE 2.93 3.00 6.00 1.00 1.49 90.00
Source: Eviews Output from Data of Sample Insurers, 2005– 2014

Regarding explanatory variable there are some imperative statistics that have to be
mentioned. Board size of sample Insurers which is measured as number of directors set
on board. It is confirmed in the table bellow that the average board size for the sample
Insurers is about 7 members (mean = 7.38) with a maximum of nine and a minimum of five
directors. Lipton and Lorsch (1992) recommend average board size of (i.e. between 8 and
10) for greater board efficiency and effectiveness but this data is not within this
recommendation in contrast to this Brown and Caylor (2004) suggested a board size of
between 6 and 15 further in Ethiopia case National Bank of Ethiopia currently propose
corporate governance guidelines for Ethiopia Insurers with postulates minimum
number board size for each Insurers should be nine. The standard deviation indicates
that for the sampled Insurers board size varies by 1.64 or 2 directors from the average value
of 7.38 or 7 directors. This also indicates as there is low dispersion in the board size of the
sample Insurers during study period.

Furthermore, another interesting observation is that there was somewhat a higher variation
in frequency of board meeting during study period which is measured as Number of
directors meeting in the year, on average is 18.04. The standard deviation values of
14.91 with the minimum of 2 and the maximum of 66. This result indicates that in

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sample Insures during study period there is a company which conduct highly frequent
meeting in a year at the maximum of 66 times however in sample Insurers there is a
company which conducts meeting only two times during a year. The result further
stipulates as there is high variation in conducting a meeting among Insurers during
study period by 14.91 or 15 meeting times. Generally the sample Insurers conduct
meeting 18.04 or 18 times on the average which is high when we compare with
currently proposed corporate governance guidelines by National Bank of Ethiopia for
insurance companies which postulates as each Insurers should at least conduct meeting
of 12 times in a year.

More additionally educational qualified directors measured as number of directors who

had college degree or higher is a mean value of 6.31 or 6 directors which indicates on
average directors who have collage degree or above was 6 people during study period
sample Insurers. On the hand maximum and minimum value of statics is nine and two
respectively. This indicates that from sample Insures there is a company which have
maximum of qualified of nine directors and at the minimum from the sample Insures
there is a company which have only two qualified directors during study period.
The table 4.3 also depicted directors who had prior insurance industry experience
which was measured as number of directors who served in other Insurers earlier in the
same capacity and the descriptive statics shows as the mean value of directors in the
boards of sample Insurers who have prior experience in insurance sectors are 2.93 or 3
directors. This also suggests that only small number of directors in Ethiopia insurance
industry have specifically prior Insurance related experience.
On the other hand, the standard deviation value of directors who had early insurance
experience is 1.49 or one directors which indicate that there is very small variation in
the industry in appointing directors who had early insurance experience. Further the
test statics indicates as maximum and minimum value of industry specific experience of
directors is 6 and 1 respectively. Which conform that from sample Insurer there is a
campiness which have appoint 6 directors who had early insurance specific experience and at

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the minimum there is a company which have only one directors who have early insurance
experience during study period.
The table 4.3 also shows the mean value board of director other business management
experience, is 0.77 or 77 percents. Which were measured by the number of directors
who had business management experience, divided by total number board of directors
A maximum of 1.00 or 100% percents and a minimum of 0.29 or 29 percents. This result
depicts as 77 percents of directors who serve in sample Insurers during study periods
have other business management experience.
On the other hand at maximum there is a company in sample who appoints all directs
or 100 percents who have other business management experience likewise at the
minimum there is a company which only appoint 29 percents those who have other
business management experience. As the same time the variation in sample Insurer
during the study period is 23 percents which stipulates as there is high vibration among
the sample Insurers in terms of appointing directors who have other business
management experience.
Further table 4.3 also indicates that the mean and standard deviation of female directors
in the board of Insurers are 0.86 or one directors and 1.1 or one person respectively
which is measured as number of female directors who seat in board as directors. The
result suggests that there are small number and high dispersion of women in the board
during the sample period. The minimum and maximum of female director’s ranges
from 4 and 0 respectively, 0 indicates Insurers that do not have any representation for
women on their boards.
Moreover, the table 4.3 shows the mean value of chief executive officer compensation
of the sample Insurers is 5.52 during a study period which was measured by the natural
logarithm of chief Executives’ payment with a maximum of 6.19 and minimum of 4.7. It
varies from the average value by 0.35. Which indicates the maximum compensation of
chief executives of sample insurers during study period is 6.19 where as the minimum
compensation are 4. 7 as the general the descriptive statics suggests that chief executives

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composition structure of sample Insurers during the study period are all most similar
with small variation.
Finally, the mean values of Premium growth rate of selected Insurers is 25% on average
as measured by a change in annual premium production with a range of 149% to -10%.
There is wide deviation, 23% percent, from the mean value of growth premium. This
test statics also depicts as there is high fluctuation in and variation among Insurers
during study period in production of premium.
4.2.2. Correlation Analysis of the Study Variables

This section of the study presents the results and discussions of the Pearson correlation
analysis. To identify the relationship among the considered corporate governance
mechanism variable and Insures financial performance, Pearson correlation coefficients
were used. The correlation coefficient shows the extent and direction of the linear
relationship between considered internal corporate governance variables and financial
performance of Insurers proxy by ROA of the sample Insurers in Ethiopia during study
period.

Accordingly in table 4.4 the correlation matrix which shows the relationship of the
return on asset with board size, chief executive compensation, board members
educational qualifications, female directors in board, directors frequency of meeting,
directors’ industry specific experience, board members other business management
experience, and Insurers growth premium.
The probability is shown in parenthesis with the correlation coefficient in the
correlation matrix below. The significance level also shown that is ***, ** and * for 1%, 5%
and 10% level respectively. The correlation coefficients are checked for the presence of
high colinearity among regresses.

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 Table 4.4: Correlation Matrix of Dependent and Independent Variables

Correlation
Probability ROA BS CCOP EQD FD FM ISE ODS GP
ROA 1.000000
-----

BS 0.120023 1.000000
(0.2598) -----

CCOP 0.359998 0.356704 1.000000

(0.0005***) (0.0006***) -----

EQD 0.114073 0.562073 -0.148463 1.000000

(0.2844) (0.0000***) (0.1626) -----

FD 0.348172 0.130620 0.042139 0.153312 1.000000

(0.0008***) (0.2198) (0.6933) (0.1491) -----

FM 0.295994 0.575809 0.421934 0.517772 -0.009359 1.000000

(0.0046***) (0.0000***) (0.0000***) (0.0000***) (0.9302) -----

ISE 0.209944 0.659040 0.711952 0.196928 0.062658 0.526639 1.000000

(0.0470**) (0.0000***) (0.0000***) (0.0628*) (0.5574) (0.0000***) -----

ODS 0.608013 0.208452 0.351488 -0.061560 0.159904 0.276064 0.327513 1.000000

( 0.0000***) (0.0487**) (0.0007***) (0.5644) (0.1322) (0.0084***) (0.0016***) -----

GP 0.037706 0.085169 -0.099940 0.083320 -0.019385 0.009826 0.054957 -0.034094 1.000000

(0.7242) (0.4248) (0.3487) (0.4349) (0.8561) (0.9268) (0.6069) (0.7497) -----

Source: Eviews correlation result based on the data obtained from sample Insurers
***, ** and * denotes significance at 1%, 5% and 10% levels respectively

Table 4.4. Point out that top executive compensation, female boards of directors,
frequency of meeting and board members other business management experience are
positively and significantly correlated at 1 percent significance level with return on
asset. Whereas director's industry specific experience is positively significant at five
percents however board size and Directors educational qualification are insignificant
with return on asset. Even though they are not significant board of directors educational
qualification shows a positive coefficient which is as expected but board size coefficients
is not as expected in this study.

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Further, the correlation result suggest in table 4.4 the Pearson correlation coefficients
of board size experience, chief executives compensation, directors educational
qualification, female directors, directors frequency of meeting, industry specific
experience of directors and directors other business management are 12 percent , 35
percent 11 percent 34 percent 29 percent 20 percent and 60 percent respectively. From
this it can be understand that board members other business management, top
executives composition, female directors presence in the board and board frequency of
meeting are a strong association with return on asset. In contrast board size
educational qualification of directors and industry specific experience of directors does
not have high association with return on asset high.

Moreover, as it is shown in the above correlation matrix control variables are not
significantly correlated with return on asset. As it is observed on the coefficients values,
of growth premium are weakly correlated at 3 percent level.

Generally, the correlation analysis shows that the degree and directions of association of
some study variable and financial performance proxy by ROA. The correlation analysis
shows only the direction and degree of association between variables and it does not
permit the researcher to make causal inferences regarding the relationship between the
identified variables. Therefore, it is not possible to explain the relationship between
corporate governance variables and performance measures by controlling the influence
of some selected variables using correlation analysis. As a result the main analysis is left
for regression analysis that overcomes the shortcomings of correlation analysis.
4.2.3. Results of Regression Analysis

This section covers the empirical regression model used in this study and the results of
the regression analysis. The panel data is used to run the regressions to investigate the
Impact of corporate governance mechanism on Insures financial performance measured
by return on asset. In doing this, the empirical models were developed in chapter three
to guide the analyses are provided as follows:
ROAit = α + β1BS + β2Ccopit + β3EQDit + β4FDit + β5FMit + β6ODSit + β7ISEit + β8PG + εit

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Further they are two broad classes of panel estimator approaches that can be employed in
financial research: fixed effects models (FEM) and random effects models (REM) (Brooks
2008). To check which of the two (FEM or REM) models provide consistent estimates for this
study Hausman test was employed and the result is presented as follows.
Correlated Random Effects - Hausman Test
Equation: Untitled
Test cross-section random effects

Chi-Sq.
Test Summary Statistic Chi-Sq. d.f. Prob.

Cross-section random 100.488526 8 0.0000

Table 4.5: Correlated Random Effects Hausman Test

Source: Data of sampled Insurance companies and own computation

The null hypothesis of the test was that the random effect method is the preferred
regression method. Tables 4.5 show the p-value for the test is significant at one percents,
which indicate that the null hypothesis was rejected. Hence, the fixed effect was
preferable. Accordingly, FEM was employed to estimate the relationship between the
dependant variable and the independent variables.
The regression output in table 4.6 is run by taking ROA as a dependent variable,
considered corporate governance mechanism and control variables as independent
variable. The regression output reveals that the dependent variable is well explained by
the explanatory variables in the model with R-square and adjusted R-square of 0.815
and 0.774 respectively.
The coefficient of determination R-square indicates that about 81.5% of change in return
on asset is accounted for by the explanatory variables while the adjusted R-squared of
77.4% further justifies this effect. The F- statistic of 20.14 is also significant with P- value
of zero indicating that the null hypothesis, that all the coefficients are jointly zero is
rejected and the models do not suffer from specification bias. So, the variation in the
dependent variable is well explained by the regresses in the model.

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 Table 4.6 Regression Result of the Model

Variable Coefficient Std. Error t-Statistic Prob.

C -0.844422 0.189859 -4.447626 0.0000

BS 0.014359 0.013946 1.029588 0.3063
CCOP 0.107763 0.033590 3.208222 0.0020***
EQD 0.011309 0.006763 1.672191 0.0988*
FD 0.004810 0.007048 0.682438 0.4971
FM -0.000310 0.001638 -0.188951 0.8507
ODS 0.181433 0.064118 2.829671 0.0060***
ISE 0.017609 0.008341 2.111107 0.0382**
GP 0.046762 0.026602 1.757875 0.0830*

R-squared 0.815339

Adjusted R-squared 0.774865

F-statistic 20.14490 Durbin-Watson stat 1.935916
Prob(F-statistic) 0.000000

***, ** and * denotes significance at 1%, 5% and 10% levels respectively

Source: Eviews Output from Data of Sample Insurers, 2005 to 2014

Based on the results shown in table above independent variables like board member
educational qualification (EQD) and Growth premium (GP) is statistically significant at
10%, where as industry specific experience of directors (ISE) is statistically significant at
5%. In addition, explanatory variables such as chief executive’s composition (CCOP)
and other business management experience of directors (ODS) are significant at 1%
significance level. Since the p-value for both variables are less than 0.01. On the other
hand, board sizes (BS), Existence of female directors (FD) and Board of directors’
frequency of meeting (FM) are not statistically significant.
Moreover, the signs of the parameter coefficients indicate that there is positive
relationship between, chief executives composition, educational qualification of
directors, industry specific experience of directors, other business management
experience of directors and Growth premium. This reveals that there are a direct
relationship between the above five independent variables and ROA.

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Among the insignificant variables, there is positive relationship between board size and
presence of female directors. This indicates that increments or decrements in board size
and presence or absence female directors in board do not have huge impact but low and
positives influence on performance of Insures. On the hand board frequency of meeting
have negative insignificant association on performance of Insurers Thus the increase of
directors meeting will lead to a decrease in ROA.
4.2.4. In-Depth Interview Results

The interviews were conducted with the board chairmen of the selected three Insurers
namely, AIC, NIB and NISCO and delegated person of EIC. A total of four peoples were
interviewed at different times. In this study, the interview was totally unstructured. All
the interviewees have got an education level of at least a first degree in a business
related area and have ample working experience in insurance industry. Hence, they
were believed to have a good knowledge and experience in corporate governance. The
interviews were conducted independently with each director.
The interviewees rise board of director’s motivation or directors desire to attend
meetings, read materials, spend time on corporate activities, and to make decisions that
contribute to organizational success. Motivated directors desire to information about
the operations and management of the organization as well as information about the
business environment, the performance and activities of competitors which is vital
factors lead board of directors effectiveness that enhance performance of companies.
Further they noted there is lack of motivation and commitment of directors which
hamper company performance and the challenging part of working in groups.
The interviewees also pointed out as corporate transparency and disclosure is weak in
case of Ethiopia. Effective legal framework that identifies the specific disclosure
requirements didn’t exist in the country. Furthermore, they noted that in Ethiopia issues
on corporate governance disclosure such as; financial disclosures, non-financial
disclosures, annual general meetings timing and means of disclosure and best practices
for compliance with corporate disclosure are very low.

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The interviewees also rise about board member ability to translate broad knowledge
into good strategic decisions and they suggest board members’ human capital in terms
of background and experience certainly influences the outcomes of board decision-
making. This knowledge involves technical expertise concerning areas needed to
govern effectively, such as business strategy, succession, finance, law, government,
technology, society and how organizations operate as general this lead qualified
decision that lead financial performance. But the problem is with director’s experience
and qualification as there are few directors that have prior experience in insurance
sector and qualified directors in the board.
Another issue mentioned by the interviewees was there is no appropriate national code
of corporate governance adopted in the country except the commercial code which
needs major improvements as per the interview conducted with Ethiopia Insurers
board chairman. Regarding Insurers board size there is no problem with board size of
the Insurer. Boards of directors are expected to proved strategic leadership to the
company by include supervision of corporate governance along with the monitoring of
strategic area including internal control and risk management. The board is also
expected to reviews the management of corporate resources (human resource finance
and information) thus effective and efficient leadership of the board can be realized
through full board members and board committees that monitors thematic area such
organization demand.
As per discussion the size of the board should be adequate. As the participant point out
board size have no problem. This is also evidenced that the regulatory requirement
under Article 347 of the Commercial Code of Ethiopia (1960), states that a share
company should have a board size of between 3 and 12 members only accordingly all
Insurers have a board size of five to nine (See Appendix six).
The interviewers further revealed that the closed nature of the Ethiopia financial sector
in which there are no foreigner, absence of organized stock market, a noncompetitive
market structure, and strong capital controls in place and the dominant role of state-
owned Insurer (EIC) are the key factors that affect the corporate governance of the

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country. This is also confirmed by the study of Kiyota et al. (2007). Likewise, Minga
(2008) stated that the absence of organized equity market is a serious void. Since there is
no organized equity market in the country when shareholders want to sale their shares,
they face difficulty finding a buyer.
Besides, they mentioned that there is a high unfair competition with aggressive price
cutting in the market which totally obstacle for growth of the industry the government
(NBE) remain silent for situation still. As the interviewers point out placing sound
corporate governance system in the industry which mitigate these and other problem
in the market which lead enhanced growth and create matured industry to support the
booming economic developments of the country.
The interviewees point out as professionals with requisite technical skill and experience
should head and manage insurance companies. This practice promotes professionalism
in the industry. The need for strong internal control system was emphasized, in order to
promote good corporate governance and improve the image of the Ethiopia insurance
industry.
Interviewees also agreed that effective risk management is necessary to ensure
development and growth of the Ethiopia insurance industry. Furthermore, adequate
capital base and compliance with NBE guidelines for insurance business practice are
raised as an important role which turns redeem the image of the insurance industry in
Ethiopia. They also underline as this can promote strong financial base and increase the
capacity of the nation’s insurance industry. However, government need to provide
enabling environment, as corporate governance thrives in economical and political
stable environment.
The interviewees also suggest that the proposed corporate governance guideline for the
financial sectors as general and specifically for insurance industry can enhance
insurance companies’ growth in Ethiopia. Putting governance guidelines promotes
health of the industry and keeps interest of all stakeholders in sectors and avoids sectors
systemic collapse. But when we add this guideline to our list of directives (law) we
should take a great care in analyze pros and con of each issue included in guideline.

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They underline their arguments by indicating as nature of governance practices are not
endogenous one country governance nature may not exact fit to other country
governance practice. So when we adopt/develop its batter if it can be supported by in-
depth research and further they note as the proposed corporate governance guideline
need sort of correction.
4.3. Results and Discussion

This section of the chapter discusses some of the main implications of the results. The
analysis is based on the results of the regression between the dependent variable and
the independent variables presented in table 4.6 and in-depth interview. The results
obtained under these different methods are jointly analyzed.
4.3.1. Board size

As shown above, table 4.6 of this study indicates existence of positive association
between board size (BS) and return on asset. Larger boards are associated with diversity
in skills, business contacts, and experience that smaller boards may not have, which
offers greater opportunity to secure critical resources (Haniffa and Hudaib, 2006,
p.1038). Further, Kiel and Nicholson (2003), Beiner et al. (2006), and Coles et al. (2008)
offer recent evidence for Australian, Swiss, and US listed firms, respectively, which is
entirely in line with those of Haniffa and Hudaib (2006).
The positive, but a statistically insignificant nexus between the Board size and the ROA
indicates that even though the board size has no valuation implications for the sampled
Insurers, the market perceives it as a good corporate governance practice. This finding
is also consistence with Mangena and Chamisa (2008) which record positive and
insignificant relationship between board size and incidences of listing suspension by the
JSE. More additionally Aggarwal et al. (2007) found no relationship between board size
and firm performance. The result also indicates as the proposed national bank of
Ethiopia corporate governance guideline for insurance sectors which say an Insurer
shall have at least nine directors was not empirically supported.

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The question therefore arises as to what is the optimal board size? It is difficult to
provide one solution to the question that would fit all companies. This is because
companies have different needs and several considerations are made before appointing
directors, for instance, issues of the diversity of the company’s operations, skills
requirement, shareholding structure, regulatory requirements, and size of the company
among others would have to be taking into account.
Studies such as Brown and Caylor (2004) suggested a board size of between 6 and 15
members whilst Jensen (1993) argues for 7 or 8 members. Lipton and Lorsch (1992) are
in support of a board size of between 8 and 9. It would be ideal to have a board size of
between 5 and 7 members to ensure efficiency of operations and for an improved
performance. More additionally this result also consistence with interviews result as
board size has no huge impacts on companies’ performance. Therefore based on this
premise, the null hypothesis which states there is no significant positive relationship
between board size and Insurers performance in Ethiopia is supported by this data.
4.3.2. Frequency of Board Meeting

As shows in table 4.6 above this study indicates existence of negative association
between board frequency of meeting and return on asset. The result is inconsistent with
this study expectation. A possible theoretically explanation of the negative nexus
between the frequency of board meetings and the ROA supports the idea that frequent
board meetings are not necessarily beneficial. A higher frequency of board meetings, for
example, can result in higher costs in the form of managerial time, travel expenses,
refreshment, and directors’ meetings fees.
This finding also implies that the currently proposed corporate governance guidelines
for Insurers by national bank of Ethiopia which postulates frequency of meeting to at
list ones in the month is not empirically supported. Empirically, this finding is
consistent with the result of El Mehdi (2007) who reports a statistically insignificant
association between the frequency of board meetings and the ROA for a sample of 24
Tunisian listed firms from 2000 to 2005.

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By contrast, it does not support the results of Mangena and Tauringana (2006) who
document a statistically significant and positive relationship between the frequency of
board meetings and the ROA in sample of 157 Zimbabwean listed firms from 2001 to
2003. This finding also supported by in qualitative party of the study result which
suggests high frequent meeting is boring, managerial time consuming which totally
affects performance of firm. Therefore based on this premise, the null hypothesis which
says there is no statistically significant positive relationship between the frequency of
board meetings and Insures financial performance, as measured by ROA is supported
by this data.
4.3.3. Chief Executives Compensation

The regression result provided in table 4.6 reveals a positive coefficient parameter of
0.1697 between the variables and ROA which is significant at 1% which entails that the
more compensation is made for CEO, the higher the financial performance of Insurers
in Ethiopia.
This also confirms that CEOs compensation does have significant and positive impact
upon Insurer’s performance as measured in terms of ROA. Hence, the data of this study
rejects the premises of null hypothesis which says there is no significant positive
relationship between chief executive’s compensation and Insurers’ performance in
Ethiopian. Thus, the positive and significant coefficient of CEO shows that there is a
point at which adding a compensation for CEO increases Insurers value. Compensation
contracts are therefore seen as a remedy to the principal agent problem. Besides this,
short term and long term incentive plans benefit shareholders by incentivizing
managers to perform better in their own interests. Furthermore, the result suggests that
at least in Ethiopia insurance industry the incentive of chief executives pay is directly
linked to Insurers performance. Thus, the chief executive’s compensation plays
important and efficient incentive mechanisms, which inevitably enhances performance.
This is in line with Zhang and Yang (2011) who argue that executive compensation
incentives have a significant positive impact on firm performance.

65 | P a g e
4.3.4. Proportion of Female Directors

The relationship between female presence in board gender (FD) and financial
performance measures by ROA are insignificant since the premise of null hypothesis
under this study which says there is no statically positive /negative relationship
between the proportions of female directors and Insurers performance were not rejected
.Therefore, this study does not support the view that gender diversity leads to superior
Insurers financial performance.
Some previous studies document a positive effect of the role of women on boards and
find that women enhance the quality of decision making and firm performance
(Bathula, 2008; Erhardt et al. 2003). However, this study does not find a significant
positive/ negative association between percentage of women directors and Insurers
financial performance.
The result is not surprising because other studies that examined the association between
proportion of women on boards and firm performance also found insignificant result
(for example see Rose, 2007; Habbash, 2010). But the result simply indicates the
presence of female directors will not improve Insurers operation and performance
unless they are qualified and competent. Whether gender diversity help improve
insurers operation and performance it depends on factors such as experience, education
and assertiveness of female directors.
4.3.5. Educational Qualification of Directors.

Board members educational qualification (EQD) has a positive effect on Insures

financial performance. Board members educational qualification explains the variations
of the financial performance of Insurers with a coefficient of 0.011309 and statistically
significant at, 10 percent for return on asset. The result indicate that the increase in the
proportions of directors who had college degree or higher have a significant positive
influence on the financial performance of Insurers in Ethiopia and vice versa.
In other words the higher the number of directors who had college degree or above
sitting on the board the higher the financial performance of sample Insurers in Ethiopia

66 | P a g e
and vice versa. This suggests that the presence of qualified directors on the board plays
an important role in carrying out the boards monitoring responsibility and in
improving financial performance.
The premises of null hypothesis under this study which says there is no significant
positive relationship between educational Qualification of directors with business
background and Insurers performances were rejected and the alternative hypothesis
were accepted. This result supports the finding revealed by Amran (2011) and Yasser
(2011). They argues that directors with higher education are better in managing the
business operation and controlling agency problem than less educated counterparts this
reduce agency cost.
Educational qualification affects the oversight and monitoring role of boards of
directors. The result support the view that educational qualification is potentially
important since the ability to seek and interpret appropriate information is essential for
the efficient operation of Insures and the effective control or guidance of management
by boards of directors. The qualification of directors as measured by the percentage of
directors who had college degree or higher significantly influences Insures performance
in Ethiopia.
Thus, educational qualifications of directors play a great role in board decision making.
Both the regression result and the qualitative result indicate that educational
qualification of directors is important factor to improve financial performance of the
sampled Insurers in Ethiopia.
4.3.6. Other Business Management Experience of Directors

Other Business management experience of directors (ODS) has a positive effect on

measures of Insurers financial performance. Other Business management experience of
directors explains the variations of the financial performance of Insurers with a
coefficient of 0.181433 and statistically significant at, one percent.
The result indicate that the increase in the number of directors who have other
directorial ship have a significant positive influence on the financial performance of
Insurers in Ethiopia and vice versa. In other words the higher the number of directors

67 | P a g e
who had Other Business management experience sitting on the board the higher the
financial performance of sample Insurers in Ethiopia and vice versa.
The premises of null hypothesis under this study which says there is no a significant
positive association between board members business management experience and
financial performance of Insurers is rejected by this data. This finding is consistence
with (Saat et al.2011) he argues as business management experience of directors enables
them to have better knowledge and understanding about business and enable to
contribute effectively in the decision making process as well as in effectively monitoring
the activities of management.
The results also parallel with Kroll, et al (2008) which point outs that boards rich in
appropriate experience are associated with superior returns. The results of qualitative
part also support this finding which indicates that boards comprising directors with
appropriate knowledge gained through experience can be not only better monitors, but
also more useful advisors to top managers.
4.3.7. Industry specific experience

The regression result in table 4.6 also indicates that coefficient parameter of industry
specific experience (ISE) 0.017609 is Significant at 5% significance level. Suggesting; that
if one board directors with prior experience in insurance industry is added to board of
directors then Insurers ROA will increase by 1.7%. Based on this result the premises of
null hypothesis in this study which says there is no significant positive association
board members industry specific experience and Insures performance where not
accepted. This is in consistence with the study by Poon, Heong and Lee (2013) who
suggest that the more senior the firms director, the greater experience, wisdom and
understanding of the industry and the better the firm performance.
Senior directors are more conservative in pursuing firms’ strategies and tend to focus
on business activities that yield immediate profits in the short term during their service
periods, ultimately improving firm performance. By this evidence, therefore, NBE
directives which states that members of board of directors shall have adequate
experience in business management, preferably in Insurers business, and/or should

68 | P a g e
take adequate training in insurance business management after holding a seat on the
board is appropriate in order to increase the financial performance of Insurers in
Ethiopia (NBE Directive No.SIB/32/2012).
4.3.8. Controlling Variable Result and Discussion

In addition to what has been discussed above, table 4.6 depicts the result of the
regression analysis between the one control variables and financial performance
indicators of sample EthiopiaInsurers which are interpreted below.
a. Growth premium

The above regression results reveal that Insurers (GP) has significant positive influence
on insurance companies performance measured by return on asset ( with p value of
0.0830). As the result signify premium growth in the Ethiopia insurance industry vital
factors that increase industry financial performance. Generally this chapter presented
the results of the structured record reviews and in depth interview and then discussed
the analysis of these results jointly.
Table 4.7 below summarizes the comparison of the test result for considered corporate
governance variable with the hypothesized expectations. As shown in the table 4.7, the
test result of the variables was consistent with the hypothesis presented in section 4.1
except for frequency of meeting and presence of female directors and board size which
were found as statistically insignificant. The next chapter will discuss the conclusions
and recommendations of the study.

69 | P a g e
 Table 4.7 Test Result summary

Independent Variable Actual Significance

Relationship (10%,5% and 1%)

Board size + Insignificant

Chief Executive Compensation. + Significant

Educational Qualification of Directors + significant

Female directors + Insignificant

Frequency of board Meeting - Insignificant

Other business Mgt experience Significant

Industry specific experience of directors. + Significant

70 | P a g e
Chapter Five Conclusions and Recommendations

In the previous chapter, the results of the study were presented and discussed. This
chapter deals with the conclusions and recommendations of the study based on the
findings. Hence, section 5.1 presents the conclusions, section 5.2 presents the
recommendations and Avenues for Future Research and Improvements provided in
section 5.3.
5.1. Conclusions

Good corporate governance is beneficial to insurance companies because it facilitates

accountability, promotes transparency of operations, improves firm’s profitability and
enhances growth of the insurance industry. Corporate governance helps to protect
stakeholders’ interest by aligning their interest with that of managers.

To this end, this study aimed at examining corporate governance mechanism that could
influence the performance of insurance companies in Ethiopia. In order to achieve this
objective, seven hypotheses have been developed. To address research hypotheses and
achieve the broad research objective, the study used mixed research approach. More
specifically, the analyses were performed documents reviews of insurance companies
in Ethiopia during a ten year period from 2005-2014 and in-depth interview with
selected Insurers board chair man.

Nine insurance companies were selected as a sample from seventeen insurance

companies currently operating in Ethiopia. Fixed effect model was used to estimate the
regression equation. In the study board size, chief executive composition, proportion of
female directors, frequency of board meeting, educational qualification of directors ,
industry specific experience of directors and other business management experience
directors and growth premium were considered as independent variables while return
on asset was considered as dependent variables. With regard to in-depth interviews,
the study conducted interview with three board chair man and one delegated person of
selected Insurers.

71 | P a g e
5.2. Summary of Finding
The result of regression analysis showed existence of positive but insignificant
association between board size (BS) and return on asset. This statically insignificant
nexus between the Board size and the ROA indicates that even though the board size
has no valuation implications for the sampled firms, the market perceives it as a good
corporate governance practice. At the same time, the result indicates as the proposed
corporate governance guideline which postulates at least nine directors for one
insurance company is not empirically supported.

The results also show existence of negative association between board frequency of
meeting and return on asset. A possible theoretically explanation, the negative nexus
between the frequency of board meetings and the ROA supports the idea that frequent
board meetings are not necessarily beneficial. A higher frequency of board meetings, for
example, can result in higher costs in the form of managerial time, travel expenses,
refreshment, and directors’ meetings fees. This finding also implies that the currently
proposed corporate governance guidelines for Insurers by National Bank of Ethiopia
which postulates frequency of meeting to at list ones in the month is not empirically
supported in area of determining proper number of board meeting.

Further the result also confirms that CEOs compensation does have significant and
positive impact upon Insurer’s performance as measured in terms of ROA. Hence, the
data of this study rejects the premises of null hypothesis which says there is no
significant positive relationship between chief executive’s compensation and Insurers’
performance in Ethiopian. Thus, the positive and significant coefficient of CEO shows
that there is a point at which adding a compensation for CEO increases Insurers value.
Compensation contracts are therefore seen as a remedy to the principal agent problem.

Beside this study result also shows insignificant positive association between
percentage of women directors and Insurers financial performance. In addition to this
the result indicates Board members’ educational qualification has positive and

72 | P a g e
significant impacts on Insures performance. This means that the increase in the
proportions of directors who had college degree or higher have a significant positive
influence on the financial performance of Insurers in Ethiopia and vice versa.
Also study clearly shows Other Business management experience of directors has
positive significant impacts on Insures financial performance. This means that the
increase in the number of directors who have other directorial ship have a significant
positive influence on the financial performance of Insurers in Ethiopia and vice versa.
More additionally, study result shows significant positive association between board
members industry specific experience and Insures performance in Ethiopia.

Lastly, in the corporate governance of Ethiopia insurance sectors, as per the result of
interview: the major factors that have impact on the financial performance of the
Insurers are identified as (a) weak corporate transparency and disclosure i.e. absence of
nationally implemented standards for corporate governance, (b) closed nature of the
Ethiopia financial sector and (c) lack of qualified and experienced directors in the board.
(d) Unfair price cutting which challenge the growth the industry as general.
5.3. Recommendation
On the basis of the findings of this study, the Researcher has drawn the following
recommendations.
 As the finding of this study indicates in Ethiopia insurance industry board of
directors both industry and general business experience plays pivotal role in
increasing Insurers financial performance. So if shareholders give due
considerations to director’s experience during their nomination for approval they
further allow their company to better performance.
 CEOs compensation does have significant and positive impact upon Insurer’s
performance in Ethiopia. This Compensation contracts are therefore seen as a
remedy to the principal agent problem. Besides this, short term and long term
incentive plans benefit shareholders by incentivizing managers to perform better

73 | P a g e
 in their own interests. So it is good for insurers operating in Ethiopia to give
further attention on their CEO compensation package.
 Good corporate governance practices in insurance sectors will be positive that
maintain the level of risk they can handle and give police holders and
stakeholders as general a sufficiently safe level of their protection and
investments. Moreover, the government should revisit its proposed corporate
governance guidelines for Insurers especially in the area determination of proper
board size and optimal level of frequency of meeting.
 National Bank of Ethiopia should focus on the industry specific experience of
directors and directors other business management experience when enact
corporate governance related rule or directive.
 Finally, there is the need to set up a unified corporate body saddled with the
responsibility of collecting corporate governance related data and constructing
the relevant indices to facilitate corporate governance research in Ethiopia.
5.4. Avenues for Future Research and Improvements

There are several potential avenues for future research and improvements. First, since
there is a general dearth of corporate governance studies that make use of Ethiopia
corporate organization.
Second, current study has mainly examined the association between internal corporate
governance and Insurers financial performance. Future studies can investigate how
external corporate governance mechanisms, such as the market for corporate control,
the managerial labour market, and the law, amongst others, affect Insurers financial
performance.
Also, there are some pressing corporate governance issues that may be better addressed
by future researchers via a qualitative methodology. For instance, the importance of
corporate governance in corporate decision-making and performance can be explored
by future research by observing boardroom interactions or by conducting interviews
(i.e. structured, semi structured, and un-structured) with key company stakeholders,

74 | P a g e
such as executive and nonexecutive directors, company secretaries, senior management,
and institutional investors.
Further, research could explore the relationship in more in specific categories for
example, in not-for-profit organizations and in other companies. Since this study were
focused on the Ethiopia insurance sector it would be beneficial to have a clearer
understanding of corporate governance roles in other types of organizations. Such
research could address the similarities and differences of the roles in different
organizations and consider also the legal requirements for different organizations.
Finally, research is also required on the different aspects of corporate governance
practices. Expanding this current research into a wider study of board dynamics, how
boards work and decision making and other practices of governance would be a start in
developing a better understanding of corporate governance.

75 | P a g e
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 Appendix

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Appendix one: List of EthiopiaInsurance companies

No Insurer Date of commencement

1. Africa Insurance Company S.C 1/12/1994

2. Awash Insurance Company S.C 1/10/1994
3. Global Insurance Company S.C. 11/1/1997
4. Lion Insurance Company S.c 1/7/2007
5. NIB Insurance Company 1/5/2002
6. Nile Insurance Company S.C 11/4/1995
7. Nyala Insurance Company S.C 6/1/1995
8. United Insurance S.C 1/4/1997
9. EthiopiaInsurance Corporation 1/1/1976
10. Abay Insurance Company 26/07/2010
11. Berhan Insurance S.C. 24/05/2011
12. National Insurance Company of Ethiopia S.C. 23/09/1994
13. Oromia Insurance Company S.C. 26/01/2009
14. Ethio-Life and General Insurance S.C 23/10/2008
15. Tsehay Insurance S.C. 28/03/2012
16. Lucy insurance S.C. 15/11/2012
17. Buna insurance S.C. 23/8/2011
Source:< www.nbe.gov.et > surfed at December 29 2014

Appendix two Interviews Questionnaires

Leading questions

1. Any issue you think about governance practice in Ethiopiainsurance industry?

2. What is core issue that promotes good governance in Ethiopia insurance industry?

3. Do you believe currently existing governance practice effective in leading growth the

insurance industry?

4. Do you believe board of directors provides effective leadership in Ethiopiainsurance

industry?

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 5. Does board directors are effective in monitoring strategy implementation of insurance

companies in Ethiopia?

6. Does board of directors are effective in balancing interests of different stakeholders?

7. Do you believe board size, and frequency board meeting affect performance of Insurers

in Ethiopian?

Appendix Three Heteroskedasticity Test: White

F-statistic 2.022109 Prob. F(44,45) 0.0103

Obs*R-squared 59.76998 Prob. Chi-Square(44) 0.0567
Scaled explained SS 31.30733 Prob. Chi-Square(44) 0.9247

Appendix Four Hausman test

Correlated Random Effects - Hausman Test

Equation: Untitled
Test cross-section random effects

Chi-Sq.
Test Summary Statistic Chi-Sq. d.f. Prob.

Cross-section random 100.488526 8 0.0000

Cross-section random effects test comparisons:

Variable Fixed Random Var(Diff.) Prob.

BS 0.014359 -0.017115 0.000165 0.0141

CCOP 0.107763 0.141322 0.000419 0.1011
EQD 0.011309 0.016894 0.000029 0.2994
FD 0.004810 0.023704 0.000023 0.0001
FM -0.000035 0.000399 0.000002 0.7728
ODS 0.181433 0.253787 0.003432 0.2168
ISE 0.017609 -0.017560 0.000025 0.0000
GP 0.046762 0.053861 0.000118 0.5137

Cross-section random effects test equation:

Dependent Variable: ROA
Method: Panel Least Squares

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Date: 04/20/15 Time: 09:24
Sample: 2005 2014
Periods included: 10
Cross-sections included: 9
Total panel (balanced) observations: 90

Variable Coefficient Std. Error t-Statistic Prob.

C -0.844422 0.189859 -4.447626 0.0000

BS 0.014359 0.013946 1.029588 0.3066
CCOP 0.107763 0.033590 3.208222 0.0020
EQD 0.011309 0.006763 1.672191 0.0988
FD 0.004810 0.007048 0.682438 0.4971
FM -0.000310 0.001638 -0.188951 0.8507
ODS 0.181433 0.064118 2.829671 0.0060
ISE 0.017609 0.008341 2.111107 0.0382
GP 0.046762 0.026602 1.757875 0.0830

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.815339 Mean dependent var 0.133789

Adjusted R-squared 0.774865 S.D. dependent var 0.107782
S.E. of regression 0.051141 Akaike info criterion -2.940038
Sum squared resid 0.190923 Schwarz criterion -2.467852
Log likelihood 149.3017 Hannan-Quinn criter. -2.749625
F-statistic 20.14490 Durbin-Watson stat 1.935916
Prob(F-statistic) 0.000000

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Appendix Five Model

Dependent Variable: ROA

Method: Panel Least Squares
Date: 04/20/15 Time: 10:20
Sample: 2005 2014
Periods included: 10
Cross-sections included: 9
Total panel (balanced) observations: 90

Variable Coefficient Std. Error t-Statistic Prob.

C -0.844422 0.189859 -4.447626 0.0000

BS 0.014359 0.013946 1.029588 0.3066
CCOP 0.107763 0.033590 3.208222 0.0020
EQD 0.011309 0.006763 1.672191 0.0988
FD 0.004810 0.007048 0.682438 0.4971
FM -0.000310 0.001638 -0.188951 0.8507
ODS 0.181433 0.064118 2.829671 0.0060
ISE 0.017609 0.008341 2.111107 0.0382
GP 0.046762 0.026602 1.757875 0.0830

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.815339 Mean dependent var 0.133789

Adjusted R-squared 0.774865 S.D. dependent var 0.107782
S.E. of regression 0.051141 Akaike info criterion -2.940038
Sum squared resid 0.190923 Schwarz criterion -2.467852
Log likelihood 149.3017 Hannan-Quinn criter. -2.749625
F-statistic 20.14490 Durbin-Watson stat 1.935916
Prob(F-statistic) 0.000000

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Appendix Six: Row Data

Ethiopiainsurance corporation (EIC)

RO BS(NO. FM(NO. FD(no EQD(NO ISE(NO GP(% ODS(% ccop(LOG.

year A ) ) ) ) ) ) ) )
2005 10% 7 2 1 7 1.00 11% 86% 10.82
2006 7% 7 2 1 7 1.00 14% 86% 10.82
2007 9% 7 2 1 7 1.00 20% 86% 11.08
2008 9% 7 2 1 7 2.00 19% 86% 11.23
2009 9% 7 2 1 7 2.00 18% 86% 11.29
2010 13% 7 2 1 7 2.00 33% 86% 13.76
2011 11% 7 2 1 7 3.00 27% 86% 11.51
2012 14% 9 2 1 9 3.00 51% 67% 11.61
2013 17% 9 2 1 9 3.00 37% 67% 11.61
2014 19% 7 2 1 7 2.00 -8% 86% 11.65

NIb insurance company

ROA(% FM(NO. fd(no EQD(NO ISE(NO GP(% ccop(LOG
year ) BS(NO.) ) ) ) ) ) ods(%) .)
2005 22% 9 40 1 9 2.00 61% 100% 11.70
2006 12% 9 40 1 9 2.00 41% 100% 11.84
2007 19% 8 39 1 9 2.00 43% 100% 11.85
2008 36% 8 40 1 9 3.00 51% 100% 11.96
2009 31% 9 36 0 9 3.00 32% 100% 12.75
2010 31% 9 46 0 9 4.00 31% 100% 12.92
2011 30% 9 38 0 9 4.00 26% 100% 13.17
2012 34% 8 53 1 8 4.00 55% 100% 13.53
2013 33% 9 61 1 9 4.00 -6% 100% 13.65
2014 32% 9 66 1 9 3.00 6% 100% 13.59
Nyala insurance companies (unisco)
BS(NO. FM(NO. fd(no
year ROA ) ) ) EQD(NO) ISE(NO) GP(%) ods(%) ccop(LOG.)
2005 9% 5 5 0 2 1.00 8% 100% 12.16
2006 19% 5 3 0 2 1.00 27% 100% 12.46
2007 19% 5 6 0 2 1.00 15% 100% 12.88
2008 13% 5 7 0 2 2.00 17% 100% 13.04
2009 27% 5 3 1 2 2.00 -4% 100% 13.04
2010 25% 5 4 1 2 2.00 34% 100% 13.00
2011 30% 5 3 1 2 2.00 10% 100% 13.49
2012 35% 5 7 1 2 2.00 34% 100% 13.66

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 2013 35% 5 11 1 2 5.00 30% 100% 13.56
2014 31% 5 10 1 2 5.00 9% 100% 13.81

Global Insurance Company(GLOBAL)

RO BS(NO. FM(NO. fd(no EQD(NO ISE(NO GP(% ccop(LOG.
year A ) ) ) ) ) ) ods(%) )
2005 4% 7 6 0 6 1.00 31% 29% 11.98
2006 4% 7 7 0 6 2.00 39% 29% 11.98
2007 5% 7 6 0 6 1.00 15% 29% 12.10
2008 5% 7 5 1 6 1.00 21% 29% 12.10
2009 5% 7 7 1 6 1.00 5% 29% 12.21
2010 8% 6 5 0 5 1.00 24% 33% 12.21
2011 4% 5 6 0 4 2.00 49% 40% 12.43
2012 2% 5 6 2 4 2.00 84% 40% 12.43
2013 15% 7 6 1 7 2.00 -2% 29% 12.61
2014 16% 6 7 1 6 3.00 15% 33% 12.61

Nile Insurance Company (NILE)

year ROA BS(NO.) FM(NO.) FD(no) EQD(NO) ISE(NO) GP(%) ods(%) ccop(LOG.)
2005 4% 9 31 0 4 3.00 17% 67% 12.90
2006 4% 9 30 0 5 3.00 24% 67% 12.90
2007 2% 9 33 0 5 3.00 10% 67% 13.23
2008 -3% 9 38 0 5 5.00 -1% 67% 13.30
2009 2% 9 38 0 5 5.00 11% 67% 13.30
2010 14% 9 39 1 9 5.00 16% 67% 13.53
2011 10% 9 45 1 9 5.00 34% 67% 13.53
2012 10% 9 45 1 9 6.00 45% 67% 13.53
2013 11% 9 40 1 9 6.00 -4% 67% 13.59
2014 12% 9 40 1 9 6.00 17% 67% 13.59

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 National Insurance Company (NICE)
year ROA BS(NO.) FM(NO.) FD(no) EQD(NO) ISE(NO) GP(%) ods(%) ccop(LOG.)
2005 -5% 5 16 0 9 1.00 24% 40% 11.82
2006 6% 5 16 0 9 1.00 20% 40% 11.82
2007 8% 5 16 0 9 1.00 18% 40% 11.85
2008 6% 5 16 0 8 1.00 16% 60% 11.85
2009 5% 5 16 1 6 1.00 14% 60% 12.01
2010 6% 5 16 1 6 1.00 32% 60% 12.01
2011 0% 5 16 2 6 2.00 25% 60% 12.04
2012 17% 5 16 2 6 2.00 68% 80% 12.04
2013 12% 5 16 2 6 2.00 13% 80% 12.21
2014 7% 5 16 1 6 2.00 5% 80% 12.24

Awash Insurance Company (AIC)

year ROA BS(NO.) FM(NO.) fd(no) EQD(NO) ISE(NO) GP(%) ods(%) ccop(LOG.)
2005 8% 9 14 0 6 5.00 149% 67% 12.73
2006 6% 9 21 0 6 5.00 36% 67% 12.84
2007 7% 9 21 1 6 5.00 28% 67% 12.77
2008 7% 9 16 1 6 5.00 16% 100% 13.18
2009 5% 9 19 1 6 5.00 14% 100% 13.45
2010 11% 9 21 1 6 5.00 20% 100% 13.53
2011 8% 9 24 0 6 5.00 47% 100% 13.70
2012 8% 9 21 0 6 5.00 58% 100% 13.79
2013 15% 9 21 0 6 5.00 8% 100% 14.01
2014 10% 9 26 0 5 5.00 2% 100% 14.25

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 United insurance company (UNIC)
RO
year A BS(NO.) FM(NO.) fd(no) EQD(NO) ISE(NO) GP(%) ods(%) ccop(LOG.)
2005 -4% 9 15 4 8 3.00 -8% 56% 12.21
2006 15% 9 18 4 8 3.00 44% 56% 12.21
2007 22% 9 14 4 8 3.00 69% 67% 12.77
2008 35% 9 19 4 8 3.00 36% 89% 12.90
2009 15% 9 20 4 8 3.00 4% 100% 13.22
2010 31% 9 25 4 8 4.00 10% 100% 13.46
2011 23% 9 21 4 8 4.00 29% 100% 13.59
2012 29% 9 24 0 8 4.00 48% 100% 13.59
2013 37% 9 20 0 8 5.00 4% 100% 14.02
2014 30% 9 20 0 8 5.00 10% 100% 14.02

Africa insurance company(Africa)

year ROA BS(NO.) FM(NO.) FD(no) EQD(NO) ISE(NO) GP(%) ods(%) ccop(LOG.)
2005 0% 6 6 0 5 3.00 13% 83% 12.21
2006 7% 6 12 0 5 3.00 27% 83% 12.21
2007 2% 7 8 0 5 3.00 22% 71% 12.43
2008 4% 8 6 0 5 2.00 29% 63% 12.43
2009 5% 7 8 0 5 2.00 13% 71% 12.61
2010 6% 7 9 0 5 2.00 45% 71% 12.90
2011 5% 7 7 0 5 2.00 39% 71% 12.90
2012 5% 7 6 0 5 3.00 40% 71% 13.12
2013 6% 7 12 0 5 3.00 -10% 71% 13.24
2014 8% 7 12 0 5 3.00 2% 71% 13.30

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