Effect of Board Human Capital on Innovativeness in the Banking Industry in Kenya

Abstract

Extant literature shows that human capital by top management teams helps firm performance but does not explore impact of board human capital on firm innovativeness.  Anchored on agency, resource dependence and human capital theories, this study sought to determine impact of human capital on innovativeness in commercial banks.  Kenya has experienced significant innovations in the banking sector driven primarily by mobile technologies.  Examples of innovative products in the banking sector include M-Pesa, M-Kesho M-Shwari, M-Kopa and Pesalink.  On this basis, scope of the study was banking sector in Kenya.  Empirical research has mixed findings, some showing board human capital positively affects innovativeness, with others showing it either has negative or no effect.  Consistent with logic, the study hypothesized that human capital positively impacts firm innovativeness.  Independent variables conceptualized under this study were directors’ educational qualifications, experience and functional diversity.  Two control variables were added, to mitigate against their confounding effect on the dependent variable, bank innovativeness.  Three hypotheses were postulated under this study.  A causal research design was selected to focus on specific research hypotheses aimed at generating managerially actionable results. Under the study, purposive sampling was undertaken.  A questionnaire was developed and reviewed by two university faculty as well as two bank directors.  Feedback obtained from the reviews was incorporated before sending questionnaires to the managing directors of the 43 banks, the commercial bank universe in Kenya.  32 questionnaires were completed and returned, constituting a response rate of 74%.  Data was reviewed and analyzed using statistical software, SPSS.  Assumptions made for data were tested.  Robustness tests were undertaken.  Descriptive and inferential statistics were computed.  Pearson’s correlation coefficients were calculated.  Multiple regression was undertaken.  The study found that there was statistically significant relationship between directors’ educational qualifications, experience and functional diversity and innovativeness of banks.  This study helped resolve disagreement in extant research, by concluding that educational qualifications, board experience, functional diversity drive innovativeness.  This study can benefit management, in providing a selection criteria for directors where the entity has innovativeness as a principal focus area.  Policy makers, in promulgating corporate governance guidelines can also benefit from this study, by suggesting a selection criteria for directors.  Limitations of the study include a narrow focus on banking industry, yet future research can widen this to service sector to enhance generalizability.  A second limitation is use of board as unit of analysis, rather than role played by individual directors in innovativeness, for which future research is also recommended.

Keywords: Corporate governance, Human Capital, Innovativeness, Kenya.