CORPORATE GOVERNANCE AND PROFITABILITY OF LISTED COMPANIES

A CASE STUDY OF BANK OF BARODA (BOBU) UGANDA

MBARARA BRANCH, MBARARA DISTRICT

BY

MARIAM BIRUNGI

2011/BBA/098/PS

A RESEARCH REPORT SUBMITTED TO THE INSTITUTE OF MANAGEMENT SCIENCE IN

PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR

THE AWARD OF BACHELOR’S DEGREE OF BUSINESS

ADMINISTRATION OF MBARARA UNIVERSITY

OF SCIENCE AND TECHNOLOGY

MAY, 2014

DECLARATION

I hereby declare that, this is my original piece of work which is as a

result of my tireless effort into the research so as to ensure

reliability of information. It has never been submitted for the award

of a degree or diploma in any university or higher institution of

learning except where references to other research reports have been

made.

Signature……………………. Date……………………………

BIRUNGI MARIAM

2011/BBA/098/PS

APPROVAL

This research report has been submitted for examination with my

approval as the university supervisor.

Signature…………………………… ……………………………..

ASSOC. PROF. CHARLES TUSHABOMWE -KAZOOBA DATE

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DEDICATION

I declare this research report to my beloved father Mr.kasaija Martin.

Thank you for the love you have always shown to sacrifice the small

meager resources for my academic success and the advice and

inspiration during my struggle. I am really grateful to you and may the

lord reward you abundantly.

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ACKNOWLEGDEMENT

Firstly, to God for inspiration, strength and vision to complete my

course, wisdom and understanding. I am therefore grateful to Him. “If

you want something very badly, you can achieve it, it may take patience, very

hard work, a real struggle, and along time but it can be done, that much faith is a

prerequisite of any undertaking, artistic or otherwise ” margo jones (1913-1955).

I would sincerely like to thank my supervisor Assoc. Prof. Charles

Tushabomwe -Kazooba whose commitment, relentless support and

guidance helped me to sew together the threads of my research. Your

constant encouragement showed me that “ by believing passionately in something

that does not yet exist, we create it. ” (Nikos Kazantzakis). So, to you I am

forever grateful. I cannot fail to appreciate all my Lecturers who have

imparted knowledge and skills since year one, and provided constant

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guidance towards my academic career during this course. May God bless

you all. More appreciation goes to you my father kasaija martin and

brother kerathum Juma for your love and financial support and the words

of wisdom and encouragement at the university.

I would like to also show my gratitude to all the staff of Bank of Baroda

Mbarara Branch who rendered me access and assisted me with the data

necessary in the compilation of this report you have really made this a

success. I am indeed so grateful to all my dear friends, Golden,

SebAlright, Esau Muhwezi, James Bwambale and Natasha kamwine for the

love and academic support. May the lord richly bless you.

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TABLE OF CONTENTS

DECLARATION....................................................i

APPROVAL.......................................................i

DEDICATION....................................................ii

ACKNOWLEGDEMENT..............................................iii

LIST OF TABLES..................................................ix

LIST OF ABBREVIATIONS (ACRONYMS)................................xi

ABSTRACT.....................................................xii

CHAPTER ONE:INTRODUCTION........................................1

1.0 Introduction................................................1

1.1 Background of the study.......................................1

1.2 Motivation of the study.......................................5

1.3. Statement of the problem.....................................6

1.4. Objectives of the study......................................6

1.5. Research questions..........................................6

1.6. Scope of the study...........................................7

1.7 Significance of the study.....................................8

LITERATURE REVIEW..............................................10

2.1 History of Corporate Governance..............................10

2.1.1Conceptual meaning of corporate governance..................10

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2.2 Elements of corporate governance systems.....................12

2.2.1 Board size................................................12

2.2.2 Board roles...............................................13

2.2.2.1 Policy and decision making...............................13

2.2.2.2 Strategizing role.......................................13

2.2.2.3 Monitoring and control..................................14

2.2.2.4 Advice and counsel......................................14

2.2.3 Board effectiveness.......................................14

2.2.3.1 Committees.............................................15

2.2.3.2 Skills and knowledge (Management experience).............15

2.2.3.3 Risk Management.........................................16

2.2.3.4. Delegation............................................16

2.2.3.5 Information and communication...........................17

2.3. Definition of profitability................................17

2.3.1 Measuring profitability...................................18

2.3.2 Elements of profitability.................................18

2.3.2.1 Cost control............................................18

2.3.2.2. Revenue/ Turnover adequacy.............................18

2.3.2.3. Required rate of return.................................19

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2.3.2.4. Market share...........................................19

2.3.2.5 Pricing................................................19

2.3.2.6. Entry barriers.........................................19

2.3.2.7. Asset adequacy.........................................20

2.4. Relationship between Corporate Governance & Profitability level

..............................................................20

2.4.1. Relationship between Board roles and Profitability level.. . 21

2.4.2. Relationship between monitoring and control and Profitability

levels........................................................21

2.4.3. Relationship between Board size and Profitability level....21

2.4.4. Relationship between Policy and Decision making and

Profitability.................................................21

2.4.5. Relationship between strategizing role and profitability

level.........................................................21

2.4.6. Relationship between Board effectiveness and Profitability. 22

2.5. Conclusion................................................22

RESEARCH METHODOLOGY...........................................23

3.0Introduction...............................................23

3.1. Research design............................................23

3.2. Study population...........................................23

3.3. Sampling..................................................23

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3.3.1. Sampling size and Sampling Procedure......................23

3.4. Sources of data............................................24

3.4.1. Primary source...........................................24

3.4.2. Secondary source.........................................24

3.5. Data collection instruments................................24

3.5.1. Questionnaire...........................................24

3.5.2. Interview...............................................25

3.5.3 Documentation/ secondary data.............................25

3.6 Reliability and validity....................................25

3.7. Data collection procedure..................................26

3.8. Measuring study variables..................................26

3.9 Data Presentation and Analysis...............................26

3.10 Ethical Consideration......................................27

3.11 Limitations of the study....................................27

CHAPTER TWO: PRESENTATION, DISCUSSION AND ANALYSIS OF FINDINGS.....29

2.0 Introduction...............................................29

2.2 Corporate Governance systems................................29

2.2.4 Whether board sets strategic objectives for management to

implement.....................................................32

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4.2.2 Whether well defined strategy keeps the company in the right

direction.....................................................33

2.2.2 Whether board monitors and reviews the implementation of

strategic plan and objectives...................................34

4.2.1 Whether board members provide advice and counsel to the

Management....................................................35

2.2.1 Whether board has firm specific knowledge and skills to perform

effectively...................................................37

2.2.3 Board members integrate knowledge of the firm with their

expertise to accomplish tasks...................................38

2.4 Establishment of the relationship between Corporate Governance

and Profitability level.........................................45

CHAPTER THREE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS...........47

3.0 Introduction...............................................47

3.1 Summary of major findings of the study........................47

3.1.1 Findings on demographic characteristics of respondents......47

3.1.3 Findings on profitability level............................48

3.1.4 Findings on the relationship between corporate governance and

profitability level............................................49

3.2 Conclusions................................................49

3.3 Recommendations............................................49

3.3.1 Recommendations on corporate governance....................50

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3.3.2 Recommendations on profitability level.....................51

3.4 Areas for further Research...................................52

REFERENCES....................................................53

APPENDIX I: QUESTIONNAIRE.......................................58

APPENDIX II: WORK PLAN..........................................62

APPENDIX III: ESTIMATED BUDGET..................................63

APPENDIX IV: INTRODUCTORY LETTER................................64

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LIST OF TABLES Table 1: Maximum level for board positions.......................29

Table 2 : Effectiveness of small sized boards.....................30

Table 3: Directors increasing pool of expertise and resource pool...30

Table 4: Information for decision making.........................31

Table 5: Board developing methods for decision making.............31

Table 6 : Management allowed taking part in decision making process. 32

Table 7: Setting strategic objectives for implementation..........32

Table 8: Keeping in the right direction...........................33

Table 9: Management involvement in strategic planning process.....33

Table 10: Monitoring internal system.............................34

Table 11 : Monitoring and reviewing strategic plan and objectives...34

Table 12: Monitoring performance of the firm......................35

Table 13: Providing advice and counsel...........................35

Table 14 :Advising the CEO.......................................36

Table 15 : Sharing knowledge and experience.......................36

Table 16: Specific knowledge and skills..........................37

Table 17: Training and supervision...............................37

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Table 18 :Integrating knowledge of the firm with expertise.........38

Table 19 :Ensuring quality decision making.......................38

Table 20: Board committees and responsibilities..................39

Table 21: Staff affairs and welfare policies and regulations.......39

Table 22 : Appropriate policies to moderate risk..................40

Table 23 :Risk management identification.........................40

Table 24 :Regular review of risk management.......................41

Table 25 :Boosting morale of employee and management..............41

Table 26 : Authority and responsibilities........................42

Table 27: Articulating and documenting delegated tasks............42

Table 28 : Revenue targets......................................43

Table 29 :Cost control measures to minimize cost..................43

Table 30: Optimal use of assets..................................44

Table 31 : Role of Required Rate of Return (RRR)....................44

Table 32 : Competition with other institutions in the business......45

Table 33: Responses on the relationship between Corporate Governance

and Profitability level.........................................45

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LIST OF ABBREVIATIONS (ACRONYMS)

ACCA : ASSOCIATION OF CHARTED CERTIFIED ACCOUNTANT.

BIS : BANK FOR INTERNATIONAL SETTLEMENTS.

BOBU : BANK OF BARODA UGANDA.

BOD : BOARD OF DIRECTORS.

BOU : BANK OF UGANDA

CAMEL : CAPITAL ADEQUACY MODEL

CAR : CAPITAL ADEQUACY RATIO

CEO : CHIEF EXECUTIVE OFFICER

CK : CORE CAPITAL

CLERP : CORPORATE LAW ECONOMIC REFORM PROGRAM PAPER

CPA : CERTIFIED PUBLIC ACCOUNTANTS

GBL : GREENLAND BANK

ICB : INTERNATIONAL CREDIT BANK

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ICGU : INSTITUTE OF CORPORATE GOVERNANCE

ICSA : INSTITUTE OF CHARTED SECURITIES AND ADMINISTRATION

MD : MANAGING DIRECTOR

NPA : NON PERFORMING ASSETS

ROA : RETURN ON ASSETS

ROE : RETURN ON EQUITY

SPSS : STATISTICAL PACKAGES FOR SOCIAL SCIENCES

USAID : UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT

ABSTRACT

The research was carried out to determine the relationship between

Corporate Governance Systems and the level of profitability level of

BOBU limited using a case study of Mbarara Branch- Mbarara

Municipality on Mbarara High Street in Mbarara District as a case

study. The research arose due to the deteriorating profitability level

of BOBU. The objectives of the study were to examine the corporate

governance systems in Bank of Baroda Uganda, to establish

profitability levels in Bank of Baroda Uganda, and to establish the

relationship between corporate governance and profitability level in

Bank of Baroda Uganda.

The research was carried in Bank of Baroda, Mbarara Branch in Mbarara

Municipality. Sources of data were both primary and secondary. Primary

data was gathered using questionnaires while secondary data was got

from documents and journals obtained from libraries, professional

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journals from the internet, financial reports and published

literature like text books. A descriptive and analytical research

design was used employing both qualitative and quantitative approach,

to establish the relationship between the two variables and this

assisted the researcher in arriving at an appropriate conclusion.

This study required the use of computer applications such as Ms Excel,

Ms Word that helped in analyzing and editing data. Spearman’s rank

correlation coefficient was used to determine the magnitude of the

relationship and prediction of profitability level of Bank of Baroda

Uganda mbarara.The findings of the study revealed that corporate

governance has got a significant influence on the profitability of

Bank of Baroda Uganda as an organization in question which was

represented by a strong positive relationship of r=0.900 between the

study variables.

It is thus within Bank of Baroda’s role to set and establish policies

and procedures that can stand a test of time. There is need for constant

reviews and improvements amongst board members and their employees to

help in the achievement of the set target profits. Efforts should

further be devoted to training and supervision of the Bank’s staff to

help improve their competencies and the company’s profitability too.

From the findings, the researcher concluded that corporate governance

greatly affects profitability of companies rendering the fact that

these two variables are correlated. Thus for companies to perform

effectively, corporate governance systems should be set.

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CHAPTER ONE

INTRODUCTION

1.0 Introduction

This chapter covers the background of the study, statement of the

study, objectives of the study, research questions, description of the

study area and scope of study, significance of the study and

conclusion.

1.1 Background of the study

The International financial landscape is changing rapidly; economies

and financial systems are undergoing traumatic years. Globalization

and technology have continuing speed, financial arenas are becoming

more open, new products and services are being invented and marketed

and regulators everywhere are scrambling to assess the changes and

master the turbulence. An international wave of mergers and

acquisitions has swept the banking industry as boundaries between

financial sectors and products have blurred dramatically. In this

brave new world, one fact remains unchanged. The need for countries to

have sound resilient banking systems and strong banks with good

Corporate Governance then will use competition to strengthen and

upgrade their institutions that will survive in an increasingly open

environment (Kaheeru, 2001).

According to James Wolfensohn former World Bank Group President,

Corporate governance is about promoting corporate fairness,

transparency and accountability (Financial Times, 1999). Governance

is a requisite for survival and a gauge of how predictable the system

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for doing business in any country is. In developing countries, the

importance of governance is to strengthen the foundation of society

and chip into the global economy. Governance is concerned with

structures and processes for decision making, accountability,

control and behavior at the top of organisations. Corporate governance

is a concept that involves practices that entail the organization of

management and control of companies. Corporate governance is the means

by which an organization is directed and controlled. In broad terms,

corporate governance refers to the processes by which organizations

are directed, controlled and held accountable. Corporate governance

encompasses authority, accountability, stewardship, leadership,

direction and control exercised in corporations. It reflects the

interaction among those persons and groups, which provide resources to

the company and contribute to its performance such as shareholders,

employees, creditors, long-term suppliers and subcontractors

(Brownbridge, 2007).

Corporate governance helps in defining the relation between the

company and its general environment, the social and political systems

in which it operates. Corporate governance is linked to economic

performance. The way management and control are organized affects the

company's performance and it's long run competitiveness. It

determines the conditions for access to capital markets and the degree

of investors‟ confidence (Brownbridge, 2007). Corporate governance

is the set of processes, customs, policies, Laws and institutions

affecting the- way a corporation is directed, administered or

controlled (Knell 2006). Corporate governance also includes the

xviii

relationships among the many players involved (the stakeholders) and

the goals for which the corporation is governed. The principal players

are the shareholders, management and the board of directors. Other

stakeholders include employees, suppliers, customers, bankers and

other lenders, regulators, the environment and the community at large

(Knell 2006).

On a Global scale, corporate governance largely concentrates in

management of Financial Institutions. Efficient corporate governance

greatly helps a nation’s economy to grow. However, inefficiencies in

corporate governance grossly lead to economic crises and economic

slowdown. (Brandil Micheal; 2011): The aims of corporate governance

are to promote achievement of the highest sustainable economic growth

and raise standard of living, while maintaining financial stability,

and thus contribute to the development of the world economy, OECD

(2004). The principles of corporate Governance include: a) Ensuring

existence of a Basis for an Effective Corporate Governance Framework

to promote transparent and efficient markets. This should be

consistent with the rule of law and clearly articulate the division of

responsibilities among different supervisory, regulatory and

enforcement authorities; b) Observance of the Rights of Shareholders

and Key Ownership Functions; 1) Secure methods of ownership

registration; 2) convey or transfer shares; 3) obtain relevant and

material information on the corporation on a timely and regular basis;

4) participate and vote in general shareholder meetings; 5) elect and

remove members of the board; and 6) share in the profits of the

corporation; c) Observance of Equitable Treatment of Shareholders to

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ensure the equitable treatment of all the shareholders, including

minority and foreign shareholders. This also includes the opportunity

for all stakeholders to obtain effective redress for violation of

their rights; d) The Role of Stakeholders in Corporate Governance

should recognize the rights of stakeholders established by law or

through mutual agreements. This should also encourage active co-

operation between corporations and stakeholders in creating wealth,

jobs, and the sustainability of financially sound enterprises; e) a

framework that ensures timely, transparent, and accurate disclosure

on all material matters regarding the corporation, including the

financial situation, performance, ownership, and governance of the

company; f) The Responsibilities of the Board. The corporate

governance framework should ensure the strategic guidance of the

company, the effective monitoring of management by the board, and the

board’s accountability to the company and the shareholders.

In Uganda, the factors responsible for poor corporate performance

especially in banks emanate from lack of transparency, accountability

and poor ethical conduct (Kibirango,1999). Commercial banks failures

have been linked to self-inflicted causes resulting from bank owners;

ICB(International Credit Bank), GBL(Greenland Bank), and Coop Bank

were afflicted with the one-man management syndrome of corporate

governance exemplified by Thomas Kato (ICB), Sulaiman Kiggundu (GBL)

and USAID (Co-op Bank). There was no separation between senior

management and the board of directors in ICB or GBL and that management

took little account of depositor’s interests. The board of ICB

consisted of 4 members of the Kato family including a six -year- old

xx

child. GBL had two boards of directors but neither had a say in the

running of the bank for instance ICBs audit report cited connected or

insider lending to a tune of UShs. 4 billion. In the case of GBL the July

1998 Bank of Uganda (BOU) Audit Report stated that as per

30th June 1998, Insider lending stood at Ushs.22, 722 million

representing 47 percent of customer deposits and accounting for 55

percent of the total loan portfolio yet the maximum amount the bank

could lend according to FIS 1993 was Ushs.975 million only. The report

also cited that in most cases credit was extended on sole instructions

of then Managing Director without any or minimal documentation (BOU,

1999).

According to shliefer et al.., (1997), corporate governance is about

promoting fairness and transparency to ensure satisfactory return on

the investment. It is also defined as a system by which businesses and

corporations are directed and controlled (Oola, 2002; Institute of

Corporate Governance Manual on Corporate Governance, 2005) and is

concerned with distribution of rights and responsibilities among

different participants in the management of the corporation. Well

defined and enforced corporate governance provides a structure that,

at least in theory, works for the benefit of everyone concerned by

ensuring that the enterprise adheres to accepted ethical standards and

best practices as well as to formal laws.

To that end, organizations have been formed at the regional, national

and global levels. In recent years, corporate governance has received

increased attention because of high-profile scandals involving abuse

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of corporate power and in some cases, alleged criminal activity by

corporate officers. Corporate Governance comprises of company board

size, board roles, policy and decision making, board effectiveness and

compliance with laws and best practices (larker et al, 2005).

Corporate governance systems are founded on pillars of board sizes,

board role and board effectiveness.

Profitability refers to the ability of a company to generate returns

for the shareholders in light of the investment committed (Frank,

2002). It is further defined as the efficiency of a company to yield a

targeted level of income. It is measured as gross revenue less expenses

and tax (ACCA, 2002). It is the most used and preferred financial

performance indicator for companies. Profitability is a primary goal

of the business ventures, without which the business will not exist in

the long run (Don, 2006). It is a revealing indicator of a company’s

competitive position in markets and its quality of management (Ariho,

2006). Profitability is the most important variable for determining

business performance, as other factors and variables tend to be

subjective (Balunywa, 1992). It provides a follow up of how resources

are being managed and utilized.

Profitability is shown by the cost control, required rate of return,

pricing, asset adequacy, and revenues/turnover (Hampton, 2001)

market share and entry barriers. These show that the firm is making

profits. Corporate profits may be viewed as the return to share holders

for their invested resources. The employees of the institution should

be held to occupy a strategic role in corporate success. Policy agendas

xxii

should be formulated to form a relationship between the employees and

the Board of Directors to support and achieve the business objectives.

Thus, due to proper Corporate Governance that has been seen in Bank of

Baroda, there has been a notable rise in the Bank’s net profits which

increased by 23.95% in 2010 to shs 16.7b, up from shs 13.4b earned in

2008, (New vision: Tuesday, 2nd March 12, 2010). Deposits also

increased to shs 271.7b, up from shs 214.1b collected in 2008, while

total income rose to shs 445b, translating into a 20.49% growth. It is

also noted that customer loyalty was a key factor for Bank of Baroda

(Uganda) progress.

In a bid to improve corporate governance practices, directors face

various huddles throughout their tenure to balance numerous

conflicting demands by shareholders, staff and regulators and manage

conflict of interest. (The exchange, 2007). The major challenges

involve, operating costs, high taxes levied (Ariho, 2006) changes in

share prices, interest rate risk (Bank of Baroda (UG) Annual report

2009.) capital inadequacy, changes in technology, loss of

shareholders and low sales volumes. These major come about due to poor

corporate governance practices such as lack of responsibility by Board

members, poor communication means, poor advertising programs, poor

technology and the weak legal regulatory system.

1.2 Motivation of the study The last ten years have seen the emergence of a new field within the

corporate governance literature dedicated to the corporate

governance of banks, which has especially focused on Uganda banks.

This research report contributes to this stream of research by

xxiii

studying diverse features of the corporate governance of banks in the

Uganda Commercial Bank case. There are two main reasons why we should

study the corporate governance of banks: its relevance and its

possible specificity. First, banks are important. While efficient

banks can stimulate the prosperity and growth of the whole economy,

banking crises are able to destabilize the economic and political

situation of nations. This central role that banks play in any economy

makes the study of their corporate governance a fundamental issue, not

only from a private, but also from a public viewpoint. Second,

corporate governance in banking might be different than in other

industries. It has been argued that one reason behind the difficulty of

identifying the effect of corporate governance on performance may be

the existence of different optimal structures across industries which

would be even more patent in the presence of regulation. Corporate

governance has a central role in sustainable wealth creation,

particularly in the area of the private sector development, as it

establishes transparency in enterprises while ensuring corporate

accountability. This in turn helps to build the confidence required

for development and operation of efficient financial markets. At the

level of individual firms, strengthened governance facilitates

access to diverse forms of business finance. Thus the motivation of the

study was intended to establish the relationship between corporate

governance and profitability of Bank of Baroda (Uganda) Mbarara

branch.

1.3. Statement of the problem.

In recent years, the profitability level of Bank of Baroda (Uganda)

Mbarara branch has been low and declining. Although Bank of Baroda

xxiv

(Uganda) Mbarara branch has tried to set up various rules, and

regulations to attract and retain shareholders, reduce share prices,

follow listing rules, carry out massive advertising programs,

improved technology, good communication channels, conforming to

international standards and encouraging responsibility , the company

still continues to evidence a decline in the profitability levels.

This could be due to poor corporate governance problems arising out of

mis-management of the company, poor communication means, weak legal

and regulatory systems, poor advertising mediums caused by poor

technology and generally lack of responsibility. In persistence of

the above situation, the company may face operational problems such as

excessive borrowing, loss of business partners and customers,

excessive borrowing and under capitalization which might threaten its

long run survival amidst the ever increasing competition and may face

closure.

1.4. Objectives of the study

This study was based on the following objectives

i. To examine the corporate governance systems in Bank of Baroda (Uganda) Mbarara branch.

ii. To establish profitability levels in Bank of Baroda (Uganda) Mbarara branch.

iii. To establish the relationship between corporate governance and profitability levels in Bank of Baroda (Uganda) Mbarara branch.

1.5. Research questions

This research was set to answer the following research questions:

xxv

i. What are the corporate governance systems in Bank of Baroda

(Uganda) Mbarara branch?

ii. What is the profitability level of Bank of Baroda (Uganda)

Mbarara branch?

iii. What is the relationship between corporate governance and

profitability in Bank of Baroda (Uganda) Mbarara branch?

1.6. Scope of the study

The study was limited to Bank of Baroda (Uganda) Mbarara Branch, in

Mbarara District. This was because of the convenience and familiarity

of the location to the researcher. Mbarara Branch in Mbarara

municipality in Mbarara district Mbarara town has a number of streets

which include Mbarara High Street, Mbaguta Street, Bishop Willis

Street Garage Street, Markhansingh Street, Bulemba Road and Bucunku

Street. Mbarara town is located about 266  kilometres (165 mi)

southwest of Kampala. Population Estimates of Ugandan Cities and Towns

(2002 and 2008).

The current study focuses on the corporate governance as an

independent variable in terms of board size, policy and decision

making, board roles in terms of monitoring and control, advice and

counsel, board effectiveness in terms of skills and knowledge,

committees, delegation and risk management. The study will also

acknowledged profitability as a dependent variable was measured using

the cost control, turnover, assets, pricing, required rate of return

as well as market share.

xxvi

This study was to cover the period between 2010 up to 2013 for

provision of updated information. The area scope was limited to only

Bank of Baroda (Uganda) Mbarara Branch, in Mbarara municipality to

avoid too much complexity in research findings and also Mbarara

municipality having many commercial banks that can enable access to

the information needed by the researcher.

Table 1 Summery of the financial statement (2008 to 2013)

PATICULARS 2010

(Shs.’000)

2011

(Shs.’000)

2012

Shs.’000)

2013

Shs.’000)

After tax profit 22,588,800 28,191,520

29,471,732 30,883,725

Total assets 252,801,140 256,595,450

948,676,593 709,176,711

Net loan andadvances

226,324,000 293,241,000

61,722,194 61,085,712

Deposits 1,559,331 26,735,652

647,540,368 524,301,572

Retained earnings 70,215,003 82,306,2 123,576,288 111,418

xxvii

69 ,571

Source: financial statement from Bank of Baroda Uganda Limited

(www.bankof baroda.ug/reports/barodaFS-2010-2013)

1.7 Significance of the study

The study will help to make contribution in terms of knowledge for

policy makers and regulators in areas of corporate governance and

profitability levels of Bank of Baroda (Uganda) Mbarara branch.

The study also will provide alternatives that form a foundation of

other corporate governance research for scholars in various

institutions.

The resolutions and recommendations of this research may help the

corporate directors and managers in implementing efficient and

effective corporate governance practices to archive target profits.

The study will help the researcher to gain skills of handling research

issues. This helps the researcher in pursuance of further studies and

in office.

The study will identify other areas of corporate governance and

profitability where not much research has been made.

The study will generate data that will contribute to the formulation of

appropriate corporate governance policies by the ministry of

finance, planning and economic development.

xxviii

The study will provide a strategy that will help improve the financial

performance of tropical bank of Africa in Uganda.

The study will provide a basis on how to improve the financial

performance of other commercial banks in Uganda.

The study will provide a basis for further research in corporate

governance and performance of commercial banks in Uganda.

LITERATURE REVIEW 2.0 Introduction

xxix

This critically reviews the existing literature on the subject of

corporate governance and profitability the theoretical framework was

based on various perspectives of corporate governance systems which

included board roles, board size and board effectiveness and the

theories involved in functional profitability performance such as

cost control among others and the entire relationship between

corporate governance and profitability

2.1 History of Corporate Governance

The origins of corporate governance go back to thousands of years; when

ownership and management of enterprises were first separated thus the

owners had a need for mechanism to monitor the performance of managers.

The concept of stewardship and the role of the auditor as someone would

check that proper stewardship had taken place, emerged from this

separation of ownership and management. Corporate governance has

emerged as a key issue in the economic well being of countries and

companies. Africa in 2004 posted a brilliant growth rate and projected

brighter times ahead because some countries effected brighter times

ahead because some countries effected some regulatory reforms and

maintained good governance ( national informant ; issue 11 ,wed 25-31

may 2005). Globalization, information and communication technology,

and financial reporting requirements have driven corporate

governance to the centre stage.

2.1.1 Conceptual meaning of corporate governance

Institute of corporate governance Uganda (ICGU) defines corporate

governance as the system by which companies and corporations are

directed and controlled .this definition recognizes that any

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enterprise whether public or private is entrusted with the power and

must to adhere to established principles and practices governing the

apportionment and exercise this power .ICGU has noted that the current

global economic environment is grounded in free trade ,significant

private sector influences mind market driven economic development .

Corporate governance has a central role in sustainable wealth

creation, particularly in the area of the private sector development,

as it establishes transparency in enterprises while ensuring

corporate accountability .This in turn helps to build the confidence

required for development and operation of efficient financial

markets. At the level of individual firms, strengthened governance

facilitates access to diverse forms of business finance. Gabrielle

O’Donovan ( A broad culture of corporate governance ) a business

author, defines corporate governance as an internal system

encompassing policies, processes and people, which serves the needs of

shareholders and other stakeholders by directing and controlling

management activities with good business savvy, objectivity,

accountability and integrity . Sound corporate governance is reliant

on external market place commitment and legislation, plus a healthy

board culture which safeguards policies and processes.

O’Donovan goes to say that “the perceived quality of a company’s

corporate governance can influence its share price as well as the cost

of raising capital. Quality is determined by the financial markets

legislation and other external market forces plus how policies and

processes are implemented and how people are led, external forces are

to a large extent; outside the circle of control of any board. The

internal environment id quite a different matter and offers companies

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the opportunity to differentiate form competitors through their board

culture. To date too much of corporate governance debate has centered

on legislative policy, to deter fraudulent activities and

transparency policy which misleads executives to treat the symptoms

and not the cause.”

Corporate governance is about building credibility, ensuring

transparency and accountability as well as maintaining an effective

channel of information disclosure that would foster good corporate

performance. It is also about how to build trust and sustain confidence

among the various interest groups that make up an organization (mark,

2000). Transparency is integral to corporate governance. A higher

transparency reduces the information asymmetry between firm’s

management and financial stakeholders (equity holders and bond

holders), mitigating the firm’s problems in corporate governance

(Sandeep et al, 2002). In Uganda lack of transparency is attributed to

the closures of commercial banks (Yunusu, 2001). Corporate Governance

as an organizational concept refers to the manner in which the power of

an organization is exercised in the steward of the corporation’s total

portfolio of assets and resources with the intention of increasing and

maintaining shareholder value and satisfaction of other stakeholders

in the context of its corporate mission (Private Sector Corporate

Governance Trust, 1999.)

The ultimate goal and objective of promoting corporate governance is

to improve and strengthen leadership, credibility, stability, Board

efficiency and competitiveness of existing corporate business

entities. This will enhance the creation of new ones and enable their

xxxii

sustained ability to produce wealth, create employment and compete in

the Global market (ICGG,2005).It focuses on the relationship among

directors, officers, shareholders and regulators and how these

parties interact to monitor the operations of the company.

Corporate Governance goes beyond the simple concept of who is in charge

and who has the power. It includes the notion of accountability and

responsibility and involves an alignment of interests among

directors, employees and investors. Therefore the chief among its

goals are improving shareholder value and supporting a continuing

commitment to growth. Subsequently, the concept is gradually warming

itself to the top of policy agenda in the African continent. Indeed it

is believed that the Asian crisis and the seemingly poor performance of

the corporate sector in Africa have made the concept of Corporate

Governance a catch phrase in the development debate.(Berglof and Von

Thadden,1999).It is believed that good governance generates investor

Good will and confidence.

Again, poorly governed firms are expected to be less

profitable .Claessens et al. (2003) provides that a better corporate

framework benefits firms through greater access to financing ,better

performance and more favorable treatment of all stakeholders. They

further argue that weak corporate governance does not only lead to poor

performances and risky financing patterns, but also renders

conducive/possibility for macroeconomic crisis like the 1997 East-

Asian crisis.

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2.2 Elements of corporate governance systems

2.2.1 Board size

Board size is defined as the total number of Directors on a board.

(Panasian et al, 2003).It is regarded as an important determinant of

effective corporate governance. According to Goshi et al., (2002) the

optimal board size includes the executive directors and non executive

directors. Consideration has to be given to the size of the board

itself. Questions like, is the board too small or too large to

adequately fulfill its requirements, given the size and complexity of

the organization, Does board size have an effect on board functioning?

It is stated that large boards perform better compared to smaller

boards, because a great number of directors increases available

expertise and resource pool.

Expanding the size of the Board provides an increased pool of

expertise, information and advice quality and board’s monitoring

capacity, not obtained from other corporate staff. Thus in contrast,

small boards cannot enjoy the advantages of the pool of expertise,

information and advice quality of the larger boards.

2.2.2 Board roles

Board effectiveness occurs via the execution of roles set as proposed

by different researchers in various ways Hung(1998).Defining a clear

role set is difficult since different disciplines concentrate on

different areas of interest.

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Though there are various roles as per chairperson, chief executive and

Director’s offices, there are several board roles that must receive

board support as indicated below;

2.2.2.1 Policy and decision making

The final function that a board needs to consider is its duty with

respect to delegating authority. Due to the complexity of the business

environment, it is impossible for the board to be the sole decision

making body in the company.

Each board needs to work on developing an appropriate method that

involves everybody in decision making. Obviously, this will again vary

with the context facing the board but in all circumstances, the board

needs to clearly articulate and document the delegations it makes

(Gavin & Geoffrey, 2004).

Managers at the top level usually do not involve their subordinates in

decision making and tend to drive the organization in their own

interests. Once corporate governance policies are under looked, it may

create problems in the management as it was the case in Greenland Bank.

2.2.2.2 Strategizing role

The board’s objective in strategy formulation is aimed at ensuring

that the strategy of the company will lead to the long term creation of

shareholder wealth or goals and values upheld by the organization. The

strategizing role is included for three reasons, increasing

performance pressure being applied by institutional shareholders,

Board perception of the importance of the strategizing role,(Triker

1998) and recent legal precedent that places corporate goal setting

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and strategic direction squarely within the board’s

charter(Baxt,2002).A well laid and defined strategy drives the

company in the right direction.

2.2.2.3 Monitoring and control

The prime role of the board is control and monitoring management

performance of financial institutions, (Rosnik, 1987, 1990) a role

made necessary by the separation of ownership from control. Meigs and

Meigs (1984) contend that internal control system need to be monitored

if an entity is to realize its profitability objective and this is

accomplished through ongoing monitoring activities and separate

evaluations.

It includes regular management and supervisory activities and other

actions personnel take in performing their duties such as Risk

assessment, effectiveness and reporting deficiencies to top

management and board to design appropriate actions.

The board should frequently monitor and endeavor to review the

management’s implementation of strategic plan and objectives to

ensure management efficiency and accuracy. It is therefore predicted

that if the Board performs its duties effectively, the value of the

firm is predicted to increase and wealth of the shareholders would also

be enhanced accordingly. The Board monitors and controls the

performance of the firm. In case Managers fail to put the company’s

interests at the forefront, it may offer room for inefficient

practices to occur.

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2.2.2.4 Advice and counsel

The Directors help in providing advice to the CEO who is obliged to act

prudently in the management of the company and its day to day

implementation of the direction to success. The Board is a key source

of knowledge and experience for the organization it governs. It is thus

important for the Board to share its experience with Management

particularly the CEO, to serve the interests of the company (Garvin &

Geoffrey, 2004).

2.2.3 Board effectiveness

According to Forbes and Daniel (1999), Board effectiveness refers to

the Board’s ability to perform its control and service tasks

effectively. It is therefore a mix of executive and non executive

directors. Most people believe that the more the outside Directors a

board has, the more effective the board (Weisbach, 1998).

The perception of Board effectiveness widely differs from one

individual to another, thus to Jackson & Holland (1998) board

effectiveness is measured and based on individual experience. Whereas

Huat & David (2001) argued that board effectiveness is measured as the

ability of the board to perform its functions. Therefore, there is need

to identify the control variables and gaps in understanding how the

Board can impact on the firm performance. A board dominated by Insiders

is not expected to play their role as effective monitors and

supervisors of management especially when the Board chairman is also

the firm’s CEO (katto, 2001).

Basing on the above literature, it’s fairly held that Board

performance is largely defined in terms of the role played by the Board

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of Directors. Some of these roles are inter-related and using these

perspectives, the following have been identified;

2.2.3.1 Committees

A committee is a specific group of people to whom a specific task has

been assigned and delegated by the full board. These may be

remuneration committees, Audit committees Klein (2002) and

nominating committees vafeas (1999).It is stipulated under the audit

profession, that to ensure a balance of power, an audit committee

should comprise of at least three non-executive directors (ACCA,

2002).The set up of committees ensures that no key decisions of the

board are individually made, since vesting too much power in

individuals breeds inefficiencies and leads to poor governance. Board

committees will therefore improve on decision making in the BOD. It

further enables board effectiveness and profitability level also

increases.

These committees help to gather, review and summarize information and

report back to the full Board for decisions or can also be delegated

specific decision making powers, Gavin and Geoffrey (2004).Some

committees may be appointed and may be composed of family members and

relatives who will always act in the Board’s favour.

2.2.3.2 Skills and knowledge (Management experience)

Board members must have the right mix of skills and knowledge, that is,

functional knowledge in various business areas such as accounting,

finance, legal and marketing as well as Industry specific knowledge to

clearly understand specific company issues and challenges. In

addition, board members must have enough general knowledge to provide

xxxviii

input to all topics of discussion, ask questions of all special

interest until they are comfortable enough to cast votes, Espstein et

al., (2002).

Thus for the board to work effectively, the members must possess

necessary knowledge and skills given the unique nature of their tasks.

However, availability of expertise in a group does not guarantee the

use of that expertise. Companies need to be aware that the use of

knowledge and skills is as important as its expertise. Therefore the

board should integrate the knowledge of the firm with their expertise

in the areas of law and strategy if they are to exercise the control

task effectively. However, recruitment of inexperienced staff will be

reflected in the weakness of the management and this compromises good

corporate governance practices.

2.2.3.3 Risk Management

Risk is about uncertainty of events happening. It involves a

probability of a good or bad outcome. Risk management therefore

revolves around the techniques devised in order to promote and ensure

the effective control of risks. It involves set procedures devised to

minimize adverse effects of possible financial and business losses.

Such procedures include identifying potential sources of measuring

the financial consequences of a loss occurring and using control to

minimize actual losses. The risk process takes into account the

diversification of risk, sharing the risk and establishing controls.

Risk management further focuses on the unpredictability of financial

markets and seeks to minimize the possible effects on financial

performance. This is carried out by the treasury department under

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policies of the Board. Because of the dynamic economic and operating

conditions, mechanisms must be in place to identify and deal with the

various risks associated with change to safeguard the company’s

survival. Due to uncertainities it may not be simple to predict the

outcomes of good corporate governance thus corrective measures have to

be set in advance.

2.2.3.4. Delegation

As evidenced in company operations, due to the wide spread technical

issues involved, the board cannot be the sole decision making body in

the company. It is therefore in principle to develop an appropriate

method and level of delegation of authority. It requires the board to

document well and monitor the delegations it makes.

Delegation helps to boost the morale of the persons given the

opportunity to carry on a particular task and provides a sense of

leadership and responsibility to the entire company members. The

reluctance and negligence of managers to delegate authority to other

parties probably caused by the fear of competition violates the

corporate governance policies and principles.

2.2.3.5 Information and communication

In principle it is relevant and vital for the Board to keep its

subordinates informed of the goals, objectives, policies and

constraints to which the organization is expected to conform (Arora,

1995). Budgets are an important channel for the dissemination of this

information to the managers to fully coordinate their activities

efficiently (Nixon, 2001).

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Information preferably should be in writing and the managers should be

able to listen to their subjects’ ideas.

This helps to build team work in the company which ensures good

performances. Effective communication must occur in a broader sense,

flowing down, across and up the organization.

Poor communication renders Board inefficiency and ineffectiveness as

there will be no direction of orders and commands hence poor

performance accompanied by low profitability. All personnel must be

fully informed of their responsibilities and roles in the internal

control. The company should enhance a proper communication flow with

entire community that embodies the suppliers, customers,

stakeholders, external auditors to ensure the set Goals are attained.

2.3. Definition of profitability

Profitability refers to the ability of the company to generate returns

for the shareholders in light of their investment committed; Frank

(2002).Profit is measured as the difference between revenues and

expenses incurred in the trading period. Profit is the ultimate goal of

a company and in case of failure to achieve the target profit; the

company ceases to exist (Ariho, 2006). Profitability indicates the

firms’ professional management of its operations. Profits are seen as

a return to the shareholders for their resources invested in the

company, and also help to reveal the enterprise’s competitive position

in the market it operates.

The earning of profits is a major goal of almost every business

enterprise be it large or small. Economists define profits as the

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amount by which an entity becomes “better off” during a period of time

(kamara, 1998). This enables the businesses’ existence over a period

of time unlike the non profitable businesses which are unlikely to

continue operating for long. Measuring profitability helps to assess

business success, as per current, past profitability and projecting

future profitability.

2.3.1 Measuring profitability

Business profits perform a vital economic function in any

organization. They are relevant in improving standard of living,

achieving high employment and expanding the national economy. There

are various methods of measuring profits, such as subtracting expenses

from sales. The most common measure of profits however is profit after

tax which is a result of the impact of all factors on the firm’s

earnings.

However, profitability of the business enterprise is hard to determine

and calculate since there are some other factors that have a great

impact on it and therefore hard to predict. The factors that need

consideration here are; cost control, sales turn over, required rate

of return, asset adequacy, and market share and entry barriers.

2.3.2 Elements of profitability

2.3.2.1 Cost control

A cost is a foregoing or sacrifice, measured in monetary terms,

incurred to achieve a purpose, (Pandey, 1992). Cost control is taken up

after an event has happened, it points out the deviations that require

xlii

the Manager’s investigation, survey and addressing these issues to

bridge the gap after influencing factors have been identified.

Cost control requires the reduction of various costs for instance

financial, cost of sales and operating expenses to improve

profitability (Hampton, 2001). These costs must be reduced or

minimized to ensure a desired level of profitability.

2.3.2.2. Revenue/ Turnover adequacy

This accrues from the sale of goods and services in the course of the

business. Thus the more the sales in the specified period, the more the

returns reaped. In case the sales margin of profit is less, it results

into the inability of the firm to cover fixed costs and fixed charges

like debts and profits for its shareholders. A firm’s sales revenue is

affected by the expenses a firm incurs in raising sales such as

promotions, remuneration expenses which reduce the intended profits

of the company. But at least there should be a given range to be

maintained over time to avoid inadequacies in financing the business.

2.3.2.3. Required rate of return

This is defined as the risk free rate plus risk premium. It is also the

rate of return expected by investors (Pandey, 1994) from a proposal

before it can be accepted. When a firm invests in capital, it must make

a risk return decision. Therefore the determination of required rate

of return is a profitability function.

2.3.2.4. Market share

This relates to the entire customer population that a company commands

as defined by the number of customers (kawere, 2007). A large market

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share is characterized by high sales revenue which offers high

profitability level compared to a small market share company. However

the entry of more companies into the industry renders the share up of

profits and in the long run some exit the market

2.3.2.5 Pricing

This is determined by the cost of production involved in the process of

providing or availing a service. The price charged should fairly

reflect the time taken and it should be competitive in relation to that

of the competitor since they may use it to take over your customers.

Proper pricing involves analyzing profit requirements in pricing

decisions which leads to the formulation of pricing policies.

Therefore, a good price should be able to earn a business profits

because no business will survive without profits in the long run (Don,

2006). But also its stated that if the market price of the company’s

share is high, it may not appeal to small investors. If it is brought

down to a desired range, trading activities would increase.

2.3.2.6. Entry barriers

Entry barriers are most commonly evident in industries with high

profitability. These influence the conduct and ability of the firm in

generation of adequate profits.

Economies characterized by absence of competition and barriers are

centers for competitors and therefore profits have to be distributed

among the competing firms and hence reducing the profits reaped.

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2.3.2.7. Asset adequacy

Assets can be real assets such as property, plant and machinery or

financial assets such as shares and bonds. The assets held by the

company are important determinants of its profitability (Pandey,

2004). How resourceful are the assets available? Assets that are of no

purpose lie idle and therefore provide little if no impact to the

company thus yield no profits. Companies with a low asset base reap low

profits compared to others with a high asset base.

2.4. Relationship between Corporate Governance & Profitability level

Corporate Governance from the perspective of the investor is defined

as “both the promise to repay a fair return on capital invested and the

commitment to operate a firm efficiently given investment.” Metrick

and Ishii, (2002).

Corporate Governance is seen as concerned with ways of bringing the

interests of (investors & managers) into line and ensuring that firms

are run for the benefit of Investors. It is also concerned with the

relationship between the internal governance mechanisms of

corporations and society’s conception of the scope of corporate

accountability.

It should be noted that companies with an adequate mix of executive and

non executive directors have registered good performance (Yoshikawa &

Phan, 2004). Firms with stronger shareholder rights have higher firm

value, higher sales growth, high profits and lower capital

expenditure. (Gompers & Metrick, 2003). Further companies that

emphasize corporate governance will overtime generate superior

returns and economic performance and lower their cost of capital as

xlv

compared to those with weak corporate governance that face high risks

resulting in higher cost of capital and poor performance.

The company management should be able to turn business plans into

reality and also improve the firm’s profitability. These can be

achieved through good board size where every member plays a role to

improve a company’s efficiency. The assumption among researchers is

that effective corporate governance policies like board sizes and

board roles lead to effective organization. There should be positive

relationship in firm performance and a number of mechanisms should be

put in place, such as sucking of ineffective and non performing

managers to ensure that profitability is achieved.

2.4.1. Relationship between Board roles and Profitability level

Profitability levels can be raised through proper execution of Board

roles set by the personnel concerned. If some tend to be inactive,

reshuffles can be made and roles redefined to ensure management

efficiency and compliance with the laws therein corporate governance.

2.4.2. Relationship between monitoring and control and Profitability

levels

The Board’s role is to monitor the various elements that would

influence and have an impact as per the profitability levels. It

includes evaluation and scrutinizing the spending efficiency and

impact of various expenditure, Bakunda (2001). Monitoring of the

market and all companies activities offers proper accountability and

flow of activities to attain a preferred and set profitability levels.

xlvi

2.4.3. Relationship between Board size and Profitability level

The size of the Board is a crucial element in an organization. But a

prudent decision has to be made in respect of the Board size and the

company’s profitability levels since profits are got after expenses

are offset. In management, an optimal Board size is preferable because

of the low cost attached to it, and the ease with which decisions

regarding the direction of the company are made. A large Board size

presents high staff costs hence cutting the profits that the company

has to gain.

2.4.4. Relationship between Policy and Decision making and

Profitability

The policies set matter most as to how the company is to be run and the

decision making should involve every one since ideas help to build

proper systems that maintain better services that cut the would be

costs hence increasing the profitability levels.

2.4.5. Relationship between strategizing role and profitability

level

Strategies formed are driven at ensuring that the company is in

position of achieving the set Goals such as accumulating the desired

wealth to earn a pay back to the shareholders as a long-term goal.

2.4.6. Relationship between Board effectiveness and Profitability

Board effectiveness depends on the execution of the three board roles

that include; monitoring and control, policy and decision making,

providing counsel and advice).

xlvii

Board effectiveness is measured in terms of individual experience,

Board dynamics and continuous evaluation and review to keep a track of

the profitability level. Therefore, higher levels of Board

effectiveness ensure high profitability level since the costs of

business will be lowered down. Board effectiveness through proper

communication skills, risk management and team work provide room for

proper conduct and good performances that ensure profitability in the

company.

2.5. Conclusion

Research dedicated to Corporate Governance and Profitability

indicates that these two variables are inter-related in various

aspects and as such, the existence of proper corporate principles and

practices ensures set up of reliable internal controls that improve

the company’s profitability.

It should also be understood that corporate governance can be used as a

tool to promote young businesses’ profitability but also, the fact

that corporate governance not being the absolute measure of

profitability should be taken into account.

xlviii

RESEARCH METHODOLOGY

3.0Introduction This gives a description of the various methods that the researcher

used in collecting data and achieving the objectives of the study on

corporate governance and profitability. The subsections beneath it

include, research design, study population, sampling designs, sample

size, sampling procedures, sources of data, data collection methods,

data collection procedure, measurements of variables and instruments

and data processing and data analysis and ethical issues and

limitations during the study. It provides a thorough description on

how the relevant information was obtained to enable research to be

carried on. Findings of the study were assessed and conclusions drawn.

3.1. Research design

The research was to be designed in manners that enable the researcher

to collect data that was to meet the objectives of the study.

descriptive and analytical research designs were used in addition to

the qualitative and quantitative approach to solicit inform on

corporate governance and profitability level in Bank of Baroda Uganda.

Qualitative approach involves the use of interview. Quantitative

approach also involved the use of structured questionnaires which were

to be used to capture data about respondent’s attitudes and behaviors

from the field and to establish the relationship between two

variables. This enabled the attainment of adequate information and

making of an appropriate conclusion.

xlix

3.2. Study population

The study population involved administrators such as Directors,

Managers and all various employees such as Accountants, Managers,

Auditors, and Banking tellers and cashiers.

3.3. Sampling

3.3.1. Sampling size and Sampling Procedure

Data was collected from 15 respondents from the Bank, comprising of 3

managers and 12 Employees at the different levels (positions and

posts). These were chosen basing on the level of education and position

held. This sample size selected is a representative of the entire

population study. The sampling procedure involved purposive sampling

in which Directors and Managers who have relevant knowledge to the

purpose of the investigation are chosen. With expert sampling, the

sample was considered one with the desired expertise and expertise in

the area under investigation.

Simple random sampling was used on other employees such as Accountants

and Bank Tellers. The procedure here involved the researcher

identifying few members and assigned numbers using papers that are

mixed up and employees are required to pick recommended numbers from

one to twenty three (23) to form the sample for the study.

3.4. Sources of data

The data researcher was gathered data from both primary and secondary

sources of data.

l

3.4.1. Primary source

Primary data was gathered from respondents at Bank of Baroda Uganda

Mbarara branch management who were assumed to give first hand

information on the subject under study.

3.4.2. Secondary source

Secondary data was extracted from text books, and other related

written literature such as research reports, journal, magazines and

financial reports availed in the library. Also internet source was

vital during the compilation of data.

3.5. Data collection instruments

These instruments included questionnaires and interviews to enable

the capturing and analysis of data. The methods that were used

included;

3.5.1. Questionnaire

These were well documented structured and semi structured questions

printed in simple precise and concise language for the respondent to

understand, based in a five point Likert scale. These questionnaires

involved some that were to be mailed to the directors, managers and

other chosen employees while others were self administered

questionnaires which were land delivered to the respondents, to have

them filled. The questionnaire were piloted as recommended by Saunder

et al and other (2003) who writes that, piloting helps ensure validity

and reliability and also said that piloting helps to refine the

questionnaire so that respondents have no problem in answering the

questions and there would be no problems in recording the data.

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3.5.2. Interview

An interview is a conversation between two people (the interviewer and

the interviewee) where questions are asked by the interviewer to

obtain information from the interviewee. The qualitative research

interview seeks to describe and the meanings of central themes in the

life world of the subjects. The main task in interviewing is to

understand the meaning of what the interviewees say. (Kvale, 1996).

The researcher used formal interviewing as a method of data collection

and the interviews offered a chance to explore topics in depth and

allowed interaction between the researcher and the respondents such

that any misunderstanding of the questions and answers provided could

easily be corrected. The researcher interviewed the respondent of the

Bank of Baroda Mbarara branch using the interview guide. This was used

to tap the vital information that may not be collected using the

questionnaires from Bank of Baroda Mbarara branch employees, manager &

administrators.

3.5.3 Documentation/ secondary data : Secondary data was also used in

this study as; the researcher collected secondary information from

different sources like; text books, internet, news paper, magazines,

journals among other sources. This information reviewed by visiting

places like libraries and internet cafes.

3.6 Reliability and validity

Validity of an instrument was used in this study where consistent with

the definition provided by Miles and Huberman (1994), as the” extent to

which the items in the instrument measure what they are set out to

lii

measure.” The validity of the instruments was established by the

supervisor.

Reliability, according to Miles and Huberman (1994), has to do with the

extent to which the items in an instrument generate consistent

responses over several trials with different audiences in the same

setting or circumstances”. The reliability of the instruments and data

was established following a pre-test procedure of the instruments

before their use with actual research respondents.

3.7. Data collection procedure

The researcher got an introductory letter from Mbarara University of

Science And Technology, Department Of Management Science which was

presented to the respondents, who kindly provided the researcher with

the required information about the company. Questionnaires were to be

self-administered and respondents were guaranteed of

confidentiality.

3.8. Measuring study variables

The two variables independent and dependent were measured.

Corporate governance as the independent variable was used as an

indicator of how companies are controlled, managed and directed, this

was measured in terms of board roles, board size and board

effectiveness. Profitability as dependent variable was measured in

terms of cost control, sales turnover, required rate of return and the

market share powered by the company. A five-point response scale

ranging from strongly agrees, agree, unfair, disagree to strongly

disagree was chosen to help in the assessment of these indicators

through the various responses forwarded.

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3.9 Data Presentation and Analysis

Data analysis ; A both quantitative and qualitative method were used

during data analysis. Quantitative data involved use of frequencies,

tables against their percentages, that is pie chart and this was

showing values that aided in data interpretation. Qualitative data

presented in writing useful information from the respondents as

presented in relation to the study variables. After collecting all the

necessary data, this data was recorded and edited, analyzed and

rephrased to eliminate errors and ensure consistency. Both

qualitative and quantitative data analysis was used. Qualitative data

was analyzed in the field as it was collected (verbatim reporting)

using coding sheets while quantitative was analyzed by using computer

programs like Microsoft word and Microsoft excel. Also under

qualitative analysis, thematic analysis was used and in quantitative

data analysis; graphs, tables and pie charts were used for data

analysis and presentations of findings.

Data Editing: The collected data was edited for accuracy,

completeness. Editing was done to find out how well the answered

questionnaires were done in line with consideration paid to questions

and responses from interview guide answered by the study respondents.

Data Coding: The edited data was coded. Coding involve assigning

numbers to similar questions from which answers were given unique

looks to make the work easier. In this case computer Packages was used

to analyze the code data.

Data presentation ; After the data , was edited, it was presented

inform of frequency and tables after which the data was analyzed in

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form of pie-charts which may be developed using Micro Soft Word and

Micro Soft Excel, this was done to only quantitative edited data.

Quantitative data were grouped and statistical description such as

tables showing frequencies and percentages and pie- charts as well as

graphs for better interpretation. However, qualitative data was

analyzed in a way of identifying the responses from respondents that

are relevant to the research problem. Mainly such data was analyzed by

explaining the facts collected from the field under which the

researcher was able to quote respondents’ responses.

3.10 Ethical Consideration

Before commencing the research, an introductory letter from the

University was sought and the purpose of the study was explained to the

authorities to avoid inconveniences and misunderstandings about the

purpose. The information collected was kept highly confidential.

3.11 Limitations of the study

Confidential information: Some of the intended respondents for the

interview might decline to Offer information and others who were

involved in the Interviews might later hesitant.

Financial constraints also render the research slow. Money needed for

transport, credit for phone calls was not regularly available for the

research and flow of the process.

Time constraint: The mailed questionnaires were not delivered to the

researcher in time; this created delays in compilation of the research

finds.

lv

The study was carried out on a company with a busy drawn up schedule and

as such, collection of data and accessibility to mostly the top level

managers, directors at some point became a myth.

The researcher mostly relied on literature from the company archive to

compile this research. Despite all the hindrances, the researcher was

set out and proceed to come out with this successful investigation.

lvi

CHAPTER TWO

PRESENTATION, DISCUSSION AND ANALYSIS OF FINDINGS

2.0 Introduction

This chapter presents the study findings as the study was conducted on

Bank of Baroda (BOBU), Mbarara Branch with three major objectives; to

examine the corporate governance systems, to establish the

profitability levels, and to establish the relationship between

corporate governance and profitability levels in Bank of Baroda

Mbarara branch. Tables were used to examine the study variables about

Bank of Baroda Mbarara branch.

The study was carried out in Bank of Baroda (BOBU), Mbarara Branch as

was deemed one of the giant financial institutions in Uganda sharing a

wide coverage and perhaps largely preferred various organizations and

individuals as regards transacting businesses. It further analyses

data collected from different authors on corporate governance and

profitability about the company. It compares and contrasts findings

systematically and identifies key corporate governance systems that

affect profitability level of the company.

2.2 Corporate Governance systems

On this note, the study sought to establish whether BOBU has corporate

governance systems as compared with other institutions and findings

are presented in the table below;

4.2.1 Whether there is maximum level for board positions

lvii

The table below shows the response on the issue of the maximum level for

board positions in BOBU. The responses are as follows;

Table 1: Maximum level for board positions

Responses Frequency Valid Percent

CumulativePercent

Strongly Agree 08 53.3 53.3 Not sure 01 6.7 60

Disagree 06 40 100 Total 15 100.0 100

Source: Primary Data 2014

From the table, 53.3% of the respondents revealed that there is maximum

level for board positions in BOBU, while 40% disagreed on the limit for

board positions. Only 6.7% were not sure. This implies that the size of

the board is given due consideration. This was advocated for by

Panasian’s et al., (2003) definition that Board size is the total

number of directors on a board. Thus while Gosh et al., (2002)

emphasized a board of 16 persons as optimal board size, Forbes and

Daniel (1999) argued out that board size has no effect on board

functioning.

2.2.2 Whether small sized boards are more effective than big ones

The respondents were asked whether small sized boards are more

effective. The following table shows the responses.

Table 2 : Effectiveness of small sized boards

Responses Frequency

Valid Percent

Cumulative

Percent Strongly Agree 9 60 60

Agree 5 33.3 93.3 Not sure 01 6.7 100

lviii

Total 15 100.0 100 Source: Primary Data. 2014

According to the table above, 60% disagreed that small sized boards are

more effective than big ones, while 33.3%, agreed. Only 6.7% were not

sure. This indicates that since majority of the respondents disagreed

the size of the board need to be adjusted for better performance. This

is contrary to Yermack’s 1996 statement that small boards of

directors are more effective and that their companies are more

profitable.

2.2.3 View on whether many directors increase the pool of expertise and

resources pool

To find more about whether many board of directors increase the pool of

expertise and resource pool, a question was asked to respondents and

the following table reveals the fact about the issue;

Table 3: Directors increasing pool of expertise and resource pool

Response Frequency Valid Percent

CumulativePercent

Strongly Agree 01 6.7 6.7 Agree 12 80 86.7

Disagree 02 13.3 100 Total 15 100.0 100

Source: Primary Data.2014

As shown above, only 13.3%, disagreed that greater number of board

increase expertise and resource pool, while 86.3% revealed that

greater number increase the expertise and resource pool. This

therefore, implies large board size pool together, skills and

resources to enhance performance of the company as compared to small

boards. This is consistent with Daily (1995) who argued that greater

lix

number of directors might increase available expertise and resource

pool. Again Bonn et al., (2004) has it that expanding board size

provides an increased pool of expertise coupled with information and

advice quality.

2.2.1. Whether board is facilitated with information for proper

decision making

Respondents were required to state whether board is facilitated with

information for proper decision making. Majority of the respondents

suggested the following as shown in the table.

Table 4: Information for decision making

Responses Frequency Valid Percent

CumulativePercent

Agree 03 20 20 Not sure 01 6.67 26.67

Disagree 11 73.33 100 Total 15 100.0 100

Source: Primary Data. 2014

The table depicts that only 20% agreed that board is facilitated with

information for proper decision making. 6.67% were not sure, while a

large proportion of the respondents of 73.33% disagreed on the issue of

information for decision making. This implies that a board does not get

all the information they need for their decision making processes.

2.2.2 Responses on whether board develops methods that enhance

decision making

The details in the table below show how respondents felt about board

developing methods that enhance decision making.

lx

Table 5: Board developing methods for decision making

Responses Frequency Valid Percent

Cumulative Percent

Agree 11 73.33 73.33 Disagree 04 26.67 100

Total 15 100 100 Source: Primary Data.2014

From the table 73.33% of the respondents agreed that board develops

methods that enhance decision making, while 26.67% disagreed. Since

the majority of the respondents agreed, it shows that the board’s

ability affects the responsibility of employees and this is in

agreement with Hersey (1989) that ability is on important factor in an

employee’s performance.

2.2.3 Whether management is allowed to take part in decision making

process

Responses on whether management is allowed to take part in decision

making were expressed as;

Table 6 : Management allowed taking part in decision making process

Responses Frequency Valid Percent

CumulativePercent

Strongly Agree Agree 04 26.67 26.67

Disagree 11 73.33 100 Strongly disagree 100

Total 15 100.0 100 Source: Primary Data.2014

Gathered data from respondents indicated that, 26.67% agreed that

management is allowed to take part in decision making process, where as

lxi

73.33%, disagreed on the same issue and this is contrary to Akodo’s

(2007), statement that everybody is involved in decision making.

2.2.4 Whether board sets strategic objectives for management to

implement

Various views from respondents were collected and presented in the

table about whether board sets strategic objectives for management

Table 7 : Setting strategic objectives for implementation

Responses Frequency Valid Percent

CumulativePercent

Agree 09 60 60 Disagree 06 40 100

Total 15 100 100 Source: Primary Data 2014

While 60% agreed that board sets strategic objectives for management

to implement, 40% disagreed on this matter. Thus, since the majority

agreed, it implies that the strategic objectives set are implemented

and this enhances management efficiency and effectiveness. This is in

line with (Black, 1992) who agreed that the role of strategizing is to

increase performance pressure being applied by institutional

shareholders.

4.2.2 Whether well defined strategy keeps the company in the right

direction

While some respondents responded positively, others gave a negative

response on the view that well defined strategy keeps the company in

the right direction and their view were summarized as follows;

lxii

Table 8: Keeping in the right direction

Responses Frequency Valid Percent

CumulativePercent

Agree 12 80 80 Strongly disagree

03 20100

Total 15 100.0 100 Source: Primary Data 2014

80% of most respondents agreed; while 20% strongly disagreed that well

defined strategy keeps the company in the right direction. However

since the majority concurred with the issue, it actually implies that

the company is in the right direction and this is in line with Baxt’s

(2002) argument on the role of corporate goal setting and strategic

direction squarely within the board’s charter.

2.2.3 Whether Management is involved in strategic planning process

It was established that management involvement in strategic planning

process puts the company to a better position and the following views

were collected and analyzed in the table below;

Table 9: Management involvement in strategic planning process

Responses Frequency Valid Percent

CumulativePercent

Agree 05 33.33 33.33 Not sure 03 20 50.33

Disagree 07 46.67 100 Total 15 100 100

Source: Primary Data 2014

It is shown that 46.67% of the respondents indicated that the

management is not involved in strategic planning process. 33.33% of

the respondents when asked agreed, while 20% were not so sure. It is

showed that majority of the respondents disagreed and this implied

that the board does not involve management in strategic planning

lxiii

process. This disagrees with Tricker’s (1998), view of board

perception on the importance of strategizing role.

2.2.1 Whether board effectively monitors the internal system

The table below shows the response on the issue of effective monitoring

of the internal system.

Table 10: Monitoring internal system

Responses Frequency Valid Percent

CumulativePercent

Strongly Agree 02 13.33 13.33 Not sure 1 6.67 20

Disagree 12 80 100 Total 15 100.0 100

Source: primary Data 2014

A discussion with the respondents revealed that 80% disagreed with the

statement that the board effectively monitors the internal control

system, while 6.67% were unable to decide on the same issue. Only

13.33% showed a positive response. Since a large percentage did not

concur with the statement, it in general though contradicts the

assertion of Meigs and Meigs (1984) who argued that internal control

system need to be monitored if an entity is to realize its

profitability objective.

2.2.2 Whether board monitors and reviews the implementation of

strategic plan and objectives

The research conducted on this element was to assess whether board

monitors and reviews the implementation of strategic plan and

objectives. The following were got and prevented in the table below;

lxiv

Table 11 : Monitoring and reviewing strategic plan and objectives

Responses Frequency Valid Percent

CumulativePercent

Agree 05 33.33 33.33 Disagree 10 66.67 100

Total 15 100.0 100 Source: Primary Data 2014

From the illustration above, it is indicated that 33.33%, agreed that

the board monitors and reviews the implementation of strategic plans

and objectives, while majority 66.67% objected the view. It

significantly implied that, the board members do not monitor and

review the affairs of the company in the interest of the shareholders.

This opposes the views of (Ochieng, 1998) that board should constantly

monitor and review the Management’s implement of strategic plan and

objectives.

2.2.3 Whether Board effectively monitors performance of the firm

The researcher sought to discover whether Board effectively monitors

performance of the firm and the respondents views were summarized in

the table below;

Table 12: Monitoring performance of the firm

Responses Frequency Valid Percent

CumulativePercent

Agree 09 60 60 Not sure 02 13.33 73.33

Disagree 04 26.67 100 Total 15 100.0 100

Source: Primary Data 2014

lxv

The greatest percentage of 60% revealed that the board effectively

monitors management concerns while 26.67% disagreed on effective

monitoring of performance of the firm, and only 13.33% seemed to be Not

sure . This implies that the Board regularly and effectively monitors

the performance periodically and this agrees with (Rosnik, 1989, 1990)

view on the role of the Board that is monitoring and control of

Management performance of financial institutions.

4.2.1 Whether board members provide advice and counsel to the

Management

The study further sought to establish the respondent’s view on as far

as advice and counsel to management is concerned.

Table 13: Providing advice and counsel

Responses Frequency Valid Percent

CumulativePercent

Agree 10 66.67 66.67 Disagree 05 33.33 100

Total 15 100.0 100 Source: Primary Data 2014

The findings from the table above show that only 66.67% of the

respondents consented with the statement that board member provide

advice and counsel to the management, while the other portion of 33.33%

disagree. In view of the Majority principle, it implied that board

members participate in providing advice and counsel to the management

which falls in line with Lorsh and Maclever (1989) view of advice to the

CEO being accepted in Management.

2.2.2 Whether Board regularly advices the CEO on company issues

lxvi

In view of the Board’s advice to the CEO, the respondents provided

their views as shown in the table below;

Table 14 :Advising the CEO

Responses Frequency Valid Percent

Cumulative Percent

Agree 02 13.33 13.33 Disagree 13 86.67 100

Total 15 100.0 100 Source: Primary Data 2014

From the illustration the results indicated that only 13.33% agreed,

while 86.67% of the other respondents did not believe that statement to

hold and thus believed directors do not advise their CEO. Majority

disagreed and hence implying that directors are reluctant about their

role and this is contrary to the role of directors in providing advice

and counsel about the direction of the company.

2.2.3 Whether board members share knowledge and experiences with

management of the Co

While wondering, some respondents gave the following views on the

statement that was about sharing knowledge and experiences with

management of the company.

Table 15 : Sharing knowledge and experience

Responses Frequency

Valid Percent

Cumulative

Percent Agree 08 53.33 53.33

Not sure 01 6.67 60 Disagree 06 40 100

Total 15 100 100 Source: Primary Data 2014

lxvii

The survey on this aspect revealed that, 53.33% were in agreement with

board sharing knowledge and experience with management, and 6.67% were

not sure, while 34% admitted that board does not share their knowledge

and experience with management however the deviance/Variance is a

quite small. This signifies that the board is a key source of knowledge

and experiences for the organization as supported by (Garvin and

Geoffrey, 2004) that it is important for the board to share its

experience with management.

2.2.1 Whether board has firm specific knowledge and skills to perform

effectively

When respondents were asked whether the board has firm knowledge and

skills, the following responses were given as follows;

Table 16: Specific knowledge and skills

Responses Frequency Valid Percent

CumulativePercent

Agree 06 40 40 Not sure 01 6.67 46.67

Disagree 08 53.33 100 Total 15 100 100

Source: Primary Data 2014

From the above, it is evident that 40% of the respondents agreed that

board has firm knowledge and skills, while 6.67% were not sure. But

53.33% disagreed with this view. This implied that the board lacks

knowledge and skills which relate to the company in order to perform

their duties effectively. This contradicts with the principle for the

board to perform effectively; they must possess necessary knowledge

and skill given the unique nature of their tasks

lxviii

2.2.2 Board members carryout training and supervision to control tasks

The respondents were asked whether board members carry out training

and supervision.

Table 17: Training and supervision

Responses Frequency Valid Percent

CumulativePercent

Agree 09 60 60 Not sure 02 13.33 73.33

Disagree 04 26.67 100 Total 15 100.0 100

Source: Primary Data 2014

The findings showed that board is committed to competence by training

and supervision of its staff in order to enhance skills. Although 60%

of the respondents revealed that board carries out training and

supervision 26.67% disagreed with them and only 13.33% did not give

their response. The fact that most of the respondents agreed, implied

that board carries out training activities to import new skills

Nicholson and Geoffrey (2004) and do supervisory work as was put

forward by Namis (2004)

2.2.3 Board members integrate knowledge of the firm with their

expertise to accomplish tasks

When asked to comment about the issue, the following responses were

presented and summarized in the table below;

Table 18 :Integrating knowledge of the firm with expertise

Responses Frequency Valid Percent

CumulativePercent

lxix

Strongly Agree Agree 08 53.33 53.33

Not sure 01 6.67 60 Disagree 06 40 100 Strongly disagree 100

Total 15 100.0 100 Source: Primary Data 2014

The illustrating above shows that 40% of the respondents disagreed

with the statement. Whereas 6.67% of the respondents were not sure,

53.33% agreed, it implied that the board members integrate knowledge

of the firm with their expertise. This is in agreement with Forbes and

Daniel (1999) who argued that board should integrate knowledge of the

firm with their expertise is the areas of law and strategy if they are

to perform their control tasks effectively.

2.2.1 Whether board committees ensure quality decision making in BOD

The responses below were recorded on whether board committees ensure

quality decision making in BOD.

Table 19 :Ensuring quality decision making

Responses Frequency Valid Percent

CumulativePercent

Agree 08 53.33 53.33 Not sure 01 6.67 60

Disagree 06 40 100 Total 15 100.0 100

Source: Primary Data 2014

The analysis above show that 53.33% of the respondents agreed, while

only 6.67% were Not sure , 40% declined on the issue. As seen above,

with 54% agreeing, the implication is that forming board committees

would enhance quality decisions in the company on the BOD. This is

lxx

supported by Gavin and Geoffrey (2004) who argued that committees help

to gather, review and summarize information and report back to the full

board for decision or can be delegated specific decision making

powers.

2.2.2 Setting up board committees and assigning responsibilities to

improve governance

The following respondents were asked on whether board committees and

assignment of responsibilities improves governance.

Table 20 : Board committees and responsibilities

Responses Frequency Valid Percent

CumulativePercent

Agree 10 66.67 66.67 Disagree 04 26.67 93.34 Strongly disagree

01 6.66100

Total 15 100.0 100 Source: Primary data

From the table above, 66.67% of the total respondents indicated that

committees and assignment of responsibilities improves governance,

while 26.67% disagreed. Since 6.66% disagreed, it implied that,

committees and assignment of responsibilities improves governance

and this is in conformity with (Waqar and Ghani, 2004) which state that

the board should maintain relevant board committees with clear terms

of reference as a measure to improve Governance.

2.2.3 Whether staff affairs committees oversee the staff welfare

policies and regulations

lxxi

Respondents were asked to express their view on whether committees

oversee the staff welfare policies and regulations. The table below

indicates the number of respondents who reacted about the issue.

Table 21: Staff affairs and welfare policies and regulations

Responses Frequency Valid Percent

CumulativePercent

Agree 04 26.7 26.7 Disagree 11 73.3 100

Total 15 100.0 100 With overseeing the staff welfare policies, while 73.3% disagreed on

the issue, 26.7% consented. This implied that staff affairs

committee’s do not oversee welfare policies for board effectiveness

and the leads to inefficiencies for board effectiveness and this leads

to inefficiencies in the organization.

2.2.1 Whether board develops appropriate policies and procedures to

moderate risks.

Responses on developing appropriate policies and procedures were

obtained and presented as follows;

Table 22 : Appropriate policies to moderate risk

Responses Frequency

Valid Percent

Cumulative

PercentAgree 09 60 60Disagree 06 40 100

Total 15 100.0 100 Source: Primary Data 2014

As to whether or not attitude towards risk management, 60% of the

respondents concurred with the statement, while only 40% disagreed.

The two responses did not correlate at all. This implied that majority

lxxii

who agreed accept risk as part and parcel of a business enterprise and

indeed are entrepreneurial (Francis, 2001).

4.2.2 Whether the company’s risk management policies keep it in the

right direction

The respondents views on whether the company’s risk management polices

keep it in the right direction were collected as summarized in the

following table;

Table 23 :Risk management identification

Responses Frequency Valid Percent

Cumulative Percent

Agree 02 13.3 13.3 Not sure 04 26.7 40

Disagree 09 60 100 Total 15 100.0 100

Source: Primary Data 2014

While 13.3% agreed, 26.7% of the respondents with held their view and

60% disagreed. Those whose response was affirmative more or less had a

similar explanation to the predicament comparable to a viscous circle

of risk.

2.2.3. Whether Board regularly reviews adequacy and competence of risk

management

The views in the table reflect what respondents had to say on whether

Board regularly reviews adequacy and competence of risk management.

Table 24 :Regular review of risk management

Responses Frequency Valid Percent

CumulativePercent

Agree 08 53.3 53.3 Not sure 01 6.67 60

Disagree 06 40 100

lxxiii

Total 15 100.0 100 Source: Primary Data 2014

The findings above indicate 53.3% of the respondents agreed, 40%

disagreed and only 6.67% were unable to decide. This indicates that the

respondents were positive about the Board’s regular review of risk

Management.

2.2.1 Whether delegation of tasks boosts the morale of employees and

Management

The following responses were given on the statement that delegation of

tasks boosts the morale of employees and Management.

Table 25 :Boosting morale of employee and management

Responses Frequency Valid Percent

CumulativePercent

Agree 07 46.7 46.7 Disagree 08 53.3 100

Total 15 100.0 100 Source: Primary Data 2014

The survey findings indicate that only 53.3% of the respondents

revealed that board does not delegate the tasks, while 46.7% less

significant indicated that the board delegates tasks, but since

majority disagreed, it implied that the boards fear to delegate tasks

to the subjects to avoid competition that may arise. This opposes

Joseph’s (1999) argument that delegation boosts the morale of

individuals who are delegated and that of their team.

2.2.2 Whether Board members delegate authority and assign

responsibilities appropriately

lxxiv

The table below shows the views of respondents on whether board members

delegate authority and assign responsibilities appropriately.

Table 26 : Authority and responsibilities

Responses Frequency Valid Percent

CumulativePercent

Agree 05 33.3 33.3 Disagree 10 66.7 100

Total 15 100.0 100 Source: Primary Data 2014

From the table above, 66.7% of the respondents revealed that there is

no delegation of authority and assignment of responsibilities and only

33.3% agreed. From the expression of the majority, it implied that

there was no delegation, which implied the possibility of frequent

errors and mistakes in the work by top management due to overload

amongst themselves.

4.2.3 Whether Board articulates and documents delegated tasks it makes

The details in the table below reflect the number of respondents who

commented on the issue of board articulating and documenting delegated

tasks it makes.

Table 27: Articulating and documenting delegated tasks

Responses Frequency Valid Percent

CumulativePercent

Agree 05 33.3 33.3 Not sure 01 6.67 40

Disagree 09 60 100 Total 15 100 100

Source: Primary Data 2014

lxxv

The table shows that 33.3% of the respondents agreed and only 6.67%

were not certain, while 60% indicated that board does not articulate

and document delegated tasks. This allows lower staff to have more

redundant and idle time especially during the normal working hours.

2.3 To establish profitability level

The researcher endeavored to establish the causes of profitability in

BOBU. Profitability was measured in terms of cost control, required

rate of return, sales, assets, market share and level of entry barriers

as illustrated below;

2.3.1 The respondents were asked whether revenue targets have been met

as planned

The respondents were asked to state whether revenue targets have been

met. The findings were as follows;

Table 28 : Revenue targets

Responses Frequency Valid Percent

Cumulative Percent

Agree 05 33.3 33.3 Not sure 03 20 53.3

Disagree 07 46.7 100 Total 15 100.0 100

Source: Primary Data 2014

With regard to the table above, 33.3% agreed that revenue targets are

met, while 46.7% disagreed and only 11% were not certain. The

implication underlying this is that revenue is affected by increased

operating expenses and changes in prices which are not in line with the

view of Gomper & Metrick (2003) who argued that firms with stronger

lxxvi

shareholder rights have higher firm value, profits and sales growth

and lower capital expenditure.

2.3.2 Whether the company undertakes cost control measures to cut down

costs

The researcher’s survey on whether the company undertakes cost

control, the following responses were got from the respondents as

presented in this table.

Table 29 :Cost control measures to minimize cost

Responses Frequency Valid Percent

CumulativePercent

Agree 02 13.3 13.3 Not sure 01 6.7 20

Disagree 12 80 100 Total 15 100.0 10

Source: Primary Data 2014

The indications from the survey showed that 13.3% agreed with the

phrase, while 6.7% did want to comment either. But 80% of the

respondents showed that the company has no measures in place to control

costs. This implies the company is affected by persistent increase in

operation costs and profitability levels slow down as a result of

increasing operating expenses.

2.3.3 Responses on whether there is optimal utilization of assets

The table below shows responses on whether there was efficient

utilization of assets and responses were summarized as under;

Table 30 : Optimal use of assets

Responses Frequency Valid Percent

CumulativePercent

lxxvii

Agree 04 26.7 26.7 Not sure 02 13.3 40

Disagree 09 60 100 Total 15 100.0 100

Source: Primary Data 2014

From the table above, 60% of the respondents disagreed about efficient

utilization of company assets, although 13.3% agreed that high profits

result from efficient use of assets, 26.7% of the respondents were not

sure about the statement this implies profitability is affected by

inefficient utilization of the company’s assets.

2.3.4 Whether the required rate of return is vital in investment

decisions

The table below provides a summary of the respondents’ views about the

required rate of return;

Table 31 : Role of Required Rate of Return (RRR)

Responses Frequency Valid Percent

CumulativePercent

Agree 03 20 20 Not sure 02 13.3 33.3

Disagree 10 66.7 100 Total 15 100 100

Source: Primary Data 2014

The survey showed that 66.7% of the respondents disagreed on the role

of required rate of return in investment decision, 20% agreed and only

13.3% were not sure about what would be the proper response. A larger

percentage of 71% implies that management does not take greater care as

per the required rate of return when taking investment decisions in the

lxxviii

company assets which at times leads to investment in non profitable

projects.

4.3.5 Whether there is competition with other institutions in the same

business

The question was to establish whether the company competes with other

institutions in the business for the market.

Table 32 : Competition with other institutions in the business

Responses Frequency

Valid Percent

Cumulative

Percent Agree 12 80 80

Disagree 03 20 100 Total 15 100.0

Source: Primary Data 2014

The responses provided indicated that 80% of the respondents agreed on

the fact that the company competes with other institutions for the

market, and only 20% disagreed. This means that most respondents are

aware of the situation existing in the market and this is in line with

the emphasis as stated by Kawere’s (2007) statement that most of the

listed companies are located and operated around town, Kampala city

neglecting rural areas where competition does not exist.

2.4 Establishment of the relationship between Corporate Governance

and Profitability level

The researcher made a general analysis and Spearman Correlation

Coefficient (r) was used to establish the relationship between

corporate governance and profitability level of BOBU limited.

lxxix

The table below depicts the results of the relationship between

corporate governance and profitability level of BOBU limited.

Table 33 : Responses on the relationship between Corporate Governance

and Profitability level

Responses Corporate Governance

(x)

Profitabil

ity(y)

Rx Ry Rx-

Ry=d

d²

Strongly

Agree

05 05 1 1 0 0

Agree 03 02 3 4 (1) 1 Not sure 01 01 5 5 0 0

Disagree 04 04 2 2 0 0 Strongly

Disagree02 03 4 3 1 1

Total 15 15 0 2 Source: Primary Data 2014

Using Spearman’s Rank correlation coefficient (r) = 1 – 6Σd²

n(n2 – 1)

= 1 – (6x2)

5(52 – 1)

= 1 – (6x2)

5(25 – 1)

= 1- 12

120

= 0.900

Results revealed that there is a significant strong positive

relationship between corporate governance systems and profitability

levels of r =0.900.This means that more is put in corporate governance

lxxx

systems for attainment of better profitability levels in the Bank.

However, there are other factors affecting the profitability of Bank

of Baroda Uganda (BOBU) limited such as Interest rate levels,

accountability and compliance with laws governing Banking Business.

Thus the more established and proper corporate governance systems put

in place by management, the higher the profitability levels of the

company.

lxxxi

CHAPTER THREE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

3.0 Introduction

This chapter is the final one in this report and presents a summary of

the major finds of the study, makes conclusions and recommendations

based on the study objectives appropriate in improving corporate

governance systems and profitability level of Bank of Baroda (BOBU)

limited. It proposes and offers suggestions for further research.

3.1 Summary of major findings of the study

The study was done on corporate governance systems and profitability

levels of BOBU with three objectives; to examine the corporate

governance systems and to establish profitability levels in Bank of

Baroda (Uganda) and to establish the relationship between corporate

governance and profitability level of BOBU limited. From this

perspective, this section provides a summary of the findings. The

discussion of these findings is in relation to existing literature and

the study objectives as dealt with below.

3.1.1 Findings on demographic characteristics of respondents

From the sample population of the study, who filled the

questionnaires, the demographic characteristics of the respondents

showed that the majority were found to be males as compared to their

counterparts (females). Marital status was investigated and found

that the married outnumbered the unmarried. Majority of the

respondents were found to lie between the age bracket of 31-40 years

and most of them were University graduates and professionals which

lxxxii

ensured well thought about responses given by them to the researcher.

The indications as per the labour turnover in the company revealed that

majority of the employees have worked with the company for duration of

3-5 years.

3.1.2 Findings on corporate governance systems

It has been discovered that Bank of Baroda Uganda is aware of Corporate

Governance systems that enhance the attainment of better

profitability levels of the company for instance reducing on Board

size, Improving on board roles and enhancing board effectiveness. From

the study, it was revealed that there was maximum level of board

positions basing on 51% of the respondents who consented. Also 63%

revealed that small boards are not effective as compared to big ones,

while 85% revealed that the greater number of Directors increase the

pool of expertise and resource pool.

The other factors comprising of policy and decision making, monitoring

and control, strategizing role, advice and counsel were analyzed as

follows;

The results obtained on policy and decision making indicated that

though board develops methods that enhance decision making,

management are also involved in the decision making processes.

It was also evident that the board integrates knowledge of the firm

with their skills and expertise and also carries out regular

supervision frequently as required.

lxxxiii

The study findings revealed that assigning responsibilities improve

governance of the company. However it was also stressed that, there is

a weakness with the committees in overseeing the quality of decisions

adopted by Board of Directors.

The research revealed that the strategizing role increases

performance pressures when strategic objectives are set to drive into

a right direction. It was however showed that board does not involve

management in strategic planning process to meet the set Goals.

It was further revealed that the board does not articulate and document

delegated tasks hence lowering down the workers’ morale. It also

indicated that the company has policies and procedures to moderate

risks, but the board is reluctant on carrying out regular review.

3.1.3 Findings on profitability level

The findings show that the company’s pricing policies to its customers

are favorable. Concern is raised on the poor cost control measures

being inappropriate, leading to the escalating costs of operation.

It’s also discovered that the Company gives no consideration to the

required rate of return hence the inability to set and reach the target

profits.

lxxxiv

3.1.4 Findings on the relationship between corporate governance and

profitability level

Results from the study revealed a significant strong positive

relationship between corporate governance systems and profitability

level of r=0.900.

3.2 Conclusions

From the foregoing analysis, it is evident that there are mixed results

regarding corporate governance and profitability levels of BOBU

limited. Thus the study has revealed that due diligence must be given

to the relevant aspects under each variable. Corporate governance for

instance the aspect of board roles is the completeness of sound

policies and decision making, strategizing role, effective

monitoring and control, frequent advice and counsel, having

committees in place, delegating tasks and responsibilities,

effective communication and training to impart skills and knowledge to

all staff and developing risk management policies.

Despite all these, BOBU limited scores fairly on the utilization of

these governance principles when dealing with employees on the other

hand linkage between board effectiveness and profitability seem to be

moderate.

It is an indication of weak cost control that accelerates operation

costs hence the low levels of profitability in BOBU limited. Bank of

Baroda’s inability to meet budgeted sales volume levels results into

poor profitability level of the company.

lxxxv

Pricing factor has also contributed a lot to the profitability levels

of Bank of Baroda (Uganda) BOBU, however the contribution of

inefficient price and weak cost controls contributed to poor

profitability levels.

It is concluded that there is a strong positive relationship between

corporate governance systems and profitability level of r=0.900. Thus

corporate governance systems are best contributors of profitability

levels making the two variables correlated. Therefore organizations

should design good governance systems that enhance profitability

levels.

3.3 Recommendations

From the findings and conclusions reached, the researcher made

recommendations that would help improve on the situation as it has been

observed. However, these recommendations are not restricted to BOBU

limited alone, but to all commercial firms that have governance

systems instilled in their business activities and operations.

These include the following;

3.3.1 Recommendations on corporate governance

Based on the findings on the effect of board size on profitability, for

board to be effective, there is need to review the size of the board to

avoid having large boards since they cut company profits through costs

such as salaries ad allowances.

On the policy and decision making aspect, it is recommended that boards

should set up appropriate policies that can stand the test of time

lxxxvi

whereby different views, points, and opinions from all stake holders

are considered.

BOBU limited should ensure proper dispute settlement mechanisms in

order to perform well and enhance harmony amongst employees themselves

and their management (Board of Directors).

The management should be involved in strategic planning process of the

company to improve board members’ focus on the company’s mission and

vision.

Board should set up measurable objectives that permit monitoring and

control of the company’s performance. This is can be made possible

through analyzing strategic plans to assess the performance of the top

management on the objectives.

Board effectiveness as an important moderating factor of corporate

governance and profitability should be managed as follows; Management

should constantly make proper assessments on the level of risk it is

planning to accept and tolerate in its investments as there is need to

take up a moderate risk.

Board should appoint employees at management and operations level who

have vast management experience skills and knowledge in order to

provide technical expertise and experience advantage to enable direct

and control the company, for instance training of its stall to improve

on their competencies while executing their work.

Commercial banks need to strengthen the corporate governance

principles especially on dimensions of timelines in delivering the

financial reports to BOU and presenting the details of loan advances.

lxxxvii

Commercial banks have got to establish mechanisms to enforce proper

governance practices like disclosure and transparency. These will

automatically build bond of trust with these customers who in turn in

are likely to turn into shareholders when the respective commercial

bank is listed both on the local capital market like USE and on

international capital markets like the New York stock exchange (NYSE).

Commercial banks operating in Uganda like any form of business

organization into days dynamic financial landscape should focus on

proper governance practices and principles not only to boost and

enhance their financial performances but as path to gaining a better

public image thus recognized by the society in which the bank operates

as socially receptive commercial bank which may cement the banks

operations and survival.

3.3.2 Recommendations on profitability level

References should be on costs and revenues on setting up

recommendations on the profitability levels of BOBU limited. Thus,

management should put in place measures to ensure optimal utilization

of idle assets to increase its profitability level and further develop

strategies to have a competitive edge over its current and would be

competitors. Efforts to improve profitability levels should

concentrate on improving sales and costs.

BOBU limited should put in place policies and guidelines to be followed

when setting price that can cover operating expenses through sales

promotions and should drop costs attached to non-revenue earning

segments and take remedial actions where budget sales and costs do not

lxxxviii

match the actual results if it is to achieve higher profitability

levels.

Matama (2008) states that a number of authors have argued that, banks

that must survive need: Higher Return on Assets (ROA), Better Return on

Equity (ROE), sound base capital base, adoption of corporate

governance ensuring transparency to stakeholders that is equity

shareholders, regulators and the public. This is also in agreement

with the Mckinsey Quarterly survey mark (2000) and the corporate

governance survey (2000) by the Kuala Lumpar stock exchange and

accounting firm PWC that noted that there is a link between corporate

governance and financial performance due to the investor’s

willingness to inject more funds in a well governed firm. It was

revealed that corporate governance (Transparency, trust and

disclosure) depicts 34.5% of the variance in the general profitability

levels of commercial banks in Uganda. Given that corporate governance

can influence over 34% of the financial performance of banks,

commercial banks need to adopt and strengthen the corporate governance

principles especially on dimensions of timeliness in delivering the

financial report to the bank of Uganda and presenting the details of

loan advances. This means that issues regarding transparency, trust

disclosure should not be underestimated by the commercial banks

The management should put in place a strong system of controls if

positive results are to be reaped. It is further recommended that the

strong positive relationship between corporate governance systems

and profitability level of r=0.900 be sustained at all levels.

lxxxix

3.4 Areas for further Research

The study recommends that further research should be conducted to

establish the effect of corporate governance on other variables such

as employee performance.

The study recommends that further research should be conducted to

establish or find out other factors that influence the companies’

profitability.

The study further recommends that more research should be conducted in

some other related areas such as Accountability and Profitability

levels of business firms.

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APPENDIX I: QUESTIONNAIRE

CORPORATE GOVERNANCE AND PROFITABILITY OF COMMERCIAL BANK USING A CASE

STUDY BANK OF BARODA UGANDA MBARARA BRANCH

Dear Respondent,

The researcher is a student of Mbarara University of science and

Technology conducting an academic research study on corporate

governance and profitability of listed companies, and aimed at

fulfilling the condition for the award of a degree of Bachelor of

Business Administration (Accounting Option). The respondents include

the Management and staff of this company. You have been considered to

be one of the respondents.

You are therefore requested to spend a few minutes of your time to

answer these questions in a manner you deem appropriate and these

responses will be treated with utmost confidentiality.

Your co-operation is highly appreciated.

SECTION A: DEMOGRAPHIC CHARACTERISTICS

Please tick in the box provided.

1. Gender.

Male Female

2. Age group.

20-30 years 31-40 years 41-50 years above 51 years

3. Education background.

Tertiary University Post graduate Professional

xcix

Others (please specify)…………………………………………………………………………

4. How long have you worked with Bank of Baroda?

Less than 1 year 1-3 years 3-5 years above 5 years

5. Position of respondent.

Director Auditor Accountant Teller

6. Marital status.

Single Married

SECTION B: CORPORATE GOVERNANCE

Please respondent, kindly rate the various measures listed below, theresponses of which are to be represented on the scale. Therefore youare required to tick where appropriate

STATEMENT SA A NS D SD

PART II: Board size

1. There is a maximum level for board positions

2. Small sized boards are more effective to the company.

3. The greater the number of managers, the greater the pool of resources and expertise.

PART III: Policy and decision making

1. The board is facilitated with information for proper decision making.

2. The board members develop methods that enhance decision making.

3. Employees are involved in decision making to ensureefficiency.

c

PART IV: Strategizing role

1. Board sets strategic objectives for management toimplement.

2. Well defined strategy keeps the company in the rightdirection.

3. There is board involvement in strategic planningprocess.

PART V: Monitoring and Control

1. The board effectively monitors the internal controlsystem.

2.The board monitors and reviews the implementation of strategic plan and objectives

3. The board of directors ensures and effectively monitors performance of the firm.

PART VI: Advice and counsel

1. The board members provide advice and counsel to themanagement.

2. The board regularly advises the CEO on company issues.

3.The board members share knowledge and experience with management of the Co.

PART VII: Skills and knowledge

1. Board possesses firm specific knowledge and skills to perform effectively.

2. Board members carry out training and supervision to control tasks.

3. Board members integrate the knowledge and experience of the firm with their expertise to accomplish tasks.

PART VIII: Committees

ci

1. Board committee ensures quality decision making inBOD.

2. Setting up board committees and assigning responsibilities to improve governance.

3. Staff affairs committees oversee the staff welfare policies and regulations.

PART IX: Risk management

1. The board develops appropriate policies to moderate the impact of risk.

2. The company’s risk management policies keep in the right direction.

3. Board regularly reviews its competency against riskmanagement.

PART X: Delegation

1. Delegation of tasks boosts the morale of employees andmanagement.

2. Board members delegate authority and assign responsibilities well.

3. Board clearly articulates tasks it makes.

PART XI: Profitability

1. Revenue targets are always reached as plannedovertime.

2. The company undertakes cost control measures to cut down costs.

3. There is optimal utilization of assets of the company.

4. The required rate of return is vital in investmentdecisions.

5. The company competes with other institutions involved in the same business.

cii

SECTION C. RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND

PROFITABILITY

33. There is a relationship between corporate governance systems and profitability level of the company.

Stronglyagree

Agree Uncertain Disagree Stronglydisagree

34. In your own opinion and view, how can corporate governance systems

are improved to meet the company’s set profitability level.

……………………………………………………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………………

35. What are other determinants of profitability levels in Bank of

Baroda Uganda?

……………………………………………………………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………………………………

Thank you.

ciii

APPENDIX II: WORK PLAN

Activity Decembe

r

2014

January

2014

February

2014

March –

April

2014

May

2014

Proposal

Data

collection

Presentati

on

Writing of

the

dissertati

on

dissertati

on

Submission

civ

APPENDIX III: ESTIMATED BUDGETItem Quantity Cost per

unit

Total

Proposal

Typing & printing 6 4000 24,000

Data collection

Photocopying

questionnaires

100 100 10,000

Transport 20,000

Stationary 15,000

cv

Air time 10,000

Dissertation

Typing & printing 1st

draft

1 37,000 37,000

2nd draft (printing) 1 15000 15,000

Submission

Final draft 1 20000 20,000

Binding (hard copy) 2 20000 40,000

Spiral binding 3 3000 9,000

GRAND TOTAL 200,000=

APPENDIX IV: INTRODUCTORY LETTER

cvi