CEO tenure, board capital and firm financial innovation: Evidence from financial services sector

Abstract

Firm financial innovation is key in enhancing financial performance and competitive advantage of financial services sector players. In response to recent trends in financial technology, firms have sought to find ways to improve financial innovations. However, there are limited empirical studies on effect of board capital on financial innovation. The general objective of this research was to ascertain the effect of CEO tenure on the relationship between board capital and firm financial innovation in the financial services sector in Kenya. The specific objective of this study was to establish the effect of board human capital (education, experience and functional diversity) as well as board social capital (interlocks, prestige and directors‘ relations with the CEO) on firm financial innovation. The study also sought to determine the moderating effect of CEO tenure on the relationship between board human and social capital and financial innovation in the financial services sector in Kenya. The study was guided by Agency, Resource Dependence, Human Capital, Social Capital, Upper Echelons, Stakeholder and Innovation Ecosystems theories. The study adopted positivism research philosophy to undertake the explanatory research using hierarchical regression models. The study targeted 90 firms in the financial services sector in Kenya and used questionnaires to collect data from 270 respondents, three from each qualifying firm. This study adopted Cronbach‘s alpha to determine the internal consistency and reliability of the Likert-type scales used in the research instrument. The validity of the instrument was measured through Kaiser-Meyer-Olkin Measure of Sampling Adequacy and Bartlett‘s Test of Sphericity. The findings showed that board of directors‘ education (β=0.24, p=0.00), board of directors‘ interlocks (β=0.3, p=0.00), board of directors‘ prestige (β=0.29, p=0.00) and board functional diversity (β=0.21, p=0.01) had positive and significant effect on firm financial innovation, while board of directors‘ relationship with CEO (β=- 0.17, p=0.01) had negative and significant effect on firm financial innovation. CEO tenure enhances the relationship between board of directors‘ education and firm financial innovation of financial services sector (R2∆=0.174, β=-1.93, ρ<0.05). CEO tenure also enhances the relationship between board of directors‘ experience (R2∆=0.039, β=0.6, ρ<0.05) as well as the relationship between board of directors‘ interlocks and firm financial innovation (R2∆=0.019, β=.58, ρ<0.05). Finally, CEO tenure enhances the relationship between boards‘ functional diversity of directors and firm financial innovation of financial services sector (R2∆=0.037, β=-0.44, ρ<0.05). In the end, this study concluded that board of directors‘ education qualifications, prestige and interlocks enhance financial innovations. The results of this study suggest that CEO tenure enhances impact of board capital on firm financial innovation and is to be considered in leveraging on board human and social capital to drive financial innovation. This study recommends nomination to boards of directors of persons with at least one university degree, persons with prestige as well as persons sitting on other boards to drive financial innovations and further, to consider CEO tenure as it enhances the relationship between board human and social capital and financial innovation. This study makes two contributions to literature, finding support for board human and social capital theories and extending knowledge on the moderating effect of CEO tenure on the relationship between board human and social capital and firm financial innovation. Regarding policy, directors in the financial services sector should possess at least a university degree and be independent of the CEO.