‘Welcome on board’: resource dependency and agency theoretic evidence from the South African life insurance market

Abstract

Purpose

This paper examines the role of corporate governance on the financial performance of life insurers in South Africa. Specifically, the paper tests two competing hypotheses on the role of boards as effective monitors of opportunistic behaviour of executives, as prescribed by the agency theory or as an effective resource, as advocated by the resource dependency view.

Design/methodology/approach

The paper estimates both static and dynamic panel data of 68 insurers from 2007 to 2014 using random effects, panel corrected standard error ordinary least squares and generalized method of moment’s estimation techniques. Board size, audit committee size, board independence and audit committee independence are used as the governance indicators while profitability is measured as returns on assets and equity.

Findings

The findings support both the resource dependency and agency theoretic views of boards. Specifically, the results indicate that large board and audit committees improve financial performance which supports the view of boards as effective resources for insurers. In addition, the role of non-executive directors in addressing agency conflict is reflected in the positive effect of board independence on financial performance. However, the long-run causal positive effect is only reported for audit committee size on return on assets. In addition, the paper also finds evidence of profitability persistence in the life insurance market. Finally, reinsurance usage, insurer size and market concentration were found to have a negative effect on financial performance.

Practical implications

The findings re-enforce the important role of boards in their oversight responsibilities and as effective resources in the operations of highly specialized insurance businesses.

Originality/value

As far as the authors are concerned, this empirical analysis documents the first evidence of the linkages between governance mechanisms and financial performance of an insurance market in Africa.

Citation

Alhassan, A.L., Zyambo, K. and Afua Boakye, M.-A. (2021), "‘Welcome on board’: resource dependency and agency theoretic evidence from the South African life insurance market", Corporate Governance, Vol. 21 No. 4, pp. 626-644. https://doi.org/10.1108/CG-12-2019-0375