HUMAN CAPITAL, SOCIAL CAPITAL, EMPLOYEE EMPOWERMENT … · 2019-11-12 · the joint effect of human capital, social capital, employee empowerment and quality of decisions on firm

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HUMAN CAPITAL, SOCIAL CAPITAL, EMPLOYEE EMPOWERMENT ,

QUALITY OF DECISIONS AND PERFORMANCE OF COMMERCIAL

BANKS AND INSURANCE FIRMS IN KENYA

BY

MERCY GACHERI MUNJURI

A Research Thesis Submitted in Fulfillment of the Requirements for the

Award of the Degree of Doctor of Philosophy (PhD) in Business

Administration, School of Business, University of Nairobi

DECEMBER 2013

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DECLARATION

I, the undersigned, declare that this is my original work and that it has not been presented

to any institution of learning for academic credit. All the sources used herein are duly

acknowledged.

Mercy Gacheri Munjuri

Signature _______________________ Date _________________________

This thesis has been submitted with our approval as the University Supervisors.

Prof. Peter K’Obonyo __________________ Date_______________________

Department of Business Administration

School of Business

University of Nairobi

Prof. Martin Ogutu __________________ Date_______________________

Department of Business Administration

School of Business

University of Nairobi

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DEDICATION

To God almighty for His faithfulness upon my life.

To the love of my life, Alex who went to be with the Lord early this year. It was not a

very smooth road that we walked over the years, but I will always treasure the time I

shared with you. May you rest in peace.

To my wonderful family, my mum Mrs. Mary Munjuri, My brother Phil and my sister

Grace, thank you very much guys for always being there for me. You are awesome.

To my extended family, the Buria family, my uncles, aunties, cousins and grandma, thank

you very much for your encouragement, prayers and support. God bless you all.

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ACKNOWLEDGEMENT

I would like to express my sincere gratitude and appreciation to the following persons for

the help they gave me and whose contribution facilitated the successful completion of my

doctoral studies:

My special thanks to my supervisors, Prof. Peter K’Obonyo and Prof. Martin Ogutu, for

the support, advice, constructive criticism and guidance they gave me throughout the

research process.

Sincere thanks to my special friend, Patrick for the emotional and moral support.

Profound thanks and appreciation to Dr. Njihia and Dr. Iraki for their guidance and input

in the research methodology and to Dr. Vincent Machuki, thank you for your feedback

that was resourceful.

I truly appreciate my mentor Dr. Zack Awino for his encouragement through out the

entire research process, and for constantly reminding me of the deadlines that I needed to

meet.

I sincerely thank Dr. Munyoki and my colleagues in the school of Business, University of

Nairobi, for their support. My gratitude to Alex Makori for his guidance in data analysis,

Jackie Wakaba, Fred and Jackie Njeri for their assistance in data collection, and the

respondents who enabled me to obtain the data that I needed too. To you all thank you

very much.

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ABSTRACT The purpose of the study was to establish the effect of human capital, social capital, employee empowerment and quality of decisions on the performance of commercial banks and insurance firms in Kenya. Specifically the study sought to establish the influence of human capital on the performance of insurance firms and commercial banks in Kenya; The relationship between human capital and quality of decisions; The influence of quality of decisions on firm performance; Whether the influence of human capital on firm performance is moderated by social capital and employee empowerment; If the influence of human capital on firm performance is mediated by quality of decisions and the joint effect of human capital, social capital, employee empowerment and quality of decisions on firm performance. A census survey was carried out on all the 43 licensed commercial banks and 45 insurance firms in Kenya. Out of the 88 firms that were targeted, 54 responded, constituting a response rate of 61%. Hypotheses were tested using regression analysis and Pearson’s Product Moment Correlation analysis. Descriptive statistics were computed for organizational data and the main characteristics of the study variables. Data was presented in form of tables. The findings revealed that the influence of human capital on non-financial measures of firm performance was statistically significant. There was a positive and moderate relationship between human capital and quality of decisions. The influence of quality of decisions on non-financial measures of firm performance was statistically significant. Social capital and employee empowerment do not moderate the influence of human capital on firm performance, but they both have a mediating effect. The findings also revealed that the influence of human capital on firm performance is mediated by quality of decisions. The results confirmed that the joint effect of human capital, social capital, employee empowerment and quality of decisions on non-financial firm performance was greater than the individual effects of human capital and quality of decisions on non-financial firm performance. This study contributes to understanding the link between human capital and firm performance, while at the same time confirms the findings of previous studies that have found a significant link between human capital and firm performance. Nishantha (2011) found that social capital moderates the relationship between human capital and firm growth. This study has contributed to existing knowledge by empirically confirming that social capital and employee empowerment are not moderators but mediators of the relationship between human capital and firm performance. The study also brings out an increased understanding that the combinative effect of the study variables is greater than the individual effects. Organizations can enhance their performance by building their human capital base through rigorous selection procedures and matching the right people with the right jobs. Work experience should be considered alongside academic qualifications during selection. Firms should strengthen their social networks and linkages so as to maximize on resources that may be obtained through such networks. Organizations should increase the level of employee empowerment because contributions by engaged employees are believed to have a significant impact on business productivity, revenue and the organization's overall effectiveness. Employees with the relevant knowledge, skills and competencies should be encouraged to obtain and share information through the established social networks to achieve greater synergy in increasing competitiveness.

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TABLE OF CONTENTS

DECLARATION ............................................................................................... ii

DEDICATION ................................................................................................. iii

ACKNOWLEDGEMENT..................................................................................iv

ABSTRACT .......................................................................................................v

LIST OF TABLES..............................................................................................x

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

1.1 Background of the Study................................................................................1

1.1.1 Human Capital.......................................................................................3

1.1.2 Social Capital ........................................................................................4

1.1.3 Employee Empowerment ........................................................................6

1.1.4 Quality of Decisions ..............................................................................8

1.1.5 Firm Performance ................................................................................10

1.1.6 The Insurance Industry in Kenya .......................................................... 13

1.1.7 The Banking Industry in Kenya ............................................................ 14

1.2 Research Problem........................................................................................ 16

1.3 Research Objectives .................................................................................... 20

1.4 Value of the Study ....................................................................................... 21

CHAPTER TWO:LITERATURE REVIEW ...................... ............................... 23

2.1 Introduction ................................................................................................ 23

2.2 Theoretical Foundation ................................................................................ 23

2.3 Human Capital and Firm Performance .......................................................... 25

2.4 Human Capital and Quality of Decisions ...................................................... 29

2.5 Quality of Decisions and Firm Performance.................................................. 31

2.6 Human Capital, Social Capital and Firm performance ................................... 32

2.7 Human Capital, Employee Empowerment and Firm performance ................... 34

2.8 Human Capital, Social Capital, Employee Empowerment, Quality of

Decisions and Firm Performance................................................................... 37

2.9 Conceptual Framework ................................................................................ 46

2.10 Conceptual Hypotheses .............................................................................. 49

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CHAPTER THREE:RESEARCH METHODOLOGY ................. ..................... 50

3.1 Introduction ................................................................................................ 50

3.2 Philosophical Orientation............................................................................. 50

3.3 Research Design .......................................................................................... 51

3.4 Target Population ........................................................................................ 52

3.5 Data Collection ........................................................................................... 52

3.6 Operationalization of Variables .................................................................... 53

3.7 Validity and Reliability tests ........................................................................ 56

3.8 Data Analysis and Presentation ....................................................................56

CHAPTER FOUR:DATA ANALYSIS, FINDINGS AND DISCUSSION ........... 59

4.1 Introduction ................................................................................................ 59

4.2 Reliability Test Results ................................................................................ 59

4.3 Descriptive Statistics ................................................................................... 60

4.3.1 Age of the organization ........................................................................ 60

4.3.2 Number of employees in the organization ............................................. 61

4.3.3 Ownership structure of the organizations .............................................. 61

4.3.4 Proportion of ownership incase of joint venture .................................... 62

4.3.5 Value of assets owned by the organizations........................................... 63

4.3.6Academic Qualifications ....................................................................... 63

4.3.7 Average length of service ..................................................................... 64

4.3.8 Average job-related training workshops in a year .................................. 65

4.3.9 Average short courses attended in a year ............................................... 65

4.3.10 Human capital ................................................................................... 66

4.3.11 Social capital ..................................................................................... 69

4.3.12 Employee empowerment .................................................................... 74

4.3.13 Quality of decisions ...........................................................................77

4.3.14 Non-financial performance ................................................................. 80

4.4 Tests of the Hypotheses ............................................................................... 86

4.4.1 Introduction......................................................................................... 86

4.4.2 Human Capital and Firm performance .................................................. 86

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4.4.3 Human Capital and Quality of Decisions .............................................. 90

4.4.4 Quality of Decisions and Firm Performance .......................................... 91

4.4.5 Human Capital, Social Capital and Firm Performance ........................... 94

4.4.6 Human Capital, Employee Empowerment and Firm Performance ......... 100

4.4.7 Human Capital, Quality of Decisions and Firm Performance ............... 105

4.4.8 Joint effect of human capital, social capital, employee empowerment

and quality of decisions on firm performance....................................... 109

4.5 Discussion of the research findings ............................................................ 125

4.5.1 The influence of Human Capital on Firm Performance ........................ 125

4.5.2 Relationship between Human Capital and Quality of Decisions ........... 127

4.5.3 Influence of Quality of Decisions on Firm Performance ...................... 128

4.5.4 Influence of Human Capital on Firm Performance as moderated by

Social Capital ..................................................................................... 129


Employee Empowerment ..................................................................... 130

4.5.6 Mediating effect of Quality of Decisions on Human Capital and Firm

Performance ....................................................................................... 132

4.5.7 Joint effect of human capital, social capital, employee empowerment

and quality of decisions on firm performance....................................... 133

4.6 Chapter Summary ...................................................................................... 136

4.7 Revised Conceptual Model......................................................................... 137

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND

RECOMMENDATIONS................................................................................. 140

5.1 Introduction .............................................................................................. 140

5.2 Summary of Findings................................................................................. 140

5.3 Conclusions............................................................................................... 144

5.4 Contribution to knowledge.........................................................................147

5.5 Limitations of the study ............................................................................. 148

5.6 Recommendations and Policy Implications ................................................. 149

5.7 Suggestions for Future Research ................................................................ 150

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REFERENCES .............................................................................................. 151

APPENDICES................................................................................................ 169

APPENDIX 1: QUESTIONNAIRE ................................................................... 169

APPENDIX 2: INSURANCE FIRMS IN KENYA ............................................. 177

APPENDIX 3: COMMERCIAL BANKS IN KENYA......................................... 179

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LIST OF TABLES

Table 2.1 Summary of Gaps in Knowledge ......................................................... 42

Table 3.1Operationalization of Variables ............................................................ 54

Table 4.1: Summary of Cronbach Alpha Reliability coefficients .......................... 59

Table 4.2: Distribution of organizations by age .................................................. 60

Table 4.3: Number of employees in the organization........................................... 61

Table 4.4: Ownership structure of the organizations............................................ 62

Table 4.5: Distribution of firms by ownership .................................................... 62

Table 4.6: Classification of firms by value of assets owned................................. 63

Table 4.7: Academic qualifications held by employees in the last three years ...... 63

Table 4.8: Classification of firms by average length of service ............................ 64

Table 4.9: Average job-related training workshops in a year................................ 65

Table 4.10: Average short courses attended in a year .......................................... 66

Table 4.11: Means and standard deviations for measures of Human Capital ......... 67

Table 4.12: Means and standard deviations for measures of Social Capital .......... 70

Table 4.13: Business deals completed through external social networks in the

last one year. ................................................................................... 72

Table 4.14: Business deals concluded by employees in the last one year .............. 73

Table 4.15: Means and standard deviations for measures of Employee

Empowerment.................................................................................. 75

Table 4.16: Means and standard deviations for measures of Quality of Decisions. 78

Table 4.17: Means and standard deviations for measures of Non-financial

performance .................................................................................... 81

Table 4.18: Means and standard deviations for measures of Quality of Service .... 83

Table 4.19: Means and standard deviations for measures of Customer

Satisfaction ..................................................................................... 83

Table 4.20: Means and standard deviations for measures of Efficiency in

Service Delivery .............................................................................. 84

Table 4.21: Regression results for the influence of Human Capital on Non-

financial Performance ...................................................................... 87

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Table 4.22: Regression results for the effect of Human Capital on Return on ....... 88

Table 4.23: Human Capital and Return on Equity ............................................... 89

Table 4.24: Correlation between Human Capital and Quality of Decisions ........... 90

Table 4.25: Quality of Decisions on Return on Assets ......................................... 91

Table 4.26: Quality of Decisions on Return on Equity ........................................ 92

Table 4.27: Quality of Decisions and Non-Financial Firm Performance ............... 93

Table 4.28: Regression results for the moderating effect of Social Capital on the

influence of Human Capital on Return on Assets............................... 95


influence of Human Capital on Return on Equity .............................. 97


influence of Human Capital on non-financial Firm Performance ........ 99

Table 4.31: Regression output for the test for moderating effect of Employee

Empowerment on the influence of Human Capital on Return on

Assets ........................................................................................... 101

Table 4.32: Regression results for the moderating effect of Employee

Empowerment on the influence of Human Capital on Return on

Equity ........................................................................................... 102


Empowerment on the influence of Human Capital on Non-financial

Firm Performance .......................................................................... 104

Table 4.34: Mediating effect of quality of decisions on human capital and firm

performance (First step) ................................................................. 106


performance (Second step) ............................................................. 107


performance (Third and Fourth step) .............................................. 108

Table 4.37: Joint effect of human capital, social capital, employee

empowerment and quality of decisions on Return on Assets ............ 110


empowerment and quality of decisions on Return on Equity ............ 112

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empowerment and quality of decisions on non-financial firm

performance .................................................................................. 114

Table 4.40: Mediating effect of social capital on human capital and firm

performance (First step) ................................................................. 117


performance (Second step) ............................................................. 118


performance (Third and Fourth Step) .............................................. 119

Table 4.43: Mediating effect of employee empowerment on human capital and

firm performance (First step) ......................................................... 121


firm performance (Second step)...................................................... 122


firm performance (Third and fourth step)........................................ 123

Table 5.1: Summary of Research Objectives, Hypotheses and Test Results ........ 140

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

A firm's human capital is an important source of sustained competitive advantage (Hitt et

al., 2001) and therefore investments in the human capital of the workforce may increase

employee productivity and financial results (Pfeffer, 1998). Helping individuals to

develop knowledge, skills and competence increases the human capital of the

organization. People are better equipped to do their jobs and this is generally of value to

the organization (Cunningham, 2002). The resource-based theory argues that firm

performance is a function of how well managers build their organizations around

resources that are valuable, rare, inimitable, and lack substitutes (Barney, 1991). Human

capital as resources meet these criteria, hence the firm should care for and protect

resources that possess these characteristics, because doing so can improve organizational

performance (Crook, Ketchen, Combs, and Todd, 2008).

Having a highly skilled workforce may not guarantee a higher level of performance

because employees should be willing to share the knowledge and skills that they possess

with other coworkers and managers, hence contributing to high quality decisions.

Individuals who accumulate greater human capital will occupy central positions in the

social network of organizations and also reap the benefits of social capital. Moreover,

those with higher social capital will enhance their value by facilitating the exchange of

information across the organization and thereby achieve superior outcomes (Mehra,

Kilduff and Brass, 2001). An empowered workforce that has the relevant knowledge,

skills and competencies can produce exemplary organizational results. Empowering

employees, through greater commitment to the organization’s goals, encourages

employees to take more responsibility for their own performance and its

improvement (Barry, 1993) and skills and talents inherent in the employees can

be realized and put to work for the benefit of the organization (Ripley and

Ripley, 1993) producing more satisfied customers (Hubrecht and Teare, 1993)

and greater profits (Cotton, 1993). Contributions by empowered employees are

believed to have a significant impact on business productivity, revenue and the

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organization's overall effectiveness. An organization’s human and social capital influence

the quality of decisions made. In order to develop an assessment of the decision situation,

central decision makers gather most of their information through social ties in their direct

environment, which constitute their social capital. Strategic decisions have important

consequences for organizational performance and are often the result of the involvement

of actors both from inside as well as outside the organization (McKenzie et al., 2009).

Kenya’s development strategy is built on four pillars, where one of them is to invest in

human capital. Important roles have been played by technical, industrial, vocational and

entrepreneurship training (TIVET) in skills development but the sub-sectors growth has

been haphazard and uncoordinated due to lack of a unified policy, legal weaknesses and

inadequate funding. The TIVET curricular have also been inflexible and outdated. As a

result, there is a mismatch between the skills learned and the skills demanded by industry

(Kenya Country Strategy Paper and National Indicative Programme, 2008-2013). While

Kenya is blessed with relatively a high quality and deep base of human capital, it has yet

to find ways to deploy it more efficiently. Among African countries, Kenya has always

been known for the high aspirations of its population for education and the drive of its

citizens for self-betterment, but the productivity of Kenya’s educational system has long

been a source of concern and the AIDS epidemic has cost Kenya significant losses among

its most productive citizens. Strengthening the quality and exploiting the productive use

of Kenya’s human capital must be a high policy priority (Thugge, Heller and Kiringai,

2008). The availability of a well developed human resource base is critical to the

realization of Kenya’s Vision 2030. The much needed higher productivity in the process

of realization of Vision 2030 depends on the quality of human capital and how they are

utilized (Kimutai and Patrick, 2011).

One of the problems that insurance firms and commercial banks in Kenya face is low

human capital. A study done by PriceWaterHouseCoopers (2010) on Kenyan insurance

firms found that there is a human capital challenge facing insurance firms, where many

insurers are facing mounting skills shortages. Yet, investment in recruitment, training and

career development often trails behind other financial sectors. The primary focus can

often be short-term demands rather than securing the talent companies need to meet

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longer term strategic objectives. Looking ahead, demographic shifts, evolving aspirations

and accelerating globalization are set to transform the shape of the labour market and

could make it even harder for insurance firms to attract and retain a high quality

workforce. The banking industry is being buffeted by a storm of trends and challenges

such as employee turn over which is a persistent problem and skilled talent is in short

supply (www.sap.com). According to the Central Bank of Kenya Bank Supervision

Annual Report (2012) all the cadres of staff increased with the exception of supervisory

level which reduced by 84, which poses a human capital challenge.

1.1.1 Human Capital

There have been a number of efforts to define and investigate human capital. One stream

of research defines human capital as the abilities individuals possess (Burt, 2000).

Another stream of research incorporates education and experience into human capital.

Human capital is formed by aptitudes, competences, experiences and skills of internal

members of the organizations (Bontis et al., 2002). Pil and Leana (2009) define Human

capital as an individual’s cumulative abilities, knowledge and skills developed through

formal and informal education and experience. Human capital can provide direct benefits

in the form of superior performance, productivity and career advancement. Human

capital refers to the collective knowledge, skills, and abilities of the individuals working

in an organization (Snell and Dean, 1992). From an organizational perspective, human

capital is the result of a firm's deliberate investment through the selective hiring of

employees with high general skills (or formal education) plus a firm investment in

training of more specific skills through in-house training activities (Lepak and Snell,

1999, 2002; Skaggs and Youndt, 2004). Firms can thus increase their human capital

levels through human resource management practices related to employee selection and

training. Organizations can use selection to increase their generic human capital, while

focusing on training to develop firm-specific human capital (Groot and Van Den Brink,

2000; Skaggs and Youndt, 2004).

Human capital is formed by aptitudes, competences, experiences and skills of internal

members of the organizations (Bontis, 1999; Bontis et al., 2002). Organizations can

increase their human capital by attracting individuals with high skills from the external

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labor market and/or by internally developing the skills of their current members. Human

capital generates value through investments in increasing individuals’ knowledge, skills,

talents and know-how (Roos et al., 1997). One type of investment is education. Higher

levels of education reflect greater investments in human capital (Bontis, 1999). An

individual who is highly educated is more knowledgeable and performs better than

others, and gets more opportunities to move upward (Hitt et al., 2001). Pennings, Lee

and Witteloostuijn (1998) indicates that age is another form of human capital, as younger

employees would rather invest more time and effort in increasing their competency

compared to older employees, and the return on investment is much higher.

Human resources are crucial in creating human capital because organizations do not

create knowledge otherwise organizations can increase their human capital by attracting

individuals with high skills from the external labor market and/or by internally

developing the skills of their current members. In the latter, a big role is played by

employee retention. In terms of human capital, senior managers are crucial in attracting,

selecting and retaining the right people in the organization as well as in devising and

addressing training needs to develop the participation of employees and volunteers

(Hudson, 1995).

1.1.2 Social Capital

Social capital has been defined as the structure of individuals’ contact networks, the

pattern of interconnection among the various people with whom each person is tied

(Raider and Burt, 1996). Social capital consists of the stock of active connections among

people: the trust, mutual understanding and shared values and behaviours that bind the

members of human networks and communities and make cooperative action possible

(Cohen and Prusack, 2001). The concept of social capital refers to social networks and

reciprocity norms associated with them (Putnam, 2000). This form of capital springs from

stable relationships maintained by individuals, groups and organizations in society. Baron

and Markman (2000) observe that social capital consists of social networks (formal and

informal ties), social skills (interpersonal and communicative ability), and social identity

(status, identity and reputation). Social capital exists in the relationships between and

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among persons and extends the more that the position one occupies in the social network

constitutes a valuable resource (Friedman and Krackhardt, 1997).

Adler and Kwon (2002) further emphasize that the network position is necessary for

social capital because it represents opportunities to gain access to and interact with

others. According to Bourdieu (1980) social capital is built from two components: the

social relationship that an individual has and that gives access to the resources of these

relationships, and the amount and quality of these resources. The people a person is

connected to are the actual sources of social capital. The donation of social capital can

happen because of an expected reciprocity in a relationship when the donor expects to

receive some return on their investment or through solidarity that derives from

identification in the same group. These actions and reactions are not necessarily only

actions between two people, but they can be deposits of social capital in a common pool

of social structures and withdrawals by other people from the same common pool. This

leads to positive outcomes such as access to information or more effective sharing of

information.

Nahapiet and Ghoshal (1998) identify three dimensions of social capital: structural,

relational, and cognitive dimensions. The structural dimension of social capital concerns

the overall architecture and the pattern of relationships that define a partner's position in a

network. Relational social capital captures the norms and quality of dyadic relations

which is determined by the history of interactions between individuals. Cognitive social

capital refers to “those resources providing shared representations, interpretations, and

systems of meaning among parties”. From the network perspective, the amount of social

capital possessed is determined by whether individuals can occupy an advantageous

network position where they get tied to others who possess desirable resources, such as

information and financial support, in order to achieve positive work-related and career

outcomes.

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Social capital is an asset which can be created and exploited both at an individual and

collective level (Bowles and Gintis, 2002). Structural context influences an individual's

perceptions, actions and experiences (Yang et al., 2009). In a particular social context,

individuals acquire social capital through deliberate actions and can take advantage of it

to obtain economic returns. The ability to do so depends, nevertheless, on the nature of

the social obligations, connections and networks that they have at their disposal

(Bourdieu, 1986). The extension of social capital at a collective level among many

individuals has important social implications. Social capital built up over a geographical

area may provide benefits for the whole population.

In environments with high social capital levels where there is a proliferation of social

networks facilitating relationships between individuals, the likelihood of repeated

interaction between agents rises. This atmosphere is fertile soil for consolidating shared

values, strengthening social norms of trust, reciprocity and cooperation. The available

information is of higher quality and is spread quickly, thus increasing the opportunity

cost of opportunistic behaviour. In this way, agents' behaviour becomes more foreseeable

and uncertainty falls. On the contrary, in environments with low levels of social capital,

individuals are distrustful, relationships are based on rigid contracts, the exchange of

information is limited and barriers are raised to hinder access to resources and the

exploitation of opportunities. Thus, in the same way that an increase in the stock of

physical capital reduces the average production cost, an increase of social capital, by

improving relationships between individuals, reduces the average cost of economic

transactions (Zak and Knack, 2001).

1.1.3 Employee Empowerment

Tulloch (1993) defined empowerment as to “authorize, give power to”. Legge (1995)

argued that empowerment should be seen in terms of a redistributive model whereby

power equalization is promoted for trust and collaboration. Hales and Klidas (1998)

defined empowerment as sharing knowledge, information and power with subordinates.

The notion of empowerment involves the workforce being provided with a greater degree

of flexibility and more freedom to make decisions relating to work. This contrasts

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markedly with traditional management techniques that have emphasized control,

hierarchy and rigidity (Greasley, Bryman, Dainty, Price, Soetanto and King, 2005).

Similarly, Conger and Kanungo (1988) focused on power as the central point of

empowerment, either to strengthen this belief or to weaken belief in personal

powerlessness. Power is often redistributed by transferring control so that employees

have the authority to make and implement their own decisions. Conger and Kanungo

(1988) make a distinction between the relational and motivational meanings of

empowerment. The relational aspect examines the relationship between managers and

workers both before and after empowerment. The motivational dimension suggests a

process through which initiative will need to pass for employees to feel motivated. Pastor

(1996, p. 5) stated that: “it is part of a process or an evolution – an evolution that goes on

whenever you have two or more people in a relationship, personally or professionally”.

Lee and Koh (2001) refined this description further by looking at the intersubjective

nature of the subordinate and supervisor. They stated that empowerment is the

combination of the psychological state of a subordinate, which is influenced by the

empowering behaviours of supervisors.

Giving employees a say in company direction is important as it saves employers money

and builds a sense of ownership among workers. Contributions by engaged employees

are believed to have a significant impact on business productivity, revenue and the

organization's overall effectiveness. People have a fundamental need to contribute to the

firm's success and see the tangible results of their work. Success largely depends on

empowering employees as they take larger roles in shaping the firm's culture. Employee

involvement programs delegate authority to employees across all levels of a firm by

involving them in strategic initiatives. Employees are encouraged to generate ideas,

create beneficial initiatives and put plans into action. Success largely depends on

empowering employees as they take a stepped-up role in shaping the firm's culture.

Delegating authority spreads out the decision-making process, encourages input from

people closest to the problems, and fosters a collaborative environment. When leaders

involve everyone in moving the organization forward, it builds synergy and commitment

at all levels. By fostering a culture of involvement, firms can engage employees at all

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levels in the business of achieving quality service, increased productivity, and realized

purpose (Cameron, 2010).

The concept of employee participation has been a focus for research and practice for

many years. It has taken many different forms, evolving through the employee

involvement and participative decision-making concepts into the contemporary

empowerment perspective. Entrepreneurs, managers and researchers in the field of

management regard the employee as the major resource bringing competitive advantage

to establishments, and they are of the opinion that the involvement and empowerment of

employees is key to the success of establishments (Siegall and Gardner, 2000). When the

nature of empowerment is examined, it is observed that empowerment does yield

beneficial outcomes. When the constituents of employee empowerment are examined, it

is stressed that the construct will yield beneficial results for both employees and

employers (Baruch, 1998). Studies conducted on employee empowerment reveal that it

gives rise to organizational commitment (Han et al., 2009), motivation (Janssen et al.,

1997), and customer satisfaction (Chebat and Kollias, 2000).

1.1.4 Quality of Decisions

Mintzberg (1976) defines decision making as an incremental, sequential process which

does not necessarily happen at only one point in time. It involves progression from one

stage of planning to the next, where plans move along and develop in relation to the

decision being considered. Harrison (1996) contends that decision making is the most

significant activity engaged in by managers in all types of organizations and at any level.

It is the one activity that most nearly epitomizes the behaviour of managers, and the one

that clearly distinguishes managers from other occupations in the society. Of all the

managerial functions that executives perform, the act of making a decision is without

equal in importance. To be sure, managers and executives do many things besides make

decisions. Nonetheless, the current and lasting impact of managerial performance is

centered in the efficacy of executive choices. Strategic decisions, therefore, set the tone

and tempo of managerial decision making for every individual and unit throughout the

entire organization. If the decision making at the top of the organization is ineffective,

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then the choices made at lower levels of management will be the same. Similarly, if top

management’s strategic choices tend to be successful, it reflects favourably on choices

made in other parts of the organization. Strategic decisions are highly complex and

involve a host of dynamic variables.

The major elements of these decisions are the objectives of the decision maker, the

available information, and the potential alternatives (Delano, Parnell, Smith and Vance,

2000). Decision quality is based on the thoroughness with which all relevant leadership

and technical issues are considered. To evaluate the quality of a decision or series of

decisions at the time they are being made, standards are needed such as those that are

supplied by the following criteria by Rausch (2007): Direction - How to decide on short-

term and long-term direction and priorities for the organization, organizational unit, or

function, (including development of the vision), how to organize to achieve them, and

how to assign accountability; Communications - What should be communicated to

stakeholders, individually and in groups, when and how; Participation - How to ensure

appropriate participation in decision making and planning with consideration for who

should participate, when and how; Competence - How to ensure that there is at least

adequate competence of all stakeholders, (through selection and development efforts) and

that most effective use is made of competence strengths of individuals and/or teams;

Coordination - How to ensure coordination, and stimulate cooperation, while

anticipating, preventing, and managing potentially damaging conflict; Satisfaction - How

to achieve highest level of satisfaction by all stakeholders.

Harrison (1996) notes that successful strategic choices tend to manifest a common set of

characteristics: The managerial objectives are compatible with and reflective of the

current strategic gap of the organization; There is an open search for alternative courses

of action that encompass the principal stakeholders of the organization and which

consider applicable time and cost constraints along with the cognitive limitations of the

decision maker; There is an objective comparison and evaluation of a set of alternative

courses of action with a principal emphasis on probabilistic consequences attendant on

the selection of a given alternative; There is a tendency to select that alternative most

likely to result in the attainment of the objectives within the boundaries of rational

10

choice; The implementation of a chosen alternative proceeds within the established way

of doing business and is reflective of propitious timing and balanced risk and reward

factors in relation to the expected outcome; There is no presumption of success following

implementation and continuous measurement and evaluation of emerging results is

accompanied by timely corrective action to ensure an outcome that attains the objectives.

Strategic decisions have important consequences for organizational performance and are

often the result of the involvement of actors both from inside as well as outside the

organization (McKenzie et al., 2009). In order to develop an assessment of the decision

situation, central decision makers gather most of their information through social ties in

their direct environment, which constitute their social capital. Studies on the social capital

of managers show that the relations they maintain affect their behavior in organizations

as well as organizational processes (Bratkovic et al., 2009). The implication for central

decision makers is that their assessment of the decision situation depends largely on who

they are connected to and interact with during the strategic decision-making process

(Cross et al., 2009).

1.1.5 Firm Performance

Firm performance is defined as “the economic outcomes resulting from the interplay

among an organization’s attributes, actions and environment” (Combs et al., 2005, p.

261). The conceptual domain of firm performance can be specified only by relating this

construct to the broader construct of organizational effectiveness. Organizational

effectiveness is defined as “the degree to which organizations are attaining all the

purposes they are supposed to” (Strasser, Eveland, Cummins, Deniston, & Romani, 1981,

p. 323). Organizations obtain different effectiveness assessments based on diverse

constituencies. Therefore, organizational effectiveness encompasses firm performance

and other performance concepts (i.e., corporate environmental or social performance),

which are relevant for practice and research.

Venkatraman and Ramanujam’s (1986) performance-measurement framework focuses on

multiple indicators of organizational performance. These indicators are financial

performance, operational performance and overall effectiveness. Financial performance

11

includes overall profitability (indicated by ratios such as return on investment, return on

sales, return on assets, and return on equity), profit margin, earnings per share, stock

price and sales growth. Operational performance refers to non-financial dimensions, and

focuses on operational success factors that might lead to financial performance.

Operational performance includes both product-market outcomes (including market

share, efficiency, new product introduction and innovation, and product or service

quality) and internal process outcomes (productivity, employee retention and satisfaction,

and cycle time). Measurement of overall effectiveness reflects a wider conceptualization

of performance and includes reputation, survival, perceived overall performance,

achievement of goals, and perceived overall performance relative to competitors (Lewin

and Minton, 1986; Venkatraman and Ramanujam, 1986).

Lynn and Cox (1997) observe that improvement in individual, group, or organizational

performance cannot occur unless there is some way of getting performance feedback.

Feedback is having the outcomes of work communicated to the employee, work group, or

company. For the organization or its work unit's performance measurement is the link

between decisions and organizational goals. Before you can improve something, you

have to be able to measure it, which implies that what you want to improve can somehow

be quantified. Additionally, it has also been said that improvement in performance can

result just from measuring it. Whether or not this is true, measurement is the first step in

improvement. But while measuring is the process of quantification, its effect is to

stimulate positive action. Managers should be aware that almost all measures have

negative consequences if they are used incorrectly or in the wrong situation. Managers

have to study the environmental conditions and analyze these potential negative

consequences before adopting performance measures.

Kaplan and Norton (1992) contend that the balanced scorecard approach operates from

the perspective that more than financial data is needed to measure performance and that

non financial data should be included to adequately assess performance. They suggested

that any performance measurement framework should have four perspectives: financial

perspective; internal business perspective; customer perspective; innovation and learning

perspective. Financial perspective: Return of Capital Employed, Economic value added,

12

Sales growth, Cash flow; Customer perspective: Customer satisfaction, retention,

acquisition, profitability, market share; Internal business process perspective - Includes

measurements along the internal value chain for: Innovation - measures of how well the

company identifies the customers’ future needs; Operations - measures of quality, cycle

time, and costs; Post sales service - measures for warranty, repair and treatment of defects

and returns; Learning and growth perspective - Includes measurements for: People -

employee retention, training, skills, morale; Systems - measure of availability of critical

real time information needed for front line employees.

The modification of the balanced scorecard approach has resulted to a sustainability

balanced score card which shows the causal relation between the economic,

environmental and social performance of firms. Environmental and social aspects can be

integrated in the balanced score card in three ways. Firstly, environmental and social

aspects can be integrated in the existing four standard perspectives. Secondly, an

additional perspective can be added to take environmental and social aspects into

account. Thirdly, a specific environmental and/or social score card can be formulated

(Deegen, 2001; Epstein, 1996; Figge et al., 2001a).

Environmental and social aspects can be subsumed under the four existing balanced score

card perspectives like all other potential strategically relevant aspects. This means that

environmental and social aspects are integrated in the four perspectives through

respective strategic and core elements or performance drivers for which lagging and

leading indicators as well as targets and measures are formulated (Kaplan and Norton,

2001). As a result of this top-down approach those environmental and social aspects are

identified which are strategically relevant within the framework of the four standard

perspectives of the balanced scorecard. Environmental/social aspects consequently

become an integral part of the conventional score card and are automatically integrated in

its cause-effect links and hierarchically oriented towards the financial perspective and a

successful conversion of a business strategy (Figge et al., 2002). Reviewing past studies

reveals a multidimensional conceptualization of organizational performance construct. A

review of the operationalization of organizational performance highlights the limited

13

effectiveness of commonly accepted measurement practices in tapping this

multidimensionality. Researchers should therefore establish which measures are

appropriate to their research context.

1.1.6 The Insurance Industry in Kenya

In the last few decades the Kenyan insurance industry has flourished with the industry

leading within the East Africa Community, and is a key player in the COMESA region

(Common Market for Eastern and Southern Africa). The Industry is governed by the

Insurance Act. Cap 487 and regulated by the Insurance Regulatory Authority (IRA) as the

regulatory body. The IRA is an autonomous government agency established to oversee

Kenya’s insurance industry for the benefit of the Kenyan public (Insurance Regulatory

Authority Annual Report, 2010). Over the years, the insurance industry in Kenya has

worked hard at reclaiming its rightful image by embracing a new strategy that is aimed at

ensuring the industry commands the respect they deserve, and that more customers are

taking up the services so as to counter the limiting perceptions that insurers are out to

fleece the public with little or no likelihood of making a return from the lucrative covers

offered.

Insurance firms compete for a limited market characterized by low penetration. Kenyans'

uptake of insurance cover, both at corporate and personal level, remains predominantly in

the motor, fire, industrial and personal accident (mainly group medical cover) classes.

This illustrates a poor attitude towards personal insurance cover in general. With the debt

crisis in 2011, there was a notable drop in the over all premiums, a rise in claims and a

decline in investment income. The gross direct premium income dropped from 25% in

2010 to 18% in 2011. This forced companies, especially those transacting in non-life

business to change their strategy and not heavily depend on investment income to sustain

profit, but instead to reduce operational and acquisition costs (Insurance Regulatory

Authority Annual Report, 2011).

Insurance Regulatory Authority has enhanced consumer education and is developing a

micro-insurance policy that will increase insurance penetration in the country. The

growth rate of the economy declined from 5.6% in 2010 to 3.8% in 2011 which could be

14

attributed to rise in oil prices in the international markets and slow down in emerging

markets due to increased cost of production. The high inflation rates in the country from

4.1% in 2010 to 14% in 2011, high interest rates affecting the borrowing and inconsistent

weather conditions adversely affected the economy and the insurance industry (Insurance

Regulatory Authority Annual Report, 2011).

The performance of insurance firms is dependent on human capital attributes such as

knowledge, experience and skills because these have a clear impact on organizational

results and can build a long-term competitive advantage. Social capital is a key driver of

sales performance, especially in knowledge intensive contexts (Ustuner, 2005). With the

rise of the networked economy, the ability to build social capital across networks

becomes critical (Lesser, 2000). Insurance firms strive at increasing their social networks

(formal and informal ties), social skills, and social identity in form of status, identity and

reputation because these are critical in enhancing their performance. People have a

fundamental need to contribute to the firm's success and see the tangible results of their

work. Success of insurance firms therefore, largely depends on empowering employees

because they are encouraged to generate ideas, create beneficial initiatives and put plans

into action, hence fostering a collaborative environment. The effectiveness of strategic

decisions of these firms is dependent on the information inputs that come through their

social networks, and the human capital of central decision makers.

1.1.7 The Banking Industry in Kenya

As at 31st December 2012, the banking sector consisted of the Central Bank of Kenya as

the regulatory authority, 43 commercial banks and 1 mortgage finance company, 5

representative offices of foreign banks, 8 Deposit-Taking Microfinance Institutions

(DTMs), 2 Credit Reference Bureaus (CRBs) and 112 Forex Bureaus. Out of the 44

banking institutions, 31 locally owned banks comprise 3 with public shareholding and 28

privately owned, while 13 are foreign owned. During the year 2012, banks increased their

branch network by 111, which translated to a total of 1,272 branches. The increase is an

indication of increased provision of banking services. The banking sector registered an

increase in staff levels by 1580 from 30,056 in 2011 to 31,636, representing an increase

15

of 5.3 percent. All the cadres of staff increased with the exception of supervisory level

which reduced by 84.

The banking sector was sound and stable and recorded improved performance in 2012 as

indicated by total net assets which increased by 15.3 percent from Ksh 2.02 trillion in

December 2011 to Ksh 2.33 trillion in December 2012, with the growth being supported

by the increase in loans and advances. Customer deposits grew by 14.8 percent from Ksh

1.49 trillion in December 2011 to Ksh 1.71 trillion in December 2012. Pre-tax profit

increased by 20.6 percent from Ksh 89.5 billion in December 2011 to Ksh 107.9 billion

in December 2012. The growth was largely attributed to income generated by increased

loans and advances coupled with regional expansion initiatives. However, the ratio of

non-performing loans to gross loans increased from 4.4 percent in December 2011 to 4.7

percent in December 2012 (Central Bank of Kenya Bank Supervision Annual Report,

2012).

Human capital is a salient human resource issue that is of concern to banks operations

and performance in the 21st century. Prof Njuguna Ndung’u, Governor of the Central

Bank of Kenya in his speech on “the HR challenges in the Kenyan banking sector” on

24th January 2012 noted that the 2008 global financial crisis, coupled with the ever

changing macroeconomic environment presented a complex financial and economic

global landscape that was a challenge to the banking industry. These challenges call for

human resource capital availability and application, as well as enhanced human capital

development to cope with this changing dynamic world. “As HR directors, I want to

encourage you to formulate capacity development initiatives to equip staff with the

necessary skills and competencies to effectively manage these challenges in a manner

that guarantees a balance between efficiency and stability. There are a number of salient

human resource issues that are of concern to banks operations and performance in the

21st century. Some of these include regional integration and capacity development,

performance management and talent development, managing change and human capital.

The success of any organization depends on the resources it has, one of them being

human capital. This boils down to recruiting the best, developing, managing the best and

devising an incentive mechanism for retention and career progression”, he said.

16

1.2 Research Problem

It has been demonstrated empirically that the human capital of a firm becomes a strategic

asset when that knowledge is valuable and unique, thus generating greater

competitiveness and ultimately more profit (Subramaniam and Youndt, 2005).

Employees with the relevant knowledge, skills and competencies are encouraged to

obtain and share information through the social networks that organizations establish to

achieve greater synergy in increasing competitiveness. Social capital may reduce

transaction costs, enhance cooperation, facilitate entrepreneurship and formation of start-

up companies, and strengthen supplier relations, regional production networks, and inter-

firm learning (Knack and Keefer, 1997). While many studies have demonstrated the

positive impacts of human capital on economic outcomes, others have yielded mixed

results depending on the measure of the dependent variable used. Could these conflicting

results be explained by other factors that influence this relationship?

Contributions by empowered employees are found to have a significant impact on

business productivity, revenue and the organization's overall effectiveness (Cameron,

2010). Empowerment largely depends on the knowledge and skills that employees

possess because this influences the quality of decisions that they make. Social capital

plays a role in decision making because in assessing the decision situation, central

decision makers gather most of their information through social ties in their direct

environment, which constitute their social capital (Bratkovic et al., 2009). The quality of

strategic decisions depends on the amount of human capital possessed by the social

networks whose input organizations heavily rely on. Pfeffer (1998) concluded from a

study on a wide range of industries in more than twenty countries that how organizations

manage their people determine their long term success and economic results. Huselid

(1995) also found that Human Resource Management practices have an economically and

statistically significant impact on corporate financial performance.

One major challenge facing the financial services sector in Kenya is low human capital.

There is a human capital challenge facing insurance firms where many insurers are facing

mounting skills shortages (www.pwc.com). High labour turnover has also been cited as

17

one of the predictions of failure of insurance firms in Kenya (Kibandi, 2006). This could

be due to the low human capital in the insurance industry as well as how human resources

are managed. While banks have traditionally emphasized shrewd use of financial assets,

the increasingly competitive global marketplace is causing financial institutions to take a

fresh look at the way they manage human capital. The banking industry is being buffeted

by a storm of trends and challenges. Customers perceive banking products and services as

commodities; shareholders demand healthy growth and fat margins; employee turn over

is a persistent problem; and skilled talent is in short supply.

Similarly, the ongoing consolidation trend means banks must be prepared to blend

workforces from acquired companies, making sure that valued employees do not defect

during periods of uncertainty. Underlying this turmoil are two fundamental challenges

that must be addressed by any bank that seeks to survive and prosper in the intensely

competitive financial services arena: HR-related expenses must be reduced to meet

profitability goals, and workforce must be equipped to provide a higher level of

productivity and passion, with employees motivated and trained to handle value-adding

initiatives such as personalized customer service, new product development and cross

selling (www. sap.com). The banking and insurance industries were of interest in this

study because these are industries where sales performance largely depends on repeat

business and the social networks that the firms have established.

Awan and Sarfraz (2013) did a study on the impact of human capital on company

performance and the mediating effect of employee satisfaction. The study found a strong

positive relationship between human capital and firm performance, and further found that

employee satisfaction mediated this relationship. However the sample comprised of only

three firms in the telecom sector in Pakistan, which was a small sample.

A study by Nishantha (2011) examined the effect of entrepreneur’s human capital and

social capital on the growth of Small Enterprises (SEs) in Sri Lanka. The data was

collected from 97 manufacturing enterprises that employ less than 50 employees in

Colombo district of Sri Lanka. Specifically, the study sought to establish the relationship

18

between human capital and firm growth, and the moderating effect of social capital on

the relationship between human capital and firm growth. The study found that the

entrepreneur’s human capital relates positively and directly to the social capital. In

addition, the authors observed direct effects of human capital on firm growth. Social

capital was therefore found to moderate the relationship between human capital and firm

growth. The study focused on small organizations only, yet organizational size as a

characteristic may yield different results.

A study by Lin and Huang (2005) on the role of social capital in the relationship between

human capital and career mobility found that the relationship between human capital and

career development potential in the organizations was completed through the effect of

social capital, supporting the mediation model. The human capital indicators used in the

study were tenure, managerial rank, age and education, which yielded mixed results. The

study found that tenure and managerial rank have indirect positive effects on

developmental potential, while the other two human capital variables, age and education

did not. The study also considered the influence of human and social capital on

individual’s career mobility and not firm performance. The study covered three

Taiwanese financial institutions which is an inadequate sample hence the findings may

not be generalized to the entire financial sector or even across sectors.

Ottosson and Klyver (2010) carried out a study on the effect of human capital on social

capital among entrepreneurs. The study revealed that human capital and social capital

were co-productive, and increased human capital seemed to increase the level of social

capital concurrently. The study however did not focus on the combinative effect of social

and human capital on firm performance.

Roca-Puig, Beltrán-Martín and Cipres (2011) did a study on the combined effect of

human capital, temporary employment and organizational size on firm performance. The

study considered the moderating role of temporary employment and organizational size

on the relationship between human capital and firm performance. The study found that

the positive effect of human capital on firm performance is greater in large firms with

19

low temporary employment than in small firms with high temporary employment. These

findings only applied where Return on Sales was examined, but not where labor

productivity was selected as the dependent variable. The study therefore yielded mixed

results depending on the measure of the dependent variable used. The study further

showed a weak positive correlation (r=0.221) between human capital and organizational

size, which may be an indicator of organizational size being a less significant moderating

variable.

A study by Harris, McMahan and Wright (2012) on the impact of human capital and

overlapping tenure on unit performance, considered the moderating role of overlapping

tenure in the relationship between human capital and team performance. The study found

that human capital has a positive influence on team performance, and that organizations

with human resources that have higher levels of overlapping tenure may have higher

levels of performance. However, the interaction between human capital and overlapping

tenure was not significantly related to performance. The study also considered the role of

overlapping tenure only, while the current study considered multiple variables, that is,

social capital, employee empowerment and quality of decisions.

Nzuve and Bundi (2010) did a study on Human Capital Management Practices and Firm

Performance among the Commercial Banks in Kenya. The study aimed at determining

the relationship between Human Capital Management Practices and Firm Performance.

The findings revealed that with the exception of communication, other Human Capital

Management Practices have a positive influence on firm performance as measured by

both turnover growth and return on assets. However, the study did not consider any

moderating or mediating variables in the relationship between Human Capital Practices

and Firm Performance.

The above studies focused on the moderating role of various variables that yielded mixed

results, which may be an indicator of use of variables that may not have a great influence

on the relationship between human capital and firm performance. It is evident from the

literature reviewed that social capital is a very important form of capital because it

20

facilitates the exchange of information, higher access to resources and the exploitation of

opportunities, hence coupled with human capital may contribute to greater firm

performance. Employee empowerment may increase motivation and commitment to the

organization and encourage employees to work harder increasing overall firm

performance.

The above studies considered different moderating variables such as temporary

employment, organizational size, overlapping tenure and social capital, but did not

consider the combinative effect of these variables on the relationship between human

capital and firm performance. These studies were done in developed economies such as

Taiwan, Spain, Sweden and USA. The contextual differences may yield different results

and therefore findings and conclusions of these studies may not apply to firms operating

in the Kenyan context. Some of the studies also utilized small samples, while the current

study used a large sample which comprised all the firms in the insurance and banking

industries in Kenya. No known study has focused on the moderating effect of social

capital and employee empowerment on the relationship between human capital and firm

performance. Specifically, the study investigated the influence of social capital, employee

empowerment and quality of decisions on the relationship between human capital and

firm performance. The study therefore attempted to answer the research question, what is

the relationship between human capital and firm performance, and how does social

capital, employee empowerment and quality of decisions influence this relationship

among insurance firms and commercial banks in Kenya?

1.3 Research Objectives

The main objective of this study was to establish the role of social capital, employee

empowerment and quality of decisions in the relationship between human capital and

firm performance.

Specifically, this study sought to address the following objectives:

(i) To establish the influence of human capital on the performance of insurance

firms and commercial banks in Kenya

21

(ii) To establish the relationship between human capital and quality of decisions

(iii) To establish the influence of quality of decisions on performance of insurance

firms and commercial banks in Kenya

(iv) To establish whether social capital moderates the influence of human capital on

Firm Performance

(v) To establish whether employee empowerment moderates the influence of

human capital on Firm Performance

(vi) To determine if the influence of human capital on performance of insurance

firms and commercial banks is mediated by quality of decisions

(vii) To establish the joint effect of human capital, social capital, employee

empowerment and quality of decisions on the performance of insurance firms

and commercial banks in Kenya

1.4 Value of the Study

This study considered the combinative effects of social capital, employee empowerment,

quality of decisions, and how these variables affect the relationship between human

capital and firm performance, whereas other researchers have focused on the separate

effects of these variables.

This study will shed light on the importance of human capital and social capital, hence

organizations will devise strategies for sharpening the skills of their workforce as well as

build strong ties with internal and external networks that would be resourceful in making

quality decisions. Effective communication systems would be put in place that would

enhance information sharing and social interactions that in turn build on social capital

geared towards increasing firm performance.

This study will be resourceful to the policy makers in insurance firms and commercial

banks, because it will question the existing policies and their effectiveness in enhancing

social capital, human capital, employee empowerment and quality of decisions. Where

need be, a review of policies may be considered.

22

This study will allow insurance firms and commercial banks to critically evaluate their

practice of building social networks and the extent to which these networks facilitate

information sharing as well as provision of other resources geared towards firm

performance improvement. Insight will be gained on the importance of employee

empowerment and participation, and the role that empowered employees who have the

necessarily human capital can play in quality decision making. The degree of employee

empowerment will be examined with a view of enhancing an empowerment culture. The

Human Resource Departments of organizations will design innovative Human Resource

Development programs that will facilitate the increase of human capital.

23

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

The chapter begins with a discussion of the theories in which the study is grounded, and

then follows a review of literature highlighting relationships between the various

variables of the study, the summary of gaps in knowledge from the empirical studies

reviewed is provided as well as the conceptual framework depicting the relationship

between the variables of study.

2.2 Theoretical Foundation

The theories that are relevant to this study are the resource-based theory, human capital

theory and the social capital theory. However, the resource-based theory is the main

theory in which this study is grounded because the theory covers human capital and

social capital as firm’s resources.

Resource-based theory emphasizes the critical importance of internal resources for

sustainable competitive advantage. This perspective argues that firm performance is a

function of how well managers build their organizations around resources that are

valuable, rare, inimitable, and lack substitutes (Barney, 1991). Intangible resources like

human capital are more likely to produce a competitive advantage because they are rare

and socially complex, and therefore difficult to imitate (Hatch and Dyer, 2004; Hitt et al.,

2001). In particular, specific human capital represents an inimitable asset in terms of

knowledge and skills that are only of use to an individual company (Lepak and Snell,

2002; Rauch et al., 2005). Networks are fundamental in social capital because networks

can provide resources, which may facilitate investment, can provide access to

information, and reduce transactional cost. Trust is one of the resources that may be the

result of networks (Zhang and Fung, 2006) and this is a resource that is socially complex

and difficult to imitate. Firms obtain sustainable competitive advantages by implementing

strategies that exploit their internal strengths, while neutralizing external threats and

avoiding internal weaknesses. Strategic resources are heterogeneous and immobile across

firms, and that these resources are stable over time. The theory identifies the firm’s

24

potential key resources and evaluates whether these resources fulfill the following

criteria: Valuable – A resource must enable a firm to employ a value-creating strategy,

by either outperforming its competitors or reduce its own weaknesses; Rare – To be of

value, a resource must be rare by definition. In a perfectly competitive strategic factor

market for a resource, the price of the resource will be a reflection of the expected

discounted future above-average returns; In-imitable – If a valuable resource is controlled

by only one firm it could be a source of a competitive advantage. This advantage could

be sustainable if competitors are not able to duplicate this strategic asset perfectly. An

important underlying factor of inimitability is causal ambiguity, which occurs if the

source from which a firm’s competitive advantage stems is unknown (Peteraf, 1993). If

the resource in question is knowledge-based or socially complex, causal ambiguity is

more likely to occur as these types of resources are more likely to be idiosyncratic to the

firm in which it resides (Mahoney and Pandian, 1992). Non-substitutable – Even if a

resource is rare, potentially value-creating and imperfectly imitable, an equally important

aspect is lack of substitutability. If competitors are able to counter the firm’s value-

creating strategy with a substitute, prices are driven down to the point that the price

equals the discounted future rents, resulting in zero economic profits.

Human Capital theory was proposed by Schultz (1961) and developed extensively by

Becker (1964). Human capital theory suggests that education or training raises the

productivity of workers by imparting useful knowledge and skills, hence raising workers’

future income by increasing their lifetime earnings (Becker, 1994). It postulates that

expenditure on training and education is costly, and should be considered an investment

since it is undertaken with a view to increasing personal incomes. Human capital theorists

argue that firms will invest significantly to develop unique and non-transferable (i.e.

firm-specific) skills through extensive training initiatives (Hatch and Dyer, 2004; Lepak

and Snell, 1999). The human capital approach is often used to explain occupational wage

differentials. In his view, human capital is similar to "physical means of production", e.g.,

factories and machines: one can invest in human capital (via education, training, medical

treatment) and one’s outputs depend partly on the rate of return on the human capital one

owns. Thus, human capital is a means of production, into which additional investment

25

yields additional output. Human capital is substitutable, but not transferable like land,

labor, or fixed capital

The social capital theory was advanced by an economist, Loury in 1977. The theory of

social capital focuses on the resources embedded in one’s social networks and how

access to and use of such resources benefits the individual’s actions. The theory assumes

that the social structure has a pyramidal shape in terms of accessibility and control of

such resources. The higher the position, the fewer the occupants, and the higher the

position, the better the view it has of the structure. In terms of both number of occupants

and accessibility to positions, the pyramid suggests advantages for positions closer to the

top. A position closer to the top of the structure has greater access to and control of the

valued resources not only because more valued resources are intrinsically attached to that

position, but also because of the position’s greater accessibility to positions at other

(primarily lower) rankings. Thus, an individual occupying a higher position, because of

its accessibility to more positions, also has a greater command of social capital.

2.3 Human Capital and Firm Performance

From the strategic human resource management view, assuming that not all existing

knowledge and skills are strategic, the first step is determining what forms of human

capital exist in the firm and how they can be a source of competitive advantage.

Resource-based view of the firm indicates that resources are valuable when they allow

improving effectiveness, capitalizing on opportunities and neutralizing threats. In the

context of strategic management, value creation focuses on increasing the ratio of

customer profits in comparison with the associated costs. In this sense, firm’s human

capital can add value if it contributes to lower costs, provide increased service or product

features to customers (Perez and Pablos, 2003). The authors further note that perhaps the

organizational resources most difficult to control of all are people. Therefore, executives

have traditionally based their competitive strategies on other factors, such as product and

process technology, protected market niches, access to financial resources and economies

of scale. However, in an entrepreneurial environment such as the present one,

characterized by market globalization, the intensification of competition and the high rate

26

of technological change, tangible assets no longer provide sustainable competitive

advantages.

As firms are focusing on their intangible assets, intellectual capital can be viewed as the

future basis of sustained competitive advantage. This is particularly true in industries

based on knowledge, such as information and software services. Competitive advantage

depends more and more on “people-embodied know-how” (Prahalad, 1983).

Accordingly, it is human capital, rather than physical or financial capital, that

distinguishes the leaders in the market. For these reasons, and given the fact that

employee knowledge, skills and abilities constitute one of the most significant and

renewable resources which a company can take advantage of, the strategic management

of this capital now has greater importance than ever (Ulrich, 1991).

Knowledge is the most important resource that organizations can rely on to generate

innovation (Nonaka and Takeuchi, 1995). Knowledge can add value to organizations

through intangible assets such as customer relationships, goodwill, brand recognition and

competences of employees. Those intangible assets are defined as intellectual capital.

Edvisson and Sullivan (1996) have defined it as knowledge that can be converted into

value. There are many evidences that Intellectual Capital has a positive impact not only

on corporate value but also on its present and future performance (Chen, Cheng and

Hwang (2005); Youndt and Snell, 2004). The rise of the knowledge-based economy is

attributed to the increasing importance of intellectual capital as an intangible and

important resource for companies’ sustainable competitive advantage (Roos and Roos,

1997).

There is no doubt that part of an organization's knowledge resides in the people who form

it. The employee's knowledge value depends on their potential to contribute to the

achievement of an organizational competitive advantage. Recent research suggests that

human capital attributes (including training, experience and skills) and in particular the

executives' human capital, have a clear impact on organizational results (Huselid, 1995;

Pennings et al., 1998; Wright et al., 1995). Although the use of this knowledge is an

important factor in the actual competitive environment, it is not enough to use the actual

27

employees' knowledge basis. Thus, Wright et al. (1995) consider that “despite the firm's

resources and capacities have added some value in the past, changes in customers'

demands, in the industry's structure or in technology may turn them into less valuable in

the future” (p. 51). Therefore it is important to manage employees, their knowledge and

competences in such a way that the organization can build a long-term competitive

advantage.

In order to be a source of competitive advantage, human resources must create

organizational value. Resources are valuable if they allow the organization to develop

strategies that improve efficiency and efficacy (Barney, 1991). When human capital is

highly valuable and unique it provides strategic benefits that exceed the bureaucratic

costs associated with their development and deployment. Organizations have incentives

to internally develop and invest in human capital to maximize its value creating potential

and differentiating characteristics. To do this, organizations may implement commitment-

based human resource systems that focus on internal development of skills and long-term

relationships (Rousseau, 1995; Tsui et al., 1995). Investment in human capital improves

employability and therefore labor flexibility (Groot and Van Den Brink, 2000). Workers

with higher levels of education and training are more employable, i.e. they can be

employed in more jobs and perform multiple tasks within the firm. According to Lepak et

al. (2003) one advantage of this “resource flexibility” is that it enhances the ability of the

organization to deploy its workforce effectively, and thus, improve organizational

performance.

Barney and Wright (1998) concluded that only human capital with valuable and unique

knowledge is a strategic asset. Hence, as recommended by Boxall (1996), companies

should select and retain employees of this type, as they generate human capital

advantage. However, knowledge, skills and expertise tend to suffer a certain degree of

obsolescence. Companies can act to prevent this by using certain types of HRM practices,

as also stated by Boxall (1996) and Snell et al. (1996). If the company adopts appropriate

procedures of personnel management, human capital can be orientated to the achievement

of sustainable competitive advantages through the preservation and enlargement of the

value and the specificity of the knowledge possessed by employees. This will promote

28

the updating, improvement and transfer of this knowledge in the organization. More

recently, research into intellectual capital and its components confirmed this reasoning; it

has been demonstrated empirically that the human capital of an organization becomes a

strategic asset of the company when that knowledge is valuable and unique, thus

generating greater competitiveness and ultimately more profit (Subramaniam and

Youndt, 2005).

On the other hand, Collis and Montgomery (1995) state that the importance of human

capital depends on the degree to which it contributes to the creation of a competitive

differentiation. From an economic view, transaction-costs theory indicates that firms gain

a competitive advantage when they own firm-specific resources that can not be copied by

rivals (Williamson, 1975). Thus, as the uniqueness nature of human capital increases,

firms have incentives to invest resources into its management with the aim of reducing

risks and capitalize on its productive potential.

Idiosyncratic human capital (low value, high uniqueness) is a potential source of

differentiation because it is a firm-specific resource. Ancillary human capital (low value,

low uniqueness) is simply generated as a result of firm’s activity. As ancillary human

capital is formed basically by unskilled or semi-skilled employees that offer no source of

competitive advantage, firms tend to automate this knowledge, that is to say, they

substitute technology for employees (Snell et al., 1995). Core human capital (high value,

high uniqueness) provides strategic benefits that exceed the bureaucratic costs associated

with their development and deployment. Organizations have incentives to internally

develop and invest in this human capital to maximize its value creating potential and

differentiating characteristics. To do this, organizations may implement commitment-

based human resource systems that focus on internal development of skills and long-term

relationships (Tsui et al., 1995).

Compulsory human capital (high value, low uniqueness) is not specific to any particular

organization and employees are free, within certain limits, to sell their talents wherever

they can achieve the greatest return (Rousseau, 1995). Due to this transferability, human

capital theory suggests that organizations would not be likely to invest in this kind of

29

human capital (Becker, 1964). Instead, organizations may rely on selective staffing

processes to identify potential employees with the appropriate skills to generate

immediate productivity. The hiring firm simply pays the market rate (or above) for these

employees and takes advantage of their valuable talents immediately. These practices

characterize a market-based human resource system (Lepak and Snell, 1999).

2.4 Human Capital and Quality of Decisions

Helping individuals to develop knowledge, skills and competences increases the human

capital of the organization. People are better equipped to do their jobs (if the process

works) and this is generally of value to the organization. However, we know that merely

developing the human capital of the organization is not enough to guarantee success.

Strategic and operational choices of small organizations are quite often limited by

resource constraints, but there are evidences that human capital development facilitated

by training can play a pivotal role in innovation and consolidation of small and medium

size organizations (Baldwin and Johnson, 1996).

It is assumed that workers have the opportunity to contribute to organizational success

and as they are closer to the work situation they may be able to suggest improvements

which management would be unable to by virtue of their position in the hierarchy. Rather

than trying to control employees, they should be given discretion to provide better service

and achieve a higher standard of work (Wilkinson, 1998). In instances where employees

do not possess the basic competence to make a decision or perform an activity,

empowerment goes out of the window. For empowerment and trust to be extended there

has to be a basic competence on behalf of the person who is actually empowering others

to make decisions and take actions. In situations where executives and managers lack

that competence, specifically in the ability to oversee without micro-managing,

empowerment is lacking (Diab, 2011).

Miller and Jangwoo (2001) argue that a well designed decision making process will have

its most positive impact on company financial performance when it is carried out by a

capable, motivated and dedicated workforce. Prior research has determined that such a

workforce can be developed via an organization's commitment to its employees in the

30

form of ample training and compensation, fairness, and meaningful personal

consideration. The authors argue that organization's commitment to its employees will

enhance financial performance where it is able to improve the quality of a decision

making process that emphasizes ample information processing, collaboration, and

initiative. Conversely, these three dimensions of decision making are expected to be of

little value where organization's commitment to its employees and hence a capable and

motivated workforce are lacking. The most frequently discussed process dimensions

of decision making, by themselves, are unlikely to contribute to superior performance.

Rather, it is only when an organization is able to build a cadre of capable, dedicated

decision makers that it will be able to execute process effectively and earn superior

financial returns (Barney & Zajac, 1994; Lado & Wilson, 1994).

Analysis or scanning of the competitive environment is apt to be more effective when

performed by a corps of able, committed individuals using their imaginations and

initiative than when executed in rote fashion. Similarly, consultation among decision

makers will be more productive when it is done in a spirit of cooperation and dedication

than when it serves as an occasion for politicking or bickering. In addition, proactive

decision making is best when employees have the interests of the organization at heart,

not when it serves to further empire building or advance individual careers. Unless

decision makers at all levels of a company are guided to make decisions in a manner that

stresses awareness, reflection, collaboration and initiative, their firm will not be able to

recognize and adapt to the most important challenges and opportunities.

In integrative reviews of the literature on decision making process, three dimensions

come up again and again as being potentially vital to the quality of decision making (c.f.

the syntheses of Fredrickson, 1986, Miller, 1987, Mintzberg, 1973, and Hart, 1992).

These dimensions are information processing, collaboration, and initiative. The

information processing dimension reflects the effort devoted to scanning and analyzing

information to better understand a company's threats, opportunities and options. The

collaboration dimension gauges how much people consult and collaborate together in

making decisions. And the initiative dimension assesses whether decision makers are

biased towards action or proactiveness in competing and getting things done. While each

31

of these dimensions has the potential to contribute to more effective decisions, this

potential will not be realized unless decision makers are capable, motivated, and

committed to their companies. In other words, even the most promising approaches to

making decisions will produce little benefit without the support of a cadre of competent,

motivated human resources (Barney & Zajac, 1994; Lado & Wilson, 1994). Previous

research has shown that OCE will help to create these resources (Moorman et al., 1998;

Organ & Konovsky, 1989; Shore & Wayne, 1993).

2.5 Quality of Decisions and Firm Performance

Quality in management decision making is vital for any organization. Strategic decision-

making is essential to firm performance. Decisions are made every day by industry,

government agencies, and individuals. The major elements of these decisions are the

objectives of the decision maker, the available information, and the potential alternatives.

Decision quality is based on the thoroughness with which all relevant leadership and

technical issues are considered. Making a good decision involves making trade-offs

between multiple objectives to select an alternative that best meets the values of the

decision maker. This is even more difficult when the decision involves uncertain

information (Delano, Parnell, Smith and Vance, 2000). A study by Rogers and Blenko,

(2006) found that high performers are decision-driven organizations, built for effective

decision-making and execution. What sets apart the high performers is the quality of their

decision-making. They make the most important decisions well, and then they make them

happen, quickly and consistently.

The authors further contend that making good decisions means being clear about which

decisions really matter. It requires getting the right people focused on those decisions at

the right time. That is true whether the decisions involve the largest issues that a company

faces or more tactical, day-to-day concerns. Decision-driven organizations are

distinguished by the consistency and caliber of their decision-making and execution at

every level. The difference is striking. More than 90 percent of high-performance

organizations that were surveyed believe that significant decisions get made well in their

organizations, resulting in prompt, effective action. By contrast, nearly half of those who

rated their organizations less effective believe that they often fail at making and

32

executing decisions. A study by Letting (2011) found a positive relationship between

Board of Directors’ involvement in strategic decision-making and some measures of

corporate performance.

2.6 Human Capital, Social Capital and Firm performance

Adler and Kwon (2002) highlight information as being the first direct benefit of social

capital. They argued that social capital facilitates access to broader sources of

information and improves information’s quality, relevance and timeliness. These

conditions allow individuals to enhance their knowledge through everyday interactions

with colleagues. Similarly, Reed et al. (2006) state that the inimitable value of human

capital can be enhanced by social relations. Their argument is that, given competent and

credible participants from a diverse set of disciplines, a network of rich, social

connections can reduce the amount of time and investment required to gather information

and can serve as a valuable conduit for knowledge diffusion and transfer.

Human capital and social capital embedded in employees are viewed as the fundamental

components of intellectual capital, because intelligence is created through knowledge

exchange among organizational members (Nahapiet and Ghoshal, 1998). Individuals with

more investments in their human capital could develop professional expertise, increase

productivity at work, and then get positive rewards from organizations (Wayne, Liden,

Kraimer and Graf, 1999). Individuals gain social capital because, in comparison to others,

they occupy more advantageous network positions, which allow access to a variety of

people with the necessary information and the chance to contribute to organizational

functioning, thereby gaining more positive career outcomes, such as faster promotions

(Burt, 1992) and career success (Seibert, Kraimer and Liden, 2001).

Subramaniam and Youndt (2005) concluded that an organization’s efforts in hiring,

training, designing work and implementing other HRM practices may need to focus not

only on maintaining their employees’ functional or specific technical skills and expertise

but also on developing their abilities to network, to collaborate and to share information

and knowledge. Tsai and Goshal (1998) demonstrate that the relational dimension of

social capital positively influences resource exchange and the co-ordination among the

33

people involved, which, at the same time, creates value for the firm through its effects on

product innovation. Development of new products and services results not from

individual effort (at the individual level of knowledge) but from creative cooperation (at

the social level) (Leornard and Sensiper, 1998).

Consequently, social capital and human capital are not independent variables; rather, they

interact to improve innovative performance. Cabello-Medina, Lopez-Cabrales and Valle-

Cabrera (2011) argue that high levels of social capital can enhance the skills and

capabilities of individuals (human capital). Moreover, Baldwin et al. (1997) have

indicated that an individual who is central in the social network is, over time, able to

accumulate knowledge about task-related problems and workable solutions. This

expertise not only enables the central individual to solve problems readily, but also serves

as a valued resource for future exchanges with coworkers. Although human capital may

be the origin of all knowledge, learning requires that individuals exchange and share

insights, knowledge and mental models, which represent social capital (Senge, 1990).

Given that innovation is essentially an exercise in collaboration, social capital plays a key

role both directly improving human capital and stressing its effects on innovation.

Therefore improving individual knowledge and creating the conditions for sharing it are

issues that deserve attention.

A firm's human capital also improves the firm's learning and innovation

abilities. Firms involved in innovation processes often use external knowledge.

This ability is shaped by the firm's access to knowledge workers who receive

information, evaluate the importance of it, and use it to innovate successfully

(Hansen, 2001). Furthermore, spillovers from other firms' knowledge can more

easily be adopted and imitated by firms with higher levels of human capital

(Ballot et al., 2001). Other factors that facilitate this absorption are knowledge

acquired through previous experiences, a common language, and the ability to

recognize, assimilate and apply new information (Cohen and Levinthal, 1990).

The main sources of human capital are education and experience. Firms are

better able, using human capital, to adapt continuously to changing

34

circumstances in the external environment, to perceive new opportunities and

threats, and to gain competitive edge. Social networks are important because

achieving new skills and capabilities may be facilitated by interaction in social

networks, and enhance a person's knowledge capture and understanding. Social

capital can be perceived as the sum of actual and potential resources a

person/organization can access or derive through membership in networks

(Kogut and Zander, 1992; Nahapiet and Ghoshal, 1998). Preferential knowledge

access is one such resource (e.g., Inkpen and Tsang, 2005), and may facilitate

international learning, however, social networks are not always producing

benefits in terms of resources (Elfring and Hulsink, 2003; Hughes et al., 2007).

Networks may, for example, be too tight with all partners connected to each

other, or too homogeneous regarding the social background of the partners,

thereby missing the virtues of social capital.

There are some contradictory results in the empirical literature on the influence

of human capital and social networks on firm performance (e.g., Florin et al.,

2003), and this is a reason why it seems necessary to broaden the scope with

the innovation level of firms. The support gained from human and social capital

may be highly diverse for firms that have chosen to be a first mover or a late

follower in their industry sector, or to hold a position in-between, because their

need for resources is different (Lieberman and Montgomery, 1988; Finney

et al., 2008). What may also make a difference is the development stage of the

product/process and whether the firm already has a solid market position or is

still engaged in development activities (e.g. Gilsing and Duysters, 2008).

2.7 Human Capital, Employee Empowerment and Firm performance

The notion of empowerment involves the workforce being provided with a greater degree

of flexibility and more freedom to make decisions relating to work (Greasley, Bryman,

Price, Soetanto and King, 2005). Employee empowerment has widely been recognized as

an essential contributor to organizational success with many authors observing a direct

relationship between the level of employee empowerment and employee performance

(Spreitzer, 1995; Kirkman and Rosen, 1999), employee job satisfaction (Ugboro and

35

Obeng, 2000; Laschinger et al., 2001; Seibert et al., 2004), and employee commitment

(Ugboro and Obeng, 2000). Empowering employees enables organizations to be more

flexible and responsive (Mathieu et al., 2006) and can lead to improvements in both

individual and organizational performance (Dainty et al., 2002; Ozaralli, 2003; Bordin et

al., 2007). Similarly, it is maintained that employee empowerment is critical to

organizational innovativeness (Gomez and Rosen, 2001) and effectiveness (Morrell and

Wilkinson, 2002; Bartram and Casimir, 2007).

Employee empowerment brings decision-makers and employees closer, hence shortening

the duration of tasks. Any type of managerial style that can pave the way for developing

the feeling of self-efficacy will yield employee empowerment. Empowered individuals

will have a more active role in the organization, will take on initiatives, and their

participation in the activities of the organization will be enhanced. Entrepreneurs,

managers and researchers in the field of management regard the employee as the major

resource bringing competitive advantage to establishments, and they are of the opinion

that the involvement and empowerment of employees is key to the success of

establishments (Siegall and Gardner, 2000).

When the nature of empowerment is examined, it is observed that empowerment does

yield beneficial outcomes. When the constituents of employee empowerment are

examined, it is stressed that the construct will yield beneficial results for both employees

and employers (Baruch, 1998). Studies conducted on employee empowerment reveal that

it gives rise to organizational commitment (Han et al., 2009; Kim, 2002; Sigler and

Pearson, 2000; Spreitzer and Mishra, 2002), motivation (Caudron, 1995; Janssen et al.,

1997), performance (Çöl, 2008; Locke, 1991; Sigler and Pearson, 2000) and customer

satisfaction (Bowen and Lawler, 1992; Chebat and Kollias, 2000).

Employee empowerment is more relevant in today's competitive environment where

knowledge workers are more prevalent (Wimalasiri and Kouzmin, 2000; Jarrar and Zairi,

2002) and organizations are moving towards decentralized, organic type organizational

structures (Houghton and Yoho, 2005). Every organization has a pool of knowledge

from past experiences, individual know-how and work processes. If an

36

organization wants to create an empowerment structure it must be able to set up

an architecture that facilitates its knowledge concerning the skills and

competences of its workforce. The organization must know what it wants to

empower. On the other hand employees must know what skills and competency

profiles are defined for the various tasks within the company and must be able

to perform some kind of matching that will support them in choosing the right

development (Houtzagers, 1999).

Diab (2011) notes that a key point that is sometimes forgotten is that for

empowerment to truly work and for trust to remain extended there has to be

constant stream of positive results. If trust is extended to employees and they

are empowered to make decisions then the result turns out to negatively impact

the business, one would be less likely to continue in this empowerment and

trust in those employees would be shaken. Barney and Wright (1998) concluded

that only human capital with valuable and unique knowledge is a strategic

asset. Hence, as recommended by Boxall (1996), companies should select and

retain employees of this type, as they generate what the author terms “human

capital advantage”. It has been demonstrated empirically that the human capital

of an organization becomes a strategic asset of the company when that

knowledge is valuable and unique, thus generating greater competitiveness and

ultimately more profit (Subramaniam and Youndt, 2005).

Collins and Smith (2006) stated that employees with valuable and unique knowledge

(knowledge workers) do more to promote the process of organizational learning.

Valuable and unique human capital is more likely to explore new ways of working and to

convert them into new organizational routines. Furthermore, this type of human capital,

and no other, is capable of generating the internal conditions that promote learning, as it

is important that knowledge adds value and should be embedded in the organization so

that distinctive competences may be developed (López-Cabrales, Real and Valle, 2011).

37

2.8 Human Capital, Social Capital, Employee Empowerment, Quality of Decisions

and Firm Performance

A firm's human capital is an important source of sustained competitive advantage (Hitt et

al., 2001) and therefore investments in the human capital of the workforce may increase

employee productivity and financial results (Pfeffer, 1998). As the level of employee

human capital is fostered, people develop more efficient means of accomplishing task

requirements, thereby increasing productivity. Black and Lynch (1996) showed that the

average educational level in firms is positively related to business productivity. Firms

promote their human capital and therefore create value through selection and training,

thus increasing their performance (Hitt et al., 2001). Considerable empirical evidence

(e.g. Black and Lynch, 1996; Delaney and Huselid, 1996; Youndt et al., 1996)

corroborates the positive effects of human resource practices related to enhancing human

capital for firms' outcomes. There are several reasons for this.

First, this combination (selection and training) provides a firm with a skilled

workforce capable of ongoing learning, and employees develop a greater knowledge to

respond to intense competition, constant product innovation and more complex

technologies (Appelbaum et al., 2000; Batt, 2002; Snell and Dean, 1992). In this vein,

generic human capital (e.g. years of schooling) is especially important because people

who have received a better education have a higher potential to learn and contribute to

the success of the company (Hatch and Dyer, 2004; Hitt et al., 2001; Rauch et al., 2005).

Second, as the level of employee human capital is fostered, people develop more efficient

means of accomplishing task requirements, thereby increasing productivity. Black and

Lynch (1996) showed that the average educational level in firms is positively related to

business productivity. Third, high skills in the workforce are a requirement for

empowerment, and benefit from delayering the organization (Appelbaum et al., 2000).

More responsibility at shop floor level enables the firm to delayer the organization by

reducing middle management. Furthermore, employee participation in decision making

increases motivation and commitment to the organization and encourages employees to

work harder (Huselid, 1995; Pfeffer, 1998).

38

Fourth, intangible resources (like human capital) are more likely to produce a competitive

advantage because they are rare and socially complex, and therefore difficult to imitate

(Hatch and Dyer, 2004). In particular, specific human capital represents an inimitable

asset in terms of knowledge and skills that are only of use to an individual company

(Rauch et al., 2005). Human capital theorists (e.g. Becker, 1964) suggest that firms will

invest significantly to develop unique and non-transferable (i.e. firm-specific) skills

through extensive training initiatives (Hatch and Dyer, 2004). Development of human

capital is often path-dependent and needs to be nurtured over time by investment in

continuous training (Lepak and Snell, 2002). Fifth, the human capital pool can improve

firm performance through its contribution to the firm's flexibility. In this sense,

investment in human capital improves employability and therefore labor flexibility

(Groot and Van Den Brink, 2000). Workers with higher levels of education and training

are more employable, i.e. they can be employed in more jobs and perform multiple tasks

within the firm. According to Lepak et al. (2003) one advantage of this “resource

flexibility” is that it enhances the ability of the organization to deploy its workforce

effectively, and thus, improve organizational performance.

Given the close connection between the knowledge possessed by the personnel of the

firm and its products and services, it is clear that a firm’s ability to produce new products

and other organizational capabilities is inextricably linked to its human capital (Laursen,

2002; Lopez-Cabrales, Valle and Herrero, 2006). Considering the human capital

approach, the value and uniqueness of knowledge are the most relevant features for

innovation (Lepak and Snell, 1999; Subramaniam and Youndt, 2005). Value refers to the

potential to improve the efficiency and effectiveness of the firm, exploit market

opportunities and neutralize potential threats (Lepak and Snell, 2002, p. 519). As

Subramaniam and Youndt (2005) pointed out, it is among individuals with valuable

knowledge and skills that organizations find the greatest collection and diversity of skills.

These employees are the most flexible in acquiring new skills, which enhance the firm’s

innovative performance.

39

In order to develop an assessment of the decision situation, central decision makers

gather most of their information through social ties in their direct environment, which

constitute their social capital. Studies on the social capital of managers show that the

relations they maintain affect their behavior in organizations as well as organizational

processes (Bratkovic et al., 2009; Stam and Elfring, 2008). The implication for central

decision makers is that their assessment of the decision situation depends largely on who

they are connected to and interact with during the strategic decision-making process

(Cross et al., 2009). In general, higher breadth of social capital leads to more diverse

knowledge about the decision situation and thus has strong implications for the

complexity of the knowledge representations used by the decision makers (Iederan et al.,

2009). Moreover, in terms of evaluative judgments of the decision situation, social capital

may impact on risk taking and confidence in the decision situation. The use of social ties

increases the confidence of the decision maker in the decision that is taken, increases

through social validation and social comparison, that it is correct given the available

information (Lee and Dry, 2006).

The internal and external connections increase the availability of decision-relevant

information, which ultimately leads to a more informed judgment on the decision

situation. Information flowing through these connections is ultimately processed by the

individual decision maker and it influences the perception and interpretation of decision

situations (e.g. the amount of risk involved and the degree of confidence). When the

information which is provided through these connections is interpreted correctly and

drives decision makers to more accurately assess the decision situation, decisions will be

enhanced and decision effectiveness will be positively affected (Harrison and Pelletier,

1998). Jansen, Curseu, Vermeulen , Geurts and Gibcus (2011) concluded that social

capital as a decision aid informs managers in their assessment of the decision situation,

implying that the more social capital, the higher the decision effectiveness.

The effectiveness of strategic decisions is therefore dependent on the information inputs

that come through the social capital of central decision makers. Strategy theorists suggest

that intangible resources and in particular, core competencies and relationships, are the

most important critical drivers of sustainable competitive advantage. In knowledge

40

economy, organizations build sustainable competitive advantage, not only relying on

their intellectual capital (core competencies), but also on those for other institutions and

specifically on those of the cluster, micro cluster or territory where the company is

located. This kind of intellectual capital, basically external and of a relational nature is

one of the main constituents of the networked organization (Marti, 2004). Zhang and

Fung (2006) investigated the effects of social capital on the financial performance of

private enterprises in China. The study revealed that short-term investments in social

capital, which are measured by donation and entertainment activity, significantly improve

the financial performance of Chinese enterprises through profitability and sales.

Employee empowerment has widely been recognized as an essential contributor to

organizational success with many authors observing a direct relationship between the

level of employee empowerment and employee performance (Spreitzer, 1995; Kirkman

and Rosen, 1999). Findings have consistently suggested empowering subordinates may

serve objectives linked to managerial and organizational effectiveness (Bennis and

Nanus, 1985). Thus, empowering is considered a way to encourage and increase decision

making at lower levels of an organization, which consequently enriches employees' work

experience (Liden et al., 2000).

It is increasingly becoming important for organizations to respond rapidly to changes in

the environment and empowering employees represents a logical way to achieve such

objectives as it eliminates extensive communication up and down the organizational

hierarchy. Lower level employees receive timely information about operations, have the

relevant knowledge of their work area, and bear the consequences of the decisions made.

Empowerment of these employees also provides management with more time to consider

broader strategies and the long-term objectives of the company. Employee empowerment

is more relevant in today's competitive environment where knowledge workers are more

prevalent (Wimalasiri and Kouzmin, 2000; Jarrar and Zairi, 2002) and organizations are

moving towards decentralized, organic type organizational structures (Houghton and

Yoho, 2005). High skills in the workforce are a requirement for empowerment, and

benefit from delayering the organization (Appelbaum et al., 2000). Research has shown

41

that network forms of organization foster learning, represent a mechanism for the

attainment of status or legitimacy, provide a variety of economic benefits, facilitate the

management of resource dependencies, and provide considerable autonomy for

employees (Podolny and Page, 1998).

42

Table 2.1 Summary of Gaps in Knowledge STUDY FOCUS FINDINGS KNOWLEDGE GAP FOCUS OF CURRENT

STUDY

Roca-Puig,

Beltrán-

Martín and

Cipres,

(2011)

The study aimed at examining

how temporary employment and

organizational size moderate the

effect of human capital on firm

performance. The authors also

analyzed the overall effect of

human capital, temporary

contracts and organizational size

on firm performance.

The study found that positive effect of

human capital on return on sales is greater

in large firms with low temporary

employment than in small firms with high

temporary employment.

The study considered

the moderating role of

temporary employment

and organizational size

on the relationship

between human capital

and firm performance.

This study focused on the

moderating role of social

capital and employee

empowerment in the

relationship between human

capital and firm

performance.

Harris,

McMahan

and Wright

(2012)


the relationship between various

aspects of human capital and

overlapping tenure and unit

performance

The study found that human capital has a

positive influence on team performance.

Further, the study found that organizations

with human resources that have higher

levels of overlapping tenure may have

higher levels of performance.



overlapping tenure in

the relationship


and team performance.

This study focused on the

role of social capital,

employee empowerment and

quality of decisions in the


capital and firm

performance.

43

Jamal and

Saif (2011)

The study attempted to explain

the relationship between Human

Capital Management and

Organizational Performance.

Results of the study showed that the firms

Human Capital Management have a

significant positive impact on

organizational performance.

The study focused on

how management of

human capital can

affect firm

performance.

This study assessed the


capital itself and firm

performance, while

introducing other variables at

the same time.

Awan and

Sarfraz

(2013)

The aim of the paper was to

establish the relationship

between human capital and

firm performance and the

mediating effect of employee

satisfaction on the human

capital-firm performance

link.

The study found a strong positive

relationship between human capital

and firm performance and further

found that employee satisfaction

mediated this relationship.



employee satisfaction

on the relationship

between human

capital and firm

performance. The

sample comprised

only three firms.

This study considered the

combinative effect of human

capital, social capital,


quality of decisions on firm

performance. The sample

was large comprising all

commercial banks and

insurance companies in

Kenya.

Nishantha (2011)

The study examined the

effect of entrepreneur’s

human capital and social

capital on the growth of

Small Enterprises (SEs) in

The study found that the

entrepreneur’s human capital relates

positively and directly to the social

capital. In addition, the authors

observed direct effects of human



social capital on the

relationship between

human capital and

This study considered the





44

Sri Lanka. capital on firm growth. Social capital

was therefore found to moderate the

relationship between human capital

and firm growth.

firm performance. performance.

Lin and

Huang

(2005)


the kind of role social capital

played in the relationship

between human capital and

career outcomes, with a

particular focus on testing the

mediation and moderation

models

Found that people's roles in central

network positions were positively related

to career developmental potential. Further,

they found that the relationship between

human capital and career development

potential in the organizations was

completed through the effect of social

capital, supporting the mediation model.

The study focused on

the relationship


and career outcomes,

and not firm

performance.

This study focuses on the


capital and firm performance

and also introduces


quality of decisions as

additional moderating

variables.

Gonzalez–

Alvarez and

Solis-

Rodriguez

(2011)

To establish the influence of

human capital and social capital

on the discovery of

opportunities.

Human capital had a positive relationship

with discovery of opportunities.

There is a positive significant relationship

between social capital and discovery of

business opportunities.

What would be the

influence of human

capital and social

capital in the

performance of

businesses?

This study will fill this gap in

knowledge, while at the

same time incorporating

additional variables.

45

Ottosson

and Klyver

(2010)

The study aimed at establishing

how human capital influences

social capital.

The study revealed that human capital and

social capital were co-productive, and

increased human capital seems to increase

the level of social capital concurrently. It

was found that entrepreneurs with higher

education, in addition to production of

human capital through the knowledge and

skills they achieve, also gain social capital

through an increase in network size.

Further it was found that entrepreneurs

with start-up experience in addition to

their experience gain social capital

through a focused network consisting of a

high ratio of professional ties.

The study has not

focused on the

combinative effect of

social and human

capital on firm

performance.

This study focuses on the





performance

46

2.9 Conceptual Framework

The conceptual model considers how human capital, social capital and employee

empowerment can be utilized in decision making to achieve high quality decisions that

would enhance firm performance. Previous studies have established that human capital

attributes such as knowledge, skills and experience have an impact on organizational

results. It has been demonstrated empirically that the human capital of an organization

becomes its strategic asset when that knowledge is valuable and unique, thus generating

greater competitiveness and ultimately more profit (Subramaniam and Youndt, 2005).

Human capital generates value through investments in increasing individuals’ knowledge,

skills, talents and know-how (Roos et al., 1997). When these human capital attributes are

effectively utilized, an organization can yield significant benefits. The quality of

decisions depends on the knowledge and skills that the decision makers possess. Decision

quality is based on the thoroughness with which all relevant leadership and technical

issues are considered. This requires a high level of analytical skills. High performers are

decision-driven organizations, built for effective decision-making and execution. What

sets apart the high performers is the quality of their decision-making. They make the

most important decisions well, and then they make them happen, quickly and consistently

(Rogers and Blenko, 2006).

Individuals who accumulate greater human capital will occupy central positions in the

social network of organizations and also reap the benefits of social capital. Moreover,

those with higher social capital will enhance their value by facilitating the exchange of

information across the organization and thereby achieve superior outcomes (Mehra,

Kilduff and Brass, 2001). Investments in the human capital of the workforce may

increase employee productivity and financial results (Pfeffer, 1998). As the level of

employee human capital is fostered, people develop more efficient means of

accomplishing task requirements, thereby increasing productivity. An empowered

workforce is provided with a greater degree of flexibility and more freedom to make

decisions relating to work (Greasley, Bryman, Dainty, Price, Soetanto and King, 2005).

Competence is a critical dimension of empowerment. Empowered employees that have

the relevant knowledge and skills have an opportunity to contribute to decision making,

47

and could enhance the quality of decisions through sharing of information and ideas with

both the internal and external networks. High skills in the workforce are a requirement

for empowerment, and benefit from delayering the organization (Appelbaum et al.,

2000).

Firm performance depends on the quality of decisions made. The human capital pool can

improve firm performance through its contribution to high quality strategic decisions that

determine the course of action needed to achieve the desired organizational outcomes.

The quality of strategic decisions made have a bearing on the firm’s performance. Quality

strategic decisions depend on the amount of human capital possessed by the decision

makers as well as the input obtained from internal and external networks (social capital).

Adler and Kwon (2002) argue that social capital facilitates access to broader sources of

information and improves information’s quality, relevance and timeliness. A firm's

human capital is an important source of sustained competitive advantage (Hitt et al.,

2001). Employee participation in decision making increases motivation and commitment

to the organization and encourages employees to work harder (Pfeffer, 1998). The

amount of knowledge, skills and competencies possessed by the workforce, the ability of

employees to share information and ideas through the established social networks, as well

as the contributions that they make in strategic decisions determine firm performance.

These relationships are visually shown in figure 1.

48

Figure 1 Conceptual Model

49

2.10 Conceptual Hypotheses H1: Human capital has a significant influence on firm performance

H2: There is a relationship between human capital and quality of decisions

H3: Quality of decisions influences firm performance

H4: The influence of human capital on firm performance is moderated by social

capital

H5: The influence of human capital on Firm performance is moderated by employee

empowerment

H6: The influence of human capital on firm performance is mediated by quality of

decisions

H7: The joint effect of human capital, social capital, employee empowerment and

quality of decisions on firm performance is different from the individual effects of

human capital and quality of decisions on firm performance

50

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter discusses the research methodology that guided this study. This includes the

philosophical direction, the research design, the target population, data collection,

operationalization of variables, validity and reliability tests, data analysis and

presentation.

3.2 Philosophical Orientation

Epistemology is the branch of philosophy that studies knowledge. It attempts to answer

the basic question: what distinguishes true (adequate) knowledge from false (inadequate)

knowledge? (Heylighen, 1993). Epistemology is concerned with determination of the

nature of knowledge and the extent of human knowledge (Truncellito, 2007). There are

various philosophical paradigms such as realism, positivist and phenomenological

paradigms, but the two main paradigms that guide research in social sciences are the

positivist and phenomenological paradigms.

Positivist paradigm adopts a clear quantitative approach to investigating phenomena

(Smith, 1998). The approach assumes that an objective reality exists which is

independent of human behavior and is therefore not a creation of the human mind. The

positivists seek facts or causes of social phenomena with little regard for the subjective

states of individuals. This philosophy believes that universal scientific propositions are

true only if they have been verified by empirical tests. The researcher focuses on facts,

looks for causality and fundamental laws, reduces phenomena to simplest elements,

formulates hypotheses and tests them. This paradigm involves operationalizing concepts

so that they can be measured, and taking large samples (Saunders, Lewis, and Thornhill,

2007).

Phenomenological paradigm focuses on the immediate experience and description of

things as they are, not what the researcher thinks they are. This approach involves

gathering large amounts of rich information based on belief in the value of understanding

51

the experiences and situations of a relatively small number of subjects (Veal, 2005). This

paradigm believes that rich insights into this complex world are lost if such complexity is

reduced to a series of law-like generalizations. There is need to discover the details of the

situation to understand the reality. It is necessary to explore the subjective meanings

motivating people’s actions in order to be able to understand these (Cooper and

Schindler, 2008). This approach assumes that reality is multiple, subjective and mentally

constructed by individuals. The use of flexible and multiple methods is desirable as a way

of studying a small sample in depth over time that can establish warranted assertability as

opposed to absolute truth. The researcher interacts with those being researched, and

findings are the outcome of this interactive process with a focus on meaning and

understanding the situation or phenomenon under examination (Crossan, 2003).

This study was inclined to a positivist research philosophy because it was based on

existing body of knowledge, the researcher reviewed literature from previous related

studies, a conceptual framework was developed, and scientific processes were followed

in hypothesizing fundamental laws from which observations were deduced so as to

determine the truth or falsify the stated hypotheses. The study verified propositions

through empirical tests. The positivist approach also relies on taking large samples hence

the researcher studied the entire population so as to generalize the findings.

3.3 Research Design The research design that was used is descriptive cross-sectional design. A descriptive

study involves description of phenomena or characteristics associated with a subject

population (the who, what, when, where, and how of a topic). It allows estimates of the

proportions of a population that has these characteristics. Discovery of associations

among different variables is possible, in order to determine if the variables are

independent (or unrelated) and if they are not, then to determine the strength or

magnitude of the relationship. Questions are carefully chosen, sequenced and precisely

asked of each participant. Cross-sectional studies are carried out once and represent a

snapshot at one point in time (Cooper and Schindler, 2008).

52

A descriptive cross-sectional design enabled the researcher to discover any relationship

between social capital, employee empowerment, quality of decisions, human capital and

performance of insurance firms and commercial banks in Kenya, and in case of a

relationship, the strength of the relationship was determined. Data was also collected at

one point in time. The design was also chosen considering the type of data and the

analysis that was carried out. Nzuve and Bundi (2010) used a similar research design,

where they investigated the relationship between Human Capital Management Practices

and Firm Performance.

3.4 Target Population

The target population of this study was all the insurance companies and commercial

banks in Kenya, where a census survey was carried out on all the 88 firms which

comprised all licensed commercial banks and insurance firms in Kenya (See appendices 2

and 3). According to the Insurance Regulatory Authority (IRA) list of licensed insurance

firms as at 31st December 2012, there were 45 licensed Insurance firms in Kenya

(www.ira.go.ke). There were 43 commercial banks in Kenya as at 31st December 2012

(Bank Supervision Annual Report, 2012).

3.5 Data Collection

The study made use of both primary and secondary data. The secondary data was

obtained through a review of financial statements where the Return on Assets (ROA) and

Return on Equity (ROE) were obtained for a three year period as financial indicators of

firm performance, after which an average score was computed. For the commercial banks

the period considered was 2010, 2011 and 2012, while for the insurance companies the

period considered was 2009, 2010 and 2011. The choice of 2011 was informed by the

fact that the annual report for 2012 had not yet been compiled by the Insurance

Regulatory Authority. This period is significant because it signifies recovery from the

economic crunch in which the performance of the financial services sector was greatly

affected.

Primary data was collected on human capital, quality of decisions, social capital,

employee empowerment and qualitative indicators of firm performance using a

53

questionnaire (See appendix 1) that was divided into various sections according to the

research objectives. The first section sought to obtain organization data; Section two

covered human capital; Section three addressed social capital; Section four consisted of

questions on employee empowerment; Section five covered quality of decisions; Section

six comprised questions on the qualitative indicators of firm performance. The

questionnaire included both open-ended and likert type questions.

The organization was the unit of analysis and the target respondents were the Human

Resource Managers, Operations Managers and Marketing Managers of the commercial

banks and insurance firms. The Human Resource Manager responded to the sections on

the organization data, Human Capital and Employee Empowerment, the Operations

Manager responded to the section on Social Capital and Quality of Decisions, while the

Marketing Manager responded to the section on the non-financial indicators of firm

performance. The target respondents completed the questionnaires by themselves on a

drop-and-pick up later basis where the tentative collection date was agreed. The

filled up questionnaires were stamped with the company seal as evidence that the target

respondents filled up the questionnaires.

3.6 Operationalization of Variables

Table 3.1 below shows how the study variables were operationalized. Human

capital indicators were partly adapted from Lin and Huang (2005) “The role of social

capital in the relationship between human capital and career mobility”, Journal of

Intellectual Capital, Vol 6, No.2, pp 191-205. Social capital measures were partly

adapted from Jansen, Curseu, Vermeulen, Geurts, Gibcus (2011) "Social capital as a

decision aid in strategic decision-making in service organizations", Management

Decision, Vol. 49, No.5, pp.734 – 747. Decision effectiveness measure was partly

adapted from Walker and Brown (2004) "What success factors are important to small

business owners?", International Small Business Journal, Vol. 22 No.6, pp.577-94.

54

Table 3.1 Operationalization of Variables Variable Indicators Measurement Questionnaire

Item

Human Capital

(Independent

variable)

• Educational

level

• Tenure

• Job-related skills

Was determined by

considering the academic

qualifications held by the

employees.

Was assessed using the

length of service.

Number of workshops

attended in a year.

Number of short courses

attended in a year

Use of Likert scale type of

questions

Question 7-11

Social Capital

(Moderating

variable)

• External social

networks

• Internal social

networks

• Resources

obtained through

internal and

external social

networks


questions

Number of successfully

concluded business deals

through internal and external

social networks

Question 12-14

55

Employee

Empowerment

(Moderating

variable)

• Delegation

• Communicating

relevant job

information

• Fostering

development of

skills

• Employees’

autonomy and

control over

their work

• Suggestions

incorporated in

decisions


questions

Question 15

Quality of

Decisions

(Intervening

variable)

• Decision

effectiveness

• Degree of

involvement of

stake-holders

• Alignment with

the strategic plan

Likert scale type of

questions

Question 16

Firm

Performance

(Dependent

variable)

• Financial

indicators

• Non-financial

indicators

Return on Assets, Return on

Equity

Quality of service, Customer

Satisfaction, Efficiency in

service delivery

Question 17

56

3.7 Validity and Reliability tests

Validity of the instrument was measured by testing the questionnaire using data from a

pilot study. The purpose of the pilot test was to refine the questionnaire so that

respondents would have no problems in answering the questions and there would be no

problems in recording the data. It enables one to obtain assessment of the validity of the

data that will be collected (Saunders, Lewis, and Thornhill, 2007). The questionnaire was

also subjected to a review by a group of experts. Internal validity which is the ability of a

research instrument to measure what it is purported to measure consists of various forms:

Content validity (also known as face validity) is the extent to which the instrument

provides adequate coverage of the investigative questions guiding the study. If the

instrument contains a representative sample of the universe of subject matter of interest,

then content validity is good. Criterion-related validity reflects the success of measures

used for prediction or estimation. One may want to predict an outcome or estimate the

existence of a current behaviour or time perspective. Construct validity considers both the

theory and the measuring instrument being used. The way variables are operationally

defined should correspond with an empirically grounded theory (Cooper and Schindler,

2008).

Cronbach’s alpha was calculated to test for reliability. The Alpha can take any value from

zero (no internal consistency) to one (complete internal consistency) where 0.7 was the

acceptable limit. George and Mallery (2003) provide the following rules of thumb: >0.9 –

Excellent, >0.8 – Good, >0.7 – Acceptable, >0.6 – Questionable, >0.5 – Poor and <0.5 –

Unacceptable.

3.8 Data Analysis and Presentation Regression analysis (simple regression analysis, multiple regression analysis and

stepwise regression analysis) and Pearson’s Product Moment Correlation analysis were

used to establish the nature and magnitude of the relationships between the variables of

the study and to test the hypothesized relationships (See Table 3.8.1). Descriptive

statistics such as frequencies and percentages were computed for organizational data and

multiple choice questions in order to describe the main characteristics of the variables of

interest in the study. Mean scores were computed for likert type of questions. Data was

presented in form of tables.

57

Table 3.2 Summary of statistical tests for hypotheses and interpretation

Objectives Hypotheses Statistical Test Model To establish the influence of human capital on the performance of insurance firms and commercial banks in Kenya

H1 Human capital has an influence on firm performance

Simple Linear Regression Analysis

Firm Performance = f (Human Capital) Y = β0 +β1X1 +ε Y= Firm Performance, β0= intercept, X1= Human Capital, β1= coefficient, ε= Error term

To establish the relationship between human capital and quality of decisions

H2: There is a relationship between Human capital and quality of decisions

Pearson’s Product Moment Correlation Analysis

To establish the influence of quality of decisions on performance of insurance firms and commercial banks in Kenya

H3: Quality of decisions influences firm performance

Simple Linear Regression Analysis

Firm Performance = f (Quality of Decisions) Y = β0 +β1X1+ε Y = Firm Performance, β0= intercept, X1= Quality of Decisions, β1= coefficient, ε= Error term

To determine if the influence of human capital on Firm Performance is moderated by social capital

H4: The influence of human capital on firm performance is moderated by social capital

Multiple Linear Regression Analysis

Firm performance = f (HC, SC) Y = β0 +β1X1+β2X2+ε Y= Firm performance, β0= intercept, X1= Human Capital, X2= Social Capital, β1, β2= coefficients, ε= Error term

To determine if the influence of human capital on firm performance is moderated by employee empowerment

H5 : The influence of human capital on firm performance is moderated by employee empowerment


Firm performance = f (HC, EE) Y = β0 +β1X1+β2X2+ε Y= Firm performance, β0= intercept, X1= Human Capital, X2= Employee Empowerment, β1, β2= coefficients, ε= Error term

58

Objectives Hypotheses Statistical Test Model To determine if the influence of human capital on performance of insurance firms and commercial banks is mediated by quality of decisions

H6: The influence of human capital on firm performance is mediated by quality of decisions.


Firm Performance = f (HC, QD) Y = β0 +β1X1+β2X2+ε Y= Firm Performance, β0= intercept, X1= Human Capital, X2= Quality of Decisions (Intervening Variable), β1, β2= coefficients ε= Error term

To establish the joint effect of human capital, social capital, employee empowerment and quality of decisions on the performance of insurance firms and commercial banks in Kenya

H7: The joint effect of human capital, social capital, employee empowerment and quality of decisions on firm performance is greater than the individual effects of human capital and quality of decisions on firm performance

Stepwise Regression Analysis

Firm Performance = f (HC, SC, EE, QD) Y = β0 +β1X1+β2X2+β3X3+β4X4+ε Y= Firm Performance, B0= intercept, X1=Human Capital, X2=Social Capital, X3= Employee Empowerment, X4= Quality of Decisions, β1, β2, β3, β4= coefficients, ε= Error term

59

CHAPTER FOUR

DATA ANALYSIS, FINDINGS AND DISCUSSION

4.1 Introduction

This chapter describes the actual findings as per the feedback from the

respondents and links them to the objectives of the study. Questionnaires were

used to seek the respondents’ perceptions of the various attributes defining

human capital, social capital, employee empowerment and quality of decisions

and their appreciation concerning contributions of these attributes towards

overall organizational performance. The total number of questionnaires

distributed was 88 and out of these, 54 questionnaires were filled up and

returned indicating a response rate of approximately 61%. The various tables

that were formed in processing the information and the results obtained from

the calculations undertaken are included in this chapter.

4.2 Reliability Test Results

Table 4.1: Summary of Cronbach Alpha Reliability coefficients

Cronbach

Alpha

Cronbach's Alpha

Based on

Standardized Items

No. of

Items

Human capital .801 .800 16

Social capital .940 .940 19

Employee empowerment .929 .930 16

Quality of decisions .905 .905 14

Non financial

performance indicators .921 .927 14

Based on the cronbach alpha test results summarized in table 4.1, Human Capital which

had 16 items had a reliability coefficient of 0.801, Social Capital with 19 items had a

60

coefficient of 0.940, Employee Empowerment with 16 items had a coefficient of 0.930,

Quality of Decisions with 14 items had a coefficient of 0.905, and the non-financial

indicators of firm performance which comprised customer satisfaction, quality of service

and efficiency in service delivery had 14 items and the coefficient was 0.927. The

reliability coefficients for all the study variables were above 0.7, which is acceptable

according to George and Mallery’s criteria (2003). The range of the coefficients was

between good and excellent which signifies a high level of internal consistency of the

data collection instrument.

4.3 Descriptive Statistics

This section presents the descriptive statistics.

4.3.1 Age of the organization

The respondents were asked to indicate the range within which the age of their

organization fell. Results are presented in table 4.2.

Table 4.2: Distribution of organizations by age

Age of organizations Frequency Percent

0-25 years 27 50.9

26-50 years 15 28.3

51-75 years 2 3.8

76-100 years 7 13.2

More than 100 years 2 3.8

Total 53 100.0

The study was conducted in the financial services sector in Kenya with the

main focus being on commercial banks and insurance companies. Majority of

the institutions that responded, that is about 50% of them had been in existence

for up to 25 years. 28% of the respondents have been in operation for a period

between 26 years and 50 years as summarized in the table above. This is an

indication that majority of firms in the financial services sector are fully

61

established and therefore strive at increasing the market share or maintaining

the current market share.

4.3.2 Number of employees in the organization The questionnaire required respondents to indicate the number of employees in

their organization by ticking the appropriate range of number of employees in

the organization. The findings are presented in table 4.3.

Table 4.3: Number of employees in the organization

Number of employees Frequency Percent

0-200 27 50.9

201-400 9 17.0

401-600 3 5.7

601-800 3 5.7

801-1000 1 1.9

more than 1000 10 18.9

Total 53 100.0

Majority (68%) of the organizations had employees ranging between 0 and 400.

20% of the respondent organizations however could be categorized as very big

organizations having more than 1000 employees as summarized in table 4.2

above.

4.3.3 Ownership structure of the organizations The respondents were asked to indicate the ownership structure of their

organization by ticking the appropriate option. The findings are presented in

table 4.4.

62

Table 4.4: Ownership structure of the organizations

Ownership Structure Frequency Percent

Locally owned 33 62.3

foreign owned 2 3.8

combination of local and foreign 17 32.1

Other 1 1.9

Total 53 100.0

The respondent organizations were mainly either locally owned or a

combination of local and foreign ownership. Majority of the organizations were

locally owned (62%) while 32% of the organizations had a combination of local

and foreign ownership. Fully foreign owned organizations were less than 5% as

summarized in table 4.3 above. This may be explained by the government

policies and incentives that encourage setting up of local firms.

4.3.4 Proportion of ownership incase of joint venture The respondents were also asked to indicate the proportion of ownership incase

of a joint venture. The findings are presented in table 4.5.

Table 4.5: Distribution of firms by ownership

Proportion of ownership Frequency Percent

largely foreign owned 10 34.5

largely locally owned 14 48.3

equally owned 5 17.2

Total 29 100.0

For those in joint ventures, up to 50% had greater local shareholding with the

other half being either equally owned by local and foreign principals (17%) or

largely foreign owned (34%) as summarized in table 4.4 above. This could be

an indicator of government policies that advocate for joint ventures having a

larger local shareholding.

63

4.3.5 Value of assets owned by the organizations The questionnaire required respondents to indicate the value of assets owned by

their organization by ticking the appropriate range of value of assets. The

findings are presented in table 4.6.

Table 4.6: Classification of firms by value of assets owned

Value of assets Frequency Percent

0 to 2999.9 M 11 20.8

3000 TO 4999.9 M 8 15.1

ABOVE 5000 M 34 64.2

Total 53 100.0

Majority of the organizations (64%) controlled assets worth over 5 billion

Kenya shillings. 36% of the respondents however controlled assets worth less

than five billion Kenya shillings as summarized in table 4.6. This clearly

indicates that majority of firms in this sector are large and fully established.

4.3.6 Academic Qualifications The researcher quantified human capital on the basis of the academic

qualifications held by employees as an indicator of human capital through

human capital categorization, where certificate signified low human capital,

diploma signified average human capital, bachelors degree signified above

average human capital, masters degree and doctorate degree signified high

human capital.

Table 4.7: Academic qualifications held by employees in the last three years Academic Qualifications

Human Capital categorization

Frequency

Percentage

Certificate Low 2281 7.1% Diploma Average 6484 20.2% Bachelors degree

Above Average 17311 53.8%

Masters degree

High 3012 9.4%

Doctorate degree

High 3088 9.6%

64

Majority of employees in this sector (54%) are Bachelors degree holders. These

are the academic qualifications that have been held by majority of employees

within the last three years. About 9% and 10% of employees held masters

degree and doctorate degree respectively. It can be deduced that the level of

human capital in this sector considering the academic qualifications is above

average. This is presented in table 4.7 above.

4.3.7 Average length of service The researcher quantified human capital on the basis of length of service as an

indicator of human capital through human capital categorization, where 0-5

years signified low human capital, 6-15 years signified average human capital,

16-20 years signified above average human capital, and more than 20 years

signified high human capital.

Table 4.8: Classification of firms by average length of service Number of years Human capital categorization Frequency Percent

0-5 yrs Low 26 49.1 6-10 yrs Average 20 37.7 11-15 yrs Average 3 5.7 16-20 yrs Above Average 3 5.7 more than 20

yrs High

1 1.9

Total 53 100.0 In terms of employee experience in the sector, most of the employees (86%)

had less than 10 years of work experience. In 50% of the organizations

employees had less than five years work experience. Employees with between

6-10 years of experience could only be found in 38% of the organizations. Long

serving employees (more than 20 years) were less than 2% as summarized in

table 4.8 above. This clearly indicates that the financial services sector absorbs

a younger, vibrant and energetic workforce that would be capable of responding

swiftly to the changes that the external environment presents and the dynamic

business environment considering the volatility of this industry. A younger

work force may also cope easily with the work pressure and emerging trends in

65

this sector. The human capital in this sector, considering work experience

ranges from low to average.

4.3.8 Average job-related training workshops in a year The researcher quantified human capital on the basis of the number of job-

related training workshops conducted for employees in a year as an indicator of

human capital through human capital categorization, where 0-5 workshops

signified low human capital, 6-10 workshops signified average human capital,

and more than 10 workshops signified high human capital.

Table 4.9: Average job-related training workshops in a year

Number of job-

related training

workshops

Human

Capital

categorization

Frequency Percent

0-5 Low 49 92.5

6-10 Average 3 5.7

more than 10 High 1 1.9

Total 53 100.0

Majority (93%) of the respondent organizations conducted less than five job-

related training workshops for each employee in a year with 6% having

between 6 and 10 training sessions in a year per employee. This was

summarized in table 4.9 above. The human capital in this sector, considering

the average job-related training workshops attended by employees in a year is

low.

4.3.9 Average short courses attended in a year

The researcher quantified human capital on the basis of the number of short

courses attended by employees in a year as an indicator of human capital

through human capital categorization, where 0-5 short courses signified low

human capital, 6-10 short courses signified average human capital, and more

than 10 short courses signified high human capital.

66

Table 4.10: Average short courses attended in a year

Number of short

courses

Human Capital

categorization

Frequency Percent

0-5 Low 47 94.0

6-10 Average 2 4.0

more than 10 High 1 2.0

Total 50 100.0

Short courses attended by each employee in a year did not exceed five for most

(94%) of these organizations. Only 4% of the organizations scheduled between

6 and 10 short courses per year for each employee. This was summarized in

table 4.10 above. The human capital in this sector, considering the average

short courses attended by employees in a year is low.

4.3.10 Human capital

In this section, the researcher sought the respondents’ perception regarding the

various aspects defining human capital. The respondents were expected to

indicate to what extent they agreed to the various statements that defined

human capital variable. The responses were captured in a five point likert scale

(5= very large extent, 4= large extent, 3= moderate extent, 2= less extent and

1= not at all) and the general level of acceptance was determined by calculating

the means and standard deviation for the various statements as per the

responses and tabulated in descending order of means. The results were as

presented in table 4.11 below.

67

Table 4.11 : Means and standard deviations for measures of Human Capital

Human Capital Indicators N Mean Standard Deviation

organization considers academic qualifications during

selection 53 4.26 .836

organization keen on matching the right people with

the right job 53 4.25 .617

organization increases competence of workers by

providing training opportunities 52 4.19 .768

organization encourages employees to acquire

additional academic qualifications 54 4.19 .702

Training programs designed to meet the specific

training needs identified 53 4.17 .672

organization encourages employees to join professional

bodies 53 3.98 .772

Training needs assessment done regularly to reveal

training needs of individual employees 54 3.91 .759

Work experience is a key consideration during

selection 53 3.91 .815

organization encourages long tenure by rewarding

length of service 52 3.88 1.022

organization recognizes achievement of additional

academic qualifications through rewards 54 3.85 .833

employees obtain job related skills through

professional membership 51 3.69 .860

organization gives study leave to employees wishing to

pursue further studies 54 3.57 1.395

organization pays annual subscription fee for

employees who belong to professional bodies 54 3.54 1.299

organization has formal career development programs

in place 54 3.50 .966

organization sponsors its employees interested in

pursuing further studies 53 3.38 1.197

organization has mentorship programs aimed at

increasing job related skills 49 3.29 1.080

Grand Mean 3.85

68

The results indicate that organizations in the financial services sector consider

academic qualifications during selection (mean=4.26, standard deviation=

0.836), they are keen on matching the right people with the right job

(mean=4.25, standard deviation= 0.617), organizations increase competence of

workers by providing training opportunities (mean=4.19, standard deviation=

0.768), organizations encourage employees to acquire additional academic

qualifications (mean=4.19, standard deviation= 0.702) and that training

programs are designed to meet the specific training needs identified

(mean=4.17, standard deviation= 0.672). Some human capital practices were

not well embraced such as, organizations have formal career development

programs in place (mean=3.50, standard deviation= 0.966), organizations

sponsor employees interested in pursuing further studies (mean= 3.38, standard

deviation= 1.197) and that organizations have mentorship programs aimed at

increasing job related skills (mean=3.29, standard deviation= 1.080).

The results also indicate that there were some practices that were more visible

in some organizations but were not being felt to an appreciable extent or did

not exist in others. These practices included organizations encouraging long

tenure by rewarding length of service (standard deviation= 1.022), provision of

study leave to employees wishing to pursue further studies (standard deviation=

1.395), sponsorships for employees interested in pursuing further studies

(standard deviation= 1.197) and mentorship programs aimed at increasing job

related skills (standard deviation= 1.080).

The adoption of human capital practices obtained a grand mean of 3.85. This

signifies that the sector appreciates that employee performance highly depends

on job knowledge which can be measured by the knowledge and skills

possessed and the extent to which these match with the job. Intrinsic interest in

the job as well as job satisfaction is driven by job knowledge, which ultimately

translates into improved organizational performance. The sector is therefore

keen on achieving superior organizational outcomes through a high quality

69

workforce. A firm's human capital is an important source of sustained

competitive advantage (Hitt et al., 2001) and therefore investments in the

human capital of the workforce may increase employee productivity and

financial results (Black and Lynch, 1996; Pfeffer, 1998; Snell and Dean, 1992).

Organizations in the sector are also keen on increasing their human capital by

continuously upgrading the skills of the workers and encouraging them to

refresh their knowledge through further studies. Firms can increase their human

capital levels through human resource management practices related to

employee selection and training. Organizations can use selection to increase

their generic human capital, while focusing on training to develop firm-specific

human capital (Groot and Van Den Brink, 2000; Skaggs and Youndt, 2004). The

findings of the study are in line with existing literature which posits that human

capital can be increased through employee selection and training, and that

human capital is a source of competitive advantage.

4.3.11 Social capital

In this section, the researcher sought the respondents’ perception as regards the

various aspects of social capital. The respondents were asked to indicate to

what extent they agreed to the various statements that defined social capital

variable. These responses were also captured in a five point likert scale (5=

very large extent, 4= large extent, 3= moderate extent, 2= less extent and 1=

not at all) and the general level of acceptance was determined by calculating




70

Table 4.12: Means and standard deviations for measures of Social Capital

Social Capital Indicators N Mean Standard Deviation

organization shares the corporate goals with its employees

53 4.19 .652

organization encourages formation of cross functional teams comprising employees from different departments

53 4.04 .784

there is a high level of trust among teams in the organization

53 4.04 .678

organization obtains a lot of information from external social networks

53 4.02 .909

organization encourages sharing of information, ideas and knowledge among employees

53 3.94 .818

organization encourages sharing of information, ideas and knowledge between managerial and non managerial employees

53 3.92 .756

organization has established linkages with other firms 52 3.92 .904 organization shares a lot of information with its employees

52 3.92 .882

organization has successfully concluded deals previously facilitated by its employees

54 3.81 .933

organization has established linkages with the firms in other sectors

51 3.80 .775

organization seeks advice from external social networks 53 3.77 .974 organization obtains a lot of information from firms in other sectors

52 3.69 .897

organization shares a lot of information with its external social networks

53 3.66 .960

organization obtains a lot of information from employees through their social networks

52 3.62 1.051

organization has successfully concluded deals previously facilitated by its external social networks

54 3.61 1.071

organization obtains a lot of information from other firms

51 3.59 .898

organization has formed strategic alliances with other firms

53 3.58 .969

organization shares a lot of information with firms in other sectors

50 3.54 .994

organization shares a lot of information with other firms within the sector

53 3.38 .945

Grand Mean 3.79

71

The results indicate that respondents agreed that organizations share their

corporate goals with their employees (mean=4.19, standard deviation= 0.652),

they encouraged formation of cross functional teams comprising employees

from different departments (mean=4.04, standard deviation= 0.784), there was a

high level of trust among teams in the organizations (mean=4.04, standard

deviation= 0.678) and that organizations obtained a lot of information from

external social networks (mean=4.02, standard deviation= 0.909).

The following social capital practices were not well adopted. Organizations

obtained a lot of information from other firms (mean=3.59, standard deviation=

0.898), they formed strategic alliances with other firms (mean=3.58, standard

deviation= 0.969), shared a lot of information with firms in other sectors

(mean=3.54, standard deviation= 0.994) and shared a lot of information with

other firms within the sector (mean=3.38, standard deviation= 0.945). The

results also showed that practices that included organizations obtaining

information from employees through their social networks and successful

conclusion of deals previously facilitated by their external social networks were

more visible in some organizations but were less visible or did not exist in

other organizations.

The respondents were also asked to outline the number of deals that have been

successfully concluded in the last one year that resulted from external social

networks. The assumption made by the researcher was that 0-40 deals in a year

signified low social capital, 41-80 deals in a year signified moderate social

capital, while above 81 deals in a year signified high social capital. The results

obtained were as presented in table 4.13 below.

72

Table 4.13: Business deals completed through external social networks in the last

one year.

Number of

deals

Social Capital

Categorization Frequency Percent

0-20 Low 47 87.0

21-40 Low 1 1.9

41-60 Moderate 1 1.9


81-100 High 1 1.9

over 100 High 4 7.4

Total 54 100.0

The results indicated that majority (89%) of the respondent organizations

concluded less than 40 deals in a year, while only 11% concluded over 40 deals

in a year. It can be deduced that the social capital of the sector was low going

by the number of successfully concluded deals as a result of external social

networks. The indication is that despite the fact that organizations in the sector

tried to establish linkages and strategic alliances with other firms, not a lot of

resources were obtained as a result of such external social networks.

The respondents were also asked to outline the number of deals that have been

successfully concluded in the last one year that resulted from the employees.

The assumption made by the researcher was that 0-40 deals in a year signified

low social capital, 41-80 deals in a year signified moderate social capital, while

above 81 deals in a year signified high social capital. The results obtained were

as presented in table 4.14 below.

73

Table 4.14: Business deals concluded by employees in the last one year

Number of deals Social Capital

Categorization

Frequency Percent

0-20 Low 48 88.9

21-40 Low 0 0.0



81-100 High 0 0.0

over 100 High 4 7.4

Total 54 100.0

The results indicated that about 89% of the respondent organizations concluded

below 40 deals in a year, while only 11% concluded over 60 deals in a year. It

can be deduced that the social capital of the sector was low going by the

number of successfully concluded deals as a result of employees.

The adoption of social capital practices by organizations in the financial

services sector obtained a grand mean of 3.79. This is a clear indicator of

appreciation that high social capital can lead to superior organizational

outcomes through the resources and information obtained from the social

networks established. At the individual level, social capital can influence career

success and the creation of human capital (Burt, 1992; Zhang, 1999). At the

inter- and intra-firm level, social capital can facilitate inter-unit resource,

including information exchange and product innovation. Many studies (Gabbay

and Zuckerman, 1998; Hansen, 1998; Chong and Gibbons, 1997; Baker, 1990;

Gerlach, 1992; Murphy, 2002) found that social capital may reduce transaction

costs, enhance cooperation, facilitate entrepreneurship and formation of start-

up companies, and strengthen supplier relations, regional production networks,

and inter-firm learning. Social capital is a key driver of sales performance,

especially in knowledge intensive contexts (Üstüner, 2005). With the rise of the

networked economy, the ability to build social capital across networks becomes

74

critical (Lesser, 2000). However, this sector does not seem to be doing very

well in terms of obtaining resources through the social networks established.

Resources obtained in the form of the number of successfully concluded deals

as a result of both internal and external social networks seem to be low.

4.3.12 Employee empowerment


various aspects defining employee empowerment. The respondents expected to


employee empowerment variable. These responses were captured in a five point

likert scale (5= very large extent, 4= large extent, 3= moderate extent, 2= less

extent and 1= not at all) and the general level of acceptance was determined by

calculating the means and standard deviation for the various statements as per

the responses and tabulated in descending order of means. The results were as


75

Table 4.15: Means and standard deviations for measures of Employee

Empowerment

Employee Empowerment Indicators N Mean

Standard

Deviation

organization provides employees with adequate

resources to do their work 54 4.24 .725

employees are provided with an opportunity to learn

on their jobs 54 4.22 .604

supervisors communicate relevant job information to

their subordinates 54 4.20 .711

authority is delegated equal to the level of

responsibility 54 4.17 .637

organization values the contribution ofemployees 53 4.13 .785

employees are encouraged to believe in themselves 53 4.09 .861

supervisors help their subordinate to set meaningful

goals 54 4.07 .669

employees are allowed to exercise control over their

work 53 4.02 .571

employees are allowed to make decisions that they

can handle 53 3.98 .747

supervisors recognize and reward performance 52 3.98 .754

supervisors inspire their subordinates to do more

than they think they can 54 3.93 .773

organizational leadership responds to employee

suggestions without defensiveness and negativity 54 3.91 .853

supervisors have established trust and credibility in

their subordinates 53 3.89 .891

employees are encouraged to openly express their

feeling and concerns 52 3.87 .991

employees are given freedom and flexibility to

experiment 53 3.70 .952

employees' input is sought before major decisions

that affect them are made 54 3.50 1.023

Grand Mean 3.99

76

The results indicate that respondents generally agreed that organization

provides employees with adequate resources to do their work (mean=4.24,

standard deviation= 0.725), employees are provided with an opportunity to

learn on their jobs (mean=4.22, standard deviation= 0.604), supervisors

communicate relevant job information to their subordinates (mean=4.20,

standard deviation= 0.711), authority is delegated equal to the level of

responsibility(mean=4.17, standard deviation= 0.637), organization values the

contribution of employees (mean=4.13, standard deviation= 0.785), employees

are encouraged to believe in themselves (mean=4.09, standard deviation=

0.861), supervisors help their subordinates to set meaningful goals (mean=4.07,

standard deviation= 0.669) and that employees are allowed to exercise control

over their work (mean=4.02, standard deviation= 0.571).

Some of the employee empowerment practices that were not very well

embraced included: Employees are encouraged to openly express their feelings

and concerns (mean=3.87, standard deviation= 0.991), employees are given

freedom and flexibility to experiment (mean=3.70, standard deviation= 0.952)

and that employees' input is sought before major decisions that affect them are

made (mean=3.50, standard deviation= 1.023). The practice of seeking

employee input before making major decisions that affect them was more

visible in some organizations but in others it was less visible or did not exist at

all.

The adoption of practices regarding employee empowerment obtained a grand

mean of 3.99. Organizations in this sector seem to have empowered their

employees highly. This high level of employee empowerment has facilitated

swift responses to the dynamic nature of the environment within which this

sector operates. This kind of flexibility is critical for survival of firms in this

sector. The organizational structures within this sector seem to be leaner, hence

a high level of decentralization which is evident from delegation of authority

There is also evidence of effective performance management systems in place

77

because there is joint goal setting between supervisors and subordinates, and

there is a two way communication system characterized by honest and frank

discussions between supervisors and subordinates. Employees seem to be

involved in strategy formulation where their input is sought. This contributes to

building a sense of ownership among employees, hence commitment in helping

the organization get to its desired future. The findings thus agree with existing

literature that contends that giving employees a say in company direction is

important as it saves employers money and builds a sense of ownership among

workers. Contributions by engaged employees are believed to have a significant

impact on business productivity, revenue and the organization's overall

effectiveness. People have a fundamental need to contribute to the firm's

success and see the tangible results of their work. By fostering a culture of

involvement, firms can engage employees at all levels in the business of

achieving quality service, increased productivity, and realized purpose

(Cameron, 2010).

4.3.13 Quality of decisions

In this section, the researcher sought the respondents’ perception regarding the

various aspects defining quality of decisions. The respondents were asked to


quality of decisions. These responses were also captured in a five point likert

scale (5= very large extent, 4= large extent, 3= moderate extent, 2= less extent

and 1= not at all) and the general level of acceptance determined by calculating




78

Table 4.16: Means and standard deviations for measures of Quality of Decisions

Quality of Decisions Indicators N Mean

Standard

Deviation

strategic decisions are made by top management 54 4.46 .636

strategic decisions are aligned to the strategic plan 54 4.37 .681

strategic decisions are made after careful analysis of

the external environment 54 4.30 .743

top management monitors the progress of strategic

decisions 53 4.25 .731

top management analyzes all alternatives carefully

before making strategic decisions 54 4.22 .718

strategic decisions are made after careful analysis of

all internal organizational factors 52 4.13 .768

all departments are involved in the implementation

of strategic decisions 54 4.09 .807

top management relies on information from all its

stakeholders when making decisions 54 4.02 .739

top management relies on information from

regulatory authorities when making decisions 52 4.00 1.010

views of all strategic departments are considered

when strategic decisions are being made 54 3.98 .812

top management relies on information from its

customers when making decisions 54 3.91 .853

views of all organizational stakeholders are

incorporated in the decisions 53 3.91 .861

strategic proposals prepared by top management are

ratified by other levels of management 54 3.89 .883

top management relies on information from its

employees when making decisions 54 3.63 .896

Grand Mean 4.08

79

The results indicate that respondents generally agreed that strategic decisions

are made by top management (mean=4.46, standard deviation= 0.636), strategic

decisions are aligned to the strategic plan(mean=4.37, standard deviation=

0.681), strategic decisions are made after careful analysis of the external

environment (mean=4.30, standard deviation= 0.733), top management

monitors the progress of strategic decisions (mean=4.25, standard deviation=

0.731), top management analyzes all alternatives carefully before making

strategic decisions (mean=4.22, standard deviation= 0.718), strategic decisions

are made after careful analysis of all internal organizational factors

(mean=4.13, standard deviation= 0.768), all departments are involved in the

implementation of strategic decisions (mean=4.09, standard deviation= 0.807),

top management relies on information from all its stakeholders when making

decisions (mean=4.02, standard deviation= 0.739) and that top management

relies on information from regulatory authorities when making decisions

(mean=4.00, standard deviation= 1.010).

Some quality of decisions practices that were not well embraced included:

Strategic proposals prepared by top management are ratified by other levels of

management (mean=3.89, standard deviation= 0.883) and that top management

relies on information from its employees when making decisions (mean=3.63,

standard deviation= 0.896).

The adoption of practices regarding quality of decisions obtained a grand mean

of 4.08. This inclusive nature of decision making is necessary because of the

volatility of the environment in which this sector operates. Strategic decisions

may need to be modified to incorporate any major environmental changes that

may affect the implementation of the strategic plan. The sector is keen on

enhancing the quality of decisions made because this has got an impact on

organizational performance. Strategic decisions have important consequences

for organizational performance and are often the result of the involvement of

actors both from inside as well as outside the organization (McKenzie et al.,

80

2009). Quality in management decision making is vital for any organization.

Strategic decision-making is essential to firm performance. Decision quality is

based on the thoroughness with which all relevant leadership and technical

issues are considered. Making a good decision involves making trade-offs

between multiple objectives to select an alternative that best meets the values

of the decision maker (Delano, Parnell, Smith and Vance, 2000). The findings

on quality of decisions attributes embraced by organizations in this sector are

therefore in line with existing literature.

4.3.14 Non-financial performance


various aspects defining non financial performance. The respondents were

expected to indicate to what extent they agreed to the various statements that

defined non-financial performance. These responses were also captured in a

five point likert scale (5= very large extent, 4= large extent, 3= moderate

extent, 2= less extent and 1= not at all) and the general level of acceptance

determined by calculating the means and standard deviation for the various

statements as per the responses and tabulated in descending order of means.

The results were as presented in table 4.17 below.

81

Table 4.17: Means and standard deviations for measures of Non-financial

performance

Non-financial Performance Indicators N Mean

Standard

Deviation

there are customers that have done business with the

organization for a period of over five years 52 4.54 .641

there are mechanisms to ensure that customer

complaints are resolved to their satisfaction 53 4.42 .663

there are established mechanisms through which

customers can channel their complaints 53 4.36 .787

customer complains are processed within a reasonable

period of time 52 4.31 .701

organization provides high quality services 53 4.30 .696

there is a customer care section in the organization 53 4.28 .907

the organization is very efficient in service delivery 53 4.25 .705

the quality of service has improved tremendously

within the last three years 51 4.24 .737

considerable number of customers are referred to buy

products in the organization by existing customers 53 4.21 .793

there are mechanisms in place to ensure continuous

improvement in service quality 52 4.12 .704

organization obtains frequent feedback from customers

about the quality of services provided 53 4.06 .691

based on the reports of the last customer satisfaction

survey, customers are satisfied with the services

provided

51 3.90 .922

there is a very active quality control section in the

organization 52 3.85 1.055

Customer satisfaction surveys are carried out

frequently 53 3.75 1.108

The results indicate that respondents generally agreed that there are customers

that have done business with the organization for a period of over five years

(mean=4.54, standard deviation= 0.641), there are mechanisms to ensure that

customer complaints are resolved to their satisfaction (mean=4.42, standard

82

deviation= 0.663), there are established mechanisms through which customers

can channel their complaints (mean=4.36, standard deviation= 0.787), customer

complains are processed within a reasonable period of time (mean=4.31,

standard deviation= 0.701), organization provides high quality services

(mean=4.30, standard deviation= 0.696), there is a customer care section in the

organization (mean=4.28, standard deviation= 0.907), the organization is very

efficient in service delivery(mean=4.25, standard deviation= 0.705), the quality

of service has improved tremendously within the last three years (mean=4.24,

standard deviation= 0.737), considerable number of customers are referred to

buy products in the organization by existing customers (mean=4.21, standard

deviation= 0.793), there are mechanisms in place to ensure continuous

improvement in service quality (mean=4.12, standard deviation= 0.704) and

that organization obtains frequent feedback from customers about the quality of

services provided (mean=4.06, standard deviation= 0.691).

There were some non-financial indicators of firm performance that were not

embraced such as, based on the reports of the last customer satisfaction survey

customers are satisfied with the services provided (mean=3.90, standard

deviation= 0.922), there is a very active quality control section in the

organization (mean=3.85, standard deviation= 1.055) and that customer

satisfaction surveys are carried out frequently (mean=3.75, standard deviation=

1.108). From the results also, some organizations have active quality control

sections and carry out satisfaction surveys frequently while in some

organizations, respondents felt that these practices were less visible or did not

exist at all.

The results were further categorized based on the three indicators of non-

financial performance. These were categorized as quality of service, customer

satisfaction and efficiency in service delivery. The grand means were

calculated and used to evaluate how the various indicators faired. The results

were as presented in the tables below.

83

Table 4.18: Means and standard deviations for measures of Quality of Service

Quality of Service Indicators N Mean Standard Deviation

organization provides high quality services 53 4.30 .696

the quality of service has improved

tremendously within the last three years 51 4.24 .737

there are mechanisms in place to ensure

continuous improvement in service quality 52 4.12 .704

organization obtains frequent feedback from

customers about the quality of services

provided

53 4.06 .691

there is a very active quality control section in

the organization 52 3.85 1.055

Grand mean 4.11

Table 4.19: Means and standard deviations for measures of Customer Satisfaction

Customer Satisfaction Indicators N Mean Standard Deviation

there are customers that have done business

with the organization for a period of over five

years

52 4.54 .641

there are mechanisms to ensure that customer

complaints are resolved to their satisfaction 53 4.42 .663

there are established mechanisms through which

customers can channel their complaints 53 4.36 .787

there is a customer care section in the

organization 53 4.28 .907

considerable number of customers are referred

to buy products in the organization by existing

customers

53 4.21 .793

based on the reports of the last customer

satisfaction survey, customers are satisfied with

the services provided

51 3.90 .922

Customer satisfaction surveys are carried out

frequently 53 3.75 1.108

Grand mean 4.21

84

Table 4.20: Means and standard deviations for measures of Efficiency in Service

Delivery

Efficiency in Service Delivery Indicators N Mean

Standard

Deviation

Customer complains are processed within a

reasonable period of time 52 4.31 .701

the organization is very efficient in service

delivery 53 4.25 .705

Grand mean 4.28

Based on the evaluation as presented in table 4.18, 4.19 and 4.20, efficiency in

service delivery faired better than the rest (mean= 4.28), followed by customer

satisfaction (mean=4.21) and then quality of service (mean= 4.11).

Organizations in this sector are customer-focused hence are keen on ensuring a

high level of customer satisfaction, service quality and greater efficiency in

service delivery. This is because the sector depends a lot on repeat business as

well as referrals through established networks. Satisfying customers is critical

to a firm's success. Firms that cannot satisfy their customers are likely to lose

market share to rivals who offer better products and service at lower prices.

Fornell (2001) posits that satisfied customers may be the most consequential of

all economic assets; indeed, they may be proxies for all other economic assets

combined. More broadly, customers are a key stakeholder group that affects the

legitimacy and long-term survival of the firm (Post et al., 2002). Researchers

have found a positive relationship between a firm's own customer satisfaction

and its performance (Capon et al., 1990; Rust and Zahorik, 1993; Simon et al.,

2009). Several studies have considered the relationship between customer

satisfaction and firm performance. The results generally show that customer

satisfaction provides economic benefits to the firm. For example, customer

satisfaction has been linked to increased revenues (Rust et al., 1995; Gómez et

al., 2004; Simon et al., 2009), more inelastic demand (Anderson, 1996),

85

reduced costs of attracting new customers, and other costs associated with poor

quality, defects, and complaints (Anderson et al., 1997). Reflecting these

benefits, customer satisfaction has been found to increase a firm's profitability

(Capon et al., 1990; Aaker and Jacobson1994 Anderson et al., 1994) and its

market value (Aaker and Jacobson, 1994; Ittner and Larker, 1998).

Achieving high quality of customer service has become increasingly critical in

the service industry and been the focus of the study by the practitioners.

Managers are under tremendously increased pressure to enhance service quality

by every means so that not only existing customers remain loyal but also new

customers will become existing ones. Customers tend to reward those

companies who can provide or exceed their service expectations. Consequently,

the level and quality of service a firm provides has a tremendous impact on its

long-term market share and profitability (Yang and Chen, 2000). Service

quality is a pervasive strategic force and a key strategic issue in any

organization. In today’s competitive environment, rendering quality service is a

key for success, and many experts concur that the most powerful competitive

tool currently reshaping marketing and business strategy is service quality.

Over the years service quality has been linked with increased profitability and

is seen as providing an important competitive advantage by generating repeat

sales, positive word of mouth feedback, customer loyalty and competitive

product and service differentiation (Kimani, Kagira and Kendi, 2011).

86

4.4 Tests of the Hypotheses

4.4.1 Introduction

This study sought to establish the influence of human capital on firm

performance and the effect of social capital, employee empowerment and

quality of decisions on this influence. The tests were carried out using simple

regression analysis, multiple regression analysis, correlation analysis and step

wise regression analysis. The tests were done at 5% significance level (α =

0.05). The evaluation focused on the hypotheses derived from the objectives of

the study.

To test the hypotheses, it was necessary to compute composite scores for

variables that had several measures. In this regard, overall non-financial

measures of firm performance (quality of service, customer satisfaction and

efficiency in service delivery) were collapsed into one composite index.

Similarly, composite scores were calculated to represent the responses to the

various attributes that defined human capital, social capital, employee

empowerment and quality of decisions, which were used as input to the

evaluation. The outline and the results from the evaluation were as discussed

below:

4.4.2 Human Capital and Firm performance

The first objective of this study was to establish the influence of human capital

on the performance of the target organizations. This objective informed

hypothesis 1: Human capital has a significant influence on Firm performance.

H1a: Human Capital has a significant influence on non-financial firm

performance

Hypothesis 1a sought to establish the influence of human capital on non-

financial firm performance. This hypothesis was tested by regressing human

capital on non-financial firm performance guided by the equation Y= β0+β1X

87

where X represented human capital and Y denoted non-financial firm

performance. The results of the regression are presented in table 4.21 below.

Table 4.21: Regression results for the influence of Human Capital on Non-financial

Performance

Model Summary

Model R R

Square Adjusted R

Square Std. Error of the

Estimate 1 .391 .153 .129 .101316

ANOVA

Model Sum of Squares Df

Mean Square F Sig.

1 Regression .067 1 .067 6.494 .015 Residual .370 36 .010 Total .436 37

Coefficients

Model Unstandardized

Coefficients Standardized Coefficients T Sig.

B Std.

Error Beta 1 (Constant) .452 .147 3.065 .004 Human

capital .473 .186 .391 2.548 .015

Predictors: (Constant), human capital computed as a composite Dependent Variable: non financial performance computed as a composite

The results presented in table 4.21 show that the influence of human capital on

non-financial firm performance was significant (F = 6.494, p < 0.05). From the

table, 15% of the variation in non-financial firm performance was explained by

variation in human capital (R square =.153, p < 0.05). β was also statistically

significant (β = 0.473, t= 2.548, p < 0.05). Overall, regression results presented

in table 4.22 indicate that human capital has positive effect on non-financial

firm performance.

88

The hypothesis that human capital influences firm performance was therefore

confirmed for non-financial performance indicators. As human capital

increases, non-financial firm performance increases too.

The influence of human capital on financial performance was measured using

return on assets and return on equity. The indicators were calculated for a three

year period based on information from the financial statements filed with the

Central Bank of Kenya and the Insurance Regulatory Authority. An average of

the three year period was taken and used as the indicator for financial

performance. Regression model used is similar to the one used for non-financial

indicators as the dependent variable. The regression results for the influence of

human capital on return on assets and the influence of human capital on return

on equity are presented in table 4.23 and 4.24 respectively.

H1b: Human Capital has a significant influence on Return on Assets

The influence of human capital on return on assets was tested and the results

were as presented in table 4.22 below.

Table 4.22: Regression results for the effect of Human Capital on Return on Assets

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .070 .005 -.019 .0547020 ANOVA

Model Sum of Squares Df Mean Square F Sig.

1 Regression .001 1 .001 .204 .654 Residual .126 42 .003 Total .126 43

Coefficients(a)



B Std. Error Beta 1 (Constant) -.005 .070 -.065 .948 Human capital

.040 .089 .070 .452 .654

Predictors: (Constant), human capital Dependent Variable: return on assets

89

The results presented in table 4.22 indicate that the effect of human capital on

Return on Assets was not significant (R Square = 0.005, F= .204, p >0.05). The

test results indicated that less than 1 % of variation in Return on Assets could

be explained by variation in human capital, which was not significant (p >

0.05). The β was not significant (β = 0.040, t= 0.452, p > 0.05). The evidence

therefore indicated that the model could not be used in explaining the influence

of human capital on return on assets of the firm.

H1c: Human Capital has a significant influence on Return on Equity

The influence of human capital on return on equity was also tested and the

results were as presented in table 4.23 below.

Table 4.23: Human Capital and Return on Equity

Model R R

Square Adjusted R

Square Std. Error of the Estimate 1 .087 .008 -.016 .2039073

ANOVA


Mean Square F Sig.

1 Regression .013 1 .013 .318 .576 Residual 1.746 42 .042 Total 1.760 43

Coefficients



B Std.


capital -.188 .333 -.087 -.564 .576

Predictors: (Constant), human capital computed as a composite Dependent Variable: return on equity

The results presented in table 4.23 show that the effect of human capital on

Return on Equity was not significant (R Square = 0.008, F= .318, p >0.05). The

test results indicated that less than 1 % of the variation in Return on Equity

could be explained by variation in human capital, which was not significant (p

> 0.05). The β was also not significant (β = -.188, t= -0.564, p > 0.05). The

90

evidence therefore indicated that the model could not be used in explaining the

effect of human capital on Return on Equity.

4.4.3 Human Capital and Quality of Decisions

The second objective of the study sought to establish the relationship between

human capital and quality of decisions, which informed this hypothesis:

H2: There is a significant relationship between human capital and quality of

decisions

The scores for human capital and quality of decisions were subjected to a

correlation test and the results are as presented in table 4.24 below.

Table 4.24: Correlation between Human Capital and Quality of Decisions

human

capital

quality of

decisions

Pearson

Correlation 1 .449(**)

Sig. (2-tailed) . .003

human capital

N 44 41

Pearson

Correlation .449(**) 1

Sig. (2-tailed) .003 .

quality of

decisions

N 41 49

** Correlation is significant at the 0.01 level (2-tailed). As presented in table 4.24 above, the results showed a positive and moderate

relationship between human capital and quality of decisions (R = 0.449) that

was statistically significant (p < 0.05).

The hypothesis that there is a significant relationship between human capital

and quality of decisions was therefore confirmed.

91

4.4.4 Quality of Decisions and Firm Performance

Objective three sought to establish the influence of quality of decisions on the

performance of the financial services sector. This objective informed

Hypothesis 3: Quality of decisions influences firm performance.

H3a: Quality of Decisions has a significant influence on Return on Assets

The influence of quality of decisions on return on assets was tested and the

results were as presented in table 4.25 below.

Table 4.25: Quality of Decisions on Return on Assets

Model R R Square Adjusted R Square Std. Error of the

Estimate 1 .100 .010 -.011 .0575888

ANOVA


Mean Square F Sig.

1 Regression

.002 1 .002 .470 .496

Residual .156 47 .003 Total .157 48

Coefficients


Coefficients

Standardized

Coefficients t Sig.

B Std.

Error Beta 1 (Constant) -.016 .064 -.252 .802 quality of

decisions .053 .078 .100 .686 .496

Predictors: (Constant), quality of decisions Dependent Variable: return on assets The results presented in table 4.25 above indicate that the effect of quality of

decisions on Return on Assets was not significant (R Square = 0.010, F= .470, p

>0.05). The test results indicated that 1 % of variation in Return on Assets

could be explained by variation in quality of decisions, which was not

significant (p > 0.05). The β was not significant (β = 0.053, t= 0.686, p > 0.05).

92

The evidence therefore indicated that the model could not be used in explaining

the influence of quality of decisions on return on assets of the firm.

H3b: Quality of Decisions has a significant influence on Return on Equity

The influence of quality of decisions on return on equity was also tested and

the results were as presented in table 4.26 below.

Table 4.26: Quality of Decisions on Return on Equity


Estimate 1 .009 .000 -.021 .2228169

ANOVA

Model Sum of Squares df

Mean Square F Sig.

1 Regression .000 1 .000 .004 .950 Residual 2.333 47 .050 Total 2.334 48

Coefficients


Coefficients

Standardized

Coefficients t Sig.

B Std.

Error Beta 1 (Constant) .135 .248 .544 .589 quality of

decisions .019 .302 .009 .063 .950

Predictors: (Constant), quality of decisions Dependent Variable: return on equity The results presented in table 4.26 above indicate that the effect of quality of

decisions on Return on Equity was not significant (R Square = 0.000, F= .004,

p >0.05). The test results indicated that variation in Return on Equity could not

be explained by variation in quality of decisions. The β was not significant (β =

0.019, t= 0.063, p > 0.05). The evidence therefore indicated that the model

could not be used in explaining the influence of quality of decisions on return

on equity of the firm.

93

H3c: Quality of Decisions has a significant influence on Non-Financial

Firm Performance

Non-financial firm performance was regressed against the score for quality of

decisions guided by the linear equation Y= β0+β1X where X represented quality

of decisions and Y denoted non-financial firm performance. The results were as

presented in the table below.

Table 4.27: Quality of Decisions and Non-Financial Firm Performance

Model Summary


1 .661 .437 .423 .084422

ANOVA


Mean

Square F Sig.

1 Regression .221 1 .221 31.042 .000

Residual .285 40 .007

Total .506 41

Coefficients

Model

Unstandardized

Coefficients

Standardized

Coefficients T Sig.

B

Std.

Error Beta

1 (Constant) .281 .099 2.834 .007

quality of

decisions .673 .121 .661 5.571 .000

Predictors: (Constant), quality of decisions computed as a composite

Dependent Variable: non financial performance computed as a composite

The results presented in table 4.27 show that the influence of quality of

decisions on non-financial firm performance was significant (R Square = 0.437,

F = 31.042, p < 0.05) with 44% of the variation in non-financial firm

94

performance being explained by variation in quality of decisions. The β was

also statistically significant (β = 0.673, t= 5.571, p < 0.05). The hypothesis that

quality of decisions influences firm performance was therefore confirmed

because there was a statistically significant influence of quality of decisions on

non-financial firm performance.

4.4.5 Human Capital, Social Capital and Firm Performance

The aim of the fourth objective was to establish whether the influence of human

capital on firm performance is moderated by social capital. This informed the

hypothesis below.

H4a: The influence of human capital on return on assets is moderated by

social capital

The Baron and Kenny approach in testing for moderation was employed for the

purposes of this study guided by the equation:

Y= β0+β1X+β2Z+β3XZ

Where X= Independent variable (human capital)

Z= Moderator (social capital)

XZ= Product of the standardized scores for the independent variable and

the moderator

Y= Return on Assets

A z –score specifies the precise location of each value within a distribution.

The sign of the z-score signifies whether the score is above the mean (positive)

or below the mean (negative). The numerical value of the z-score specifies the

distance from the mean by counting the number of standard deviations between

X and µ .

The z –score is calculated as:

Ζ = X- µ

σ

Z = the standardized score

X = the X value

95

µ= the mean of the distribution

σ= the standard deviation of the distribution.

The resultant scores give a distribution that has a mean score of zero and a

standard deviation of one.

The above hypothesis would be supported if the effect of the interaction

between human capital and social capital (XZ) on return on assets is

statistically significant. The regression analysis based on the standardized

scores for the independent and moderating variables yielded the results



influence of Human Capital on Return on Assets

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate 1 .323 .104 .025 .0572288

ANOVA

Model Sum of Squares df Mean Square F Sig. 1 Regression .013 3 .004 1.317 .285 Residual .111 34 .003 Total .124 37

Coefficients



B Std.

Error Beta 1 (Constant) -.025 .080 -.319 .751 human capital -.153 .141 -.256 -1.084 .286 social capital .217 .113 .484 1.926 .062 XZ .005 .009 .095 .534 .597

Predictors: (Constant), XZ (product of Zscore human capital and Zscore social capital), human capital, social capital Dependent Variable: return on assets

96

The results presented in table 4.28 indicate that the influence of human capital

on return on assets is not affected by social capital (R Square = 0.104, F =

1.317, p > 0.05). The β depicting the coefficient for the interaction (XZ) was

also not significant (β = 0.05, t= 0.534, p> 0.05), therefore not supporting the

condition for moderation which states that the effect of the interaction between

human capital and social capital (XZ) on firm performance should be

statistically significant. The hypothesis that the influence of human capital on

return on assets is moderated by social capital was therefore not confirmed.

H4b: The influence of human capital on return on equity is moderated by

social capital

Hypothesis 4b sought to establish whether the influence of human capital on

return on equity is moderated by social capital. The Baron and Kenny approach

in testing for moderation was employed for the purposes of this study guided by

the equation:




XZ= Product of the standardized scores for the independent variable and

the moderator

Y= Return on Equity

The moderator hypothesis would be supported if the interaction XZ in

predicting return on equity would yield a statistically significant coefficient.

The regression analysis based on the standardized scores for the independent

and moderating variables yielded the results presented in table 4.29 below.

97


influence of Human Capital on Return on Equity

Model Summary


Estimate 1 .177 .031 -.054 .2177339

ANOVA

Model Sum of Squares Df Mean Square F Sig. 1 Regression .052 3 .017 .367 .777 Residual 1.612 34 .047 Total 1.664 37

Coefficients



B Std. Error

Beta

1 (Constant) .215 .304 .707 .484 human capital -.525 .537 -.240 -.979 .335 Social capital .411 .428 .251 .960 .344 XZ .011 .035 .060 .326 .746 Predictors: (Constant), XZ (product of Zscore human capital and Zscore social capital), human capital, social capital Dependent Variable: return on equity The results presented in table 4.29 indicate that the influence of human capital

on return on equity is not affected by social capital (R Square = 0031, F =

0.367, p > 0.05). The β depicting the coefficient for the interaction (XZ) was

also not significant (β = 0.011, t= 0.326, p> 0.05), therefore not supporting the

condition for moderation which states that the effect of the interaction between

human capital and social capital (XZ) on return on equity should be statistically

significant. The hypothesis that the influence of human capital on return on

equity is moderated by social capital was therefore not confirmed.

98

H4c: The influence of human capital on Non-financial Firm Performance

is moderated by social capital

Hypothesis 4c sought to establish the moderating effect of social capital on the

influence of human capital on non-financial firm performance. The Baron and

Kenny (1986) approach in testing for moderation was employed for the

purposes of this study guided by the equation:



β = Coefficient of variation


XZ= Product of the standardized scores for the independent variable

(human capital) and the moderator (social capital)

Y= Non-Financial Firm performance

The hypothesis would be supported if the effect of the interaction between

human capital and social capital (XZ) on non-financial firm performance is




99


influence of Human Capital on non-financial Firm Performance

Model Summary


ANOVA


Mean Square F Sig.


Coefficients



B Std.

Error Beta 1 (Constant) .428 .148 2.894 .007 human capital (X)

.184 .242 .159 .758 .455

social capital (Z) .332 .194 .367 1.708 .098

XZ -.017 .017 -.171

-1.054

.301

Predictors: (Constant), product of Z score human capital and Z score social capital, human capital , social capital Dependent Variable: non financial performance


on non-financial firm performance was significantly affected by social capital

(R Square = 0.293, F = 4.012, p < 0.05). The β depicting the coefficient for the

interaction (XZ) was however not significant (β = -.017, t= -1.054, p> 0.05),

therefore not supporting the condition for moderation which states that the

effect of the interaction between human capital and social capital (XZ) on firm

performance should be statistically significant. The hypothesis that the

influence of human capital on non-financial firm performance is moderated by

social capital was therefore not confirmed.

100

4.4.6 Human Capital, Employee Empowerment and Firm Performance

Objective five of the study sought to establish whether the influence of human

capital on firm performance was moderated by employee empowerment. This

informed hypothesis five below.

H5a: The influence of human capital on return on assets is moderated by

employee empowerment

The Baron and Kenny approach used in hypothesis four was also employed in

testing this hypothesis guided by the equation:


Where X= the independent variable (human capital)


Z= moderator (Employee Empowerment)

XZ= product of the standardized scores for the independent variable

(human capital) and the moderator (employee empowerment)

Y= Return on Assets


human capital and employee empowerment (XZ) on Return on Assets is




101


Empowerment on the influence of Human Capital on Return on Assets

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate 1 .084 .007 -.080 .0513796

ANOVA

Model Sum of Squares df Mean Square F Sig. 1 Regression .001 3 .000 .081 .970 Residual .090 34 .003 Total .090 37

Coefficients


Coefficients Standardized Coefficients t Sig.

B Std.

Error Beta 1 (Constant) -.009 .082 -.107 .916 human capital -.005 .112 -.010 -.048 .962 Employee

empowerment .043 .098 .097 .436 .666

XZ .001 .010 .025 .131 .896

Predictors: (Constant), XZ (product of Zscore human capital and Zscore employee empowerment), human capital, employee empowerment Dependent Variable: return on assets The results as presented in table 4.31 show that the influence of human capital

on Return on Assets is not affected by employee empowerment (R Square =

0.007, F = 0.081, p > 0.05). The β depicting the coefficient for the interaction

(XZ) was also not significant (β = 0.001, t= 0.131, p> 0.05), therefore not

supporting the condition for moderation which states that the effect of the

interaction between human capital and employee empowerment (XZ) on firm

performance should be statistically significant. The hypothesis that the

influence of human capital on firm performance is moderated by employee

empowerment was therefore not confirmed.

102

H5b: The influence of human capital on return on equity is moderated by

employee empowerment

Hypothesis 5b sought to establish whether the influence of human capital on

return on equity is moderated by employee empowerment. The Baron and

Kenny approach used in hypothesis four was also employed in testing this

hypothesis, guided by the equation:




XZ= product of the standardized scores for the independent variable and

the moderator

Y= return on equity

The outcome of the regression analysis was as presented in the table below.

Table 4.32: Regression results for the moderating effect of Employee

Empowerment on the influence of Human Capital on Return on Equity

Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate

1 .092 .009 -.079 .2175169 ANOVA

Model Sum of Squares df Mean Square F Sig. 1 Regression .014 3 .005 .098 .961 Residual 1.609 34 .047 Total 1.623 37

Coefficients



B Std. Error Beta 1 (Constant) .241 .348 .693 .493 human capital -.067 .475 -.030 -.141 .888 Employee

empowerment -.082 .415 -.044 -.198 .844

XZ .009 .043 .041 .216 .830

Predictors: (Constant), XZ (product of Zscore human capital and Zscore employee empowerment), human capital, employee empowerment Dependent Variable: return on equity

103


on return on equity is not affected employee empowerment (R Square = 0.009,

F = 0.098, p > 0.05). The β depicting the coefficient for the interaction (XZ)

was also not significant (β = 0.009, t= 0.216, p> 0.05), therefore not supporting

the condition for moderation which states that the effect of the interaction

between human capital and social capital (XZ) on return on equity should be

statistically significant. The hypothesis that the influence of human capital on

return on equity is moderated by employee empowerment was therefore not

confirmed.

H5c: The influence of human capital on Non-financial Firm Performance

is moderated by employee empowerment

Hypothesis 5c sought to establish whether the influence of human capital on

non-financial firm performance was moderated by employee empowerment.

This hypothesis was tested using the following regression equation:





XZ= product of the standardized scores for the independent variable

(human capital) and the moderator (employee empowerment)

Y= Non-financial firm performance


human capital and employee empowerment (XZ) on firm performance is




104


Empowerment on the influence of Human Capital on Non-financial Firm

Performance

Model Summary


1 .557 .310 .227 .094075

ANOVA

Model Sum of Squares df Mean Square F Sig. 1 Regression .099 3 .033 3.742 .024 Residual .221 25 .009 Total .321 28

Coefficients



B Std.

Error Beta 1 (Constant) .425 .177 2.404 .024 human capital

.057 .249 .048 .227 .822

Social capital .460 .214 .491 2.151 .041

XZ -.007 .021 -.066 -.351 .728

Predictors: (Constant), product of Zscore human capital and Zscore employee empowerment, human capital , social capital Dependent Variable: non financial performance

The results as presented in table 4.33 show that the influence of human capital

on non-financial firm performance is significantly affected by employee

empowerment (R Square = 0.310, F = 3.742, p < 0.05). The β depicting the

coefficient for the interaction (XZ) was however not significant (β = -.007, t= -

0.351, p> 0.05), therefore not supporting the condition for moderation which

states that the effect of the interaction between human capital and employee

empowerment (XZ) on firm performance should be statistically significant. The

hypothesis that the influence of human capital on non-financial firm

105

performance is moderated by employee empowerment was therefore not

confirmed.

4.4.7 Human Capital, Quality of Decisions and Firm Performance

The sixth objective of the study sought to establish whether the influence of

human capital on firm performance is mediated by quality of decisions. This

informed hypothesis six.

H6: The influence of human capital on firm performance is mediated by

quality of decisions

The Baron and Kenny approach in testing for mediation was employed for the

purposes of this study. For mediation effect to be considered positive, four

conditions should be fulfilled:

1. The independent variable is significantly related to the dependent variable in the

absence of the mediating variable

2. The independent variable is significantly related to the mediator variable

3. The mediator variable is significantly related to the dependent variable.

4. When controlling for the effects of the mediating variable on the dependent

variable, the effect of the independent variable on the dependent variable is

insignificant in the presence of the mediating variable

The outcome of the regression analysis yielded results as presented below:

106


performance (First step)

Model Summary


ANOVA


Mean Square F Sig.


Coefficients



B Std.


capital computed as a composite

.473 .186 .391 2.548 .015

Predictors: (Constant), human capital Dependent Variable: non financial performance

The results in table 4.34 show that the influence of human capital on firm

performance is significant (R Square = 0.153, F= 6.494, p < 0.05) with 15 % of the

variation in firm performance being significantly explained by the variation in human

capital. The beta was also significant (β = 0.473, t = 2.548, p < 0.05). The first

mediation condition which states that the independent variable should be

significantly related to the dependent variable in the absence of the mediating

variable was thus satisfied.

107


performance (Second step)

Model Summary


Estimate 1 .449 .202 .181 .091406

ANOVA


Mean Square F Sig.


Coefficients



B Std.


capital .482 .154 .449 3.139 .003

Predictors: (Constant), human capital computed as a composite Dependent Variable: quality of decisions computed as a composite

In the second step as presented in table 4.35, the influence of human capital on

quality of decisions was significant (R Square = 0.202, F= 9.855, p < 0.05) with

20% of the variation in quality of decisions being significantly explained by

variation in human capital. The beta was also significant (β = 0.482, t = 3.139,

p < 0.05), thus satisfying the second condition which states that the

independent variable should be significantly related to the mediator variable.

108

Table 4.36: Mediating effect of quality of decisions on human capital and firm performance (Third and Fourth step)

Model Summary

Model R R

Square Adjusted R Square

Std. Error of the

Estimate Change Statistics

R Square Change

F Change df1 df2

Sig. F Change

1 .690 .476 .460 .080382 .476 29.939 1 33 .000 2 .719 .516 .486 .078401 .041 2.689 1 32 .111 ANOVA


Mean Square F Sig.

1 Regression .193 1 .193 29.939 .000 Residual .213 33 .006 Total .407 34 2 Regression .210 2 .105 17.081 .000 Residual .197 32 .006 Total .407 34 Coefficients



B Std.

Error Beta 1 (Constant) .210 .112 1.876 .070 quality of

decisions .738 .135 .690 5.472 .000

2 (Constant) .082 .134 .607 .548 quality of

decisions .629 .147 .588 4.265 .000

Human capital .276 .168 .226 1.640 .111

Predictors: (Constant), quality of decisions Predictors: (Constant), quality of decisions, human capital Dependent Variable: non financial performance

The third and fourth steps as presented in table 4.36 were combined as per the

instructions during the test. In the third step the influence of quality of

decisions on firm performance was significant (R Square = 0.476, F= 29.939, p

< 0.05). The β was also statistically significant (β= 0.738, t= 5.472, p <0.05),

thus satisfying the third condition which states that the mediator variable

should be significantly related to the dependent variable. In the fourth step the

109

influence of the independent variable (human capital) on the dependent

variable (firm performance) was insignificant in the presence of the mediating

variable, quality of decisions (R Square = 0.516, F= 17.081, p > 0.05) and the

beta was also statistically insignificant (β = 0.276. t= 1.640, p > 0.05), and thus

satisfied the fourth condition which states that the effect of the independent

variable on the dependent variable should be insignificant in the presence of

the mediating variable.

The test thus satisfied all the four conditions that should be met for a

mediation relationship to be considered, and therefore it can be concluded that

quality of decisions mediates the influence of human capital on firm

performance. The hypothesis that the influence of human capital on firm

performance is mediated by quality of decisions was therefore confirmed.

4.4.8 Joint effect of human capital, social capital, employee empowerment and

quality of decisions on firm performance

The aim of objective seven of the study was to establish the joint effect of


on firm performance. This informed hypothesis seven below.

H7a: The joint effect of human capital, social capital, employee

empowerment and quality of decisions on return on assets is

different from the individual effects of human capital and quality of

decisions on return on assets

Hypothesis 7a sought to establish the joint effect of human capital, social

capital, employee empowerment and quality of decisions on return on assets.

Step wise regression analysis was carried out guided by the equation:

Y=β0 +β1X1 + β2X2 + β3X3 + β4 X4

Where X1 =human capital

X2 = social capital

X3 = employee empowerment

X4 = quality of decisions


Y= Return on Assets

The results from the regression analysis were as presented in table 4.37 below:

110

Table 4.37: Joint effect of human capital, social capital, employee empowerment and quality of decisions on Return on Assets

Model Summary Model R R Square Adjusted R

Square Std. Error of the Estimate

Change Statistics

R Square Change

F Change df1 df2

Sig. F Change

1 .064 .004 -.029 .0544819 .004 .125 1 30 .727 2 .238 .056 -.009 .0539390 .052 1.607 1 29 .215 3 .272 .074 -.025 .0543841 .017 .527 1 28 .474 4 .275 .076 -.061 .0553326 .002 .048 1 27 .828

ANOVA Model Sum of

Squares Df Mean

Square F Sig.

1 Regression .000 1 .000 .125 .727 Residual .089 30 .003 Total .089 31 2 Regression .005 2 .003 .867 .431 Residual .084 29 .003 Total .089 31 3 Regression .007 3 .002 .744 .535 Residual .083 28 .003 Total .089 31 4 Regression .007 4 .002 .551 .700 Residual .083 27 .003 Total .089 31

Coefficients



B Std.

Error Beta 1 (Constant) -.004 .078 -.056 .956 human capital .035 .100 .064 .353 .727 2 (Constant) -.009 .077 -.122 .904 human capital -.089 .139 -.162 -.639 .528 social capital .134 .106 .322 1.268 .215 3 (Constant) .017 .086 .199 .843 human capital -.086 .141 -.156 -.610 .547 social capital .234 .174 .563 1.343 .190 employee empowerment -.134 .184 -.278 -.726 .474 4 (Constant) .004 .106 .035 .972 human capital -.084 .143 -.152 -.583 .565 social capital .227 .179 .547 1.268 .216 employee empowerment -.142 .191 -.296 -.743 .464 quality of decisions .028 .129 .050 .220 .828

1. Predictors: (Constant), human capital 2. Predictors: (Constant), human capital, social capital 3. Predictors: (Constant), human capital, social capital, employee empowerment 4. Predictors: (Constant), human capital, social capital, employee empowerment, quality of

decisions Dependent Variable: return on assets

111

The results presented in table 4.37 indicate that the resulting model was not

statistically significant (R Square= 0.076, F= 0.551, p>0.05). The predictor

variables (human capital, social capital, employee empowerment and quality of

decisions) were also not significant (β= 0.084, 0.227, -0.142, -0.129, t= -0.583,

1.268, -0.743, 0.220, p>0.05). There was no joint effect of human capital,

social capital, employee empowerment and quality of decisions on return on

assets since the model was not statistically significant.

H7b: The joint effect of human capital, social capital, employee

empowerment and quality of decisions on return on equity is

different from the individual effects of human capital and quality of

decisions on return on equity

Hypothesis 7b sought to establish the joint effect of human capital, social

capital, employee empowerment and quality of decisions on return on equity.

Step wise regression analysis was carried out guided by the equation:

Y=β0 +β1X1 + β2X2 + β3X3 + β4 X4


X2 = social capital



The results from the regression run were as presented in the table below:

112

Table 4.38: Joint effect of human capital, social capital, employee empowerment and quality of decisions on Return on Equity

Model Summary Model R R

Square Adjusted R Square

Std. Error of the Estimate

Change Statistics

R Square Change

F Change Df1 df2

Sig. F Change

1 .035 .001 -.032 .2287912 .001 .037 1 30 .848 2 .139 .019 -.048 .2306003 .018 .531 1 29 .472 3 .286 .082 -.016 .2270512 .063 1.914 1 28 .177 4 .290 .084 -.052 .2309618 .002 .060 1 27 .809

ANOVA Model Sum of Squares df Mean Square F Sig. 1 Regression .002 1 .002 .037 .848 Residual 1.570 30 .052 Total 1.572 31 2 Regression .030 2 .015 .284 .755 Residual 1.542 29 .053 Total 1.572 31 3 Regression .129 3 .043 .833 .487 Residual 1.443 28 .052 Total 1.572 31 4 Regression .132 4 .033 .619 .653 Residual 1.440 27 .053 Total 1.572 31

Coefficients



B Std. Error Beta 1 (Constant) .195 .326 .599 .554 human capital -.081 .420 -.035 -.193 .848 2 (Constant) .183 .329 .556 .583 human capital -.387 .596 -.168 -.649 .521 social capital .329 .451 .189 .729 .472 3 (Constant) .393 .358 1.099 .281 human capital -.361 .587 -.157 -.614 .544 social capital 1.124 .726 .645 1.547 .133 employee empowerment -

1.065 .770 -.528

-1.383

.177

4 (Constant) .331 .444 .745 .462 human capital -.350 .599 -.152 -.585 .563 social capital 1.094 .749 .628 1.462 .155 employee empowerment -

1.104 .799 -.547

-1.381

.178

quality of decisions .132 .539 .055 .245 .809

1. Predictors: (Constant), human capital 2. Predictors: (Constant), human capital, social capital 3. Predictors: (Constant), human capital, social capital, employee empowerment 4. Predictors: (Constant), human capital, social capital, employee empowerment, quality of

decisions Dependent Variable: return on equity

113

The results presented in table 4.38 show that the resulting model was not

statistically significant (R Square= 0.076, F= 0.551, p>0.05). The predictor

variables (human capital, social capital, employee empowerment and quality of

decisions) were also not significant (β= -0.350, 1.094, -1.104, 0.132, t= -0.585,

1.462, -1.381, 0.245, p>0.05). There was no joint effect of human capital,

social capital, employee empowerment and quality of decisions on return on

equity since the model was not statistically significant.

H7c: The joint effect of human capital, social capital, employee

empowerment and quality of decisions on non-financial firm

performance is different from the individual effects of human capital

and quality of decisions on non-financial firm performance

Hypothesis 7c sought to establish the joint effect of human capital, social

capital, employee empowerment and quality of decisions on non-financial firm

performance. Stepwise regression analysis was carried out guided by the

equation:

Y=β0 +β1X1 + β2X2 + β3X3 + β4 X4


X2 = social capital




Y= Firm performance

The results from the regression analysis were as presented in the table below:

114

Table 4.39: Joint effect of human capital, social capital, employee empowerment and quality of decisions on non-financial firm performance

Model Summary

Model R R

Square Adjusted R

Square Std. Error of the Estimate Change Statistics

R R

square Adjusted R

square R Square Change F Change Df1 df2

Sig. F Change

1 .426(a) .181 .149 .100256 .181 5.537 1 25 .027 2 .565(b) .319 .262 .093338 .137 4.843 1 24 .038 3 .569(c) .323 .235 .095034 .004 .151 1 23 .701 4 .787(d) .620 .551 .072836 .297 17.155 1 22 .000

ANOVA


Mean Square F Sig.

1 Regression .056 1 .056 5.537 .027(a) Residual .251 25 .010 Total .307 26 2 Regression .098 2 .049 5.616 .010(b) Residual .209 24 .009 Total .307 26 3 Regression .099 3 .033 3.662 .027(c) Residual .208 23 .009 Total .307 26 4 Regression .190 4 .048 8.964 .000(d) Residual .117 22 .005 Total .307 26 Coefficients



B Std. Error Beta 1 (Constant) .428 .169 2.526 .018 human capital .501 .213 .426 2.353 .027 2 (Constant) .363 .160 2.263 .033 human capital .144 .256 .122 .562 .580 social capital .444 .202 .479 2.201 .038 3 (Constant) .341 .173 1.966 .061 human capital .140 .261 .119 .535 .598 social capital .323 .372 .349 .869 .394 Employee empowerment .150 .387 .148 .389 .701 4 (Constant) .028 .153 .185 .855 human capital .129 .200 .110 .647 .524 social capital .199 .287 .214 .693 .496 Employee empowerment -.084 .302 -.083 -.278 .783 quality of decisions .740 .179 .654 4.142 .000 Predictors: (Constant), human capital Predictors: (Constant), human capital , social capital Predictors: (Constant), human capital, social capital, employee empowerment Predictors: (Constant), human capital, social capital, employee empowerment, quality of decisions Dependent Variable: non financial performance

115

The model summary presented in table 4.39 depicted quality of decisions as

significantly contributing more in explaining the influence of human capital on

non-financial firm performance than all other variables (F= 8.964, R square

change= 0.297, p < 0.05). Employee empowerment was the least contributor

(F= 3.662, R square change= 0.004) and the contribution was insignificant (β= -

0.084, t= -0.278, p > 0.05). The overall model was significant (F= 5.537,

5.616, 3.662, 8.964, p < 0.05) on every addition of variables but the

coefficients of variation (β) moved from being statistically significant to being

insignificant as more variables entered the model.

In the third step, the model was significant (R Square= 0.323, F= 3.662,

p<0.05) but both social capital and employee empowerment were insignificant

(β= 0.323, t= 0.869, p > 0.05) and (β= 0.150, t= 0.389, p > 0.05) respectively.

In the fourth step, the model was significant (R Square= 0.620, F= 8.964,

p<0.05) but both social capital and employee empowerment were insignificant

(β= 0.199, t= 0.693, p > 0.05) and (β= -0.084, t= -0.278, p > 0.05) respectively.

Quality of decisions was however significant (β= 0.740, t= 4.142, p < 0.05)

when added as the last variable. This gave an indication of social capital and

employee empowerment not having a direct interaction with human capital

when explaining influence on non-financial firm performance

Comparison of joint effect and the individual effects of human capital and quality of decisions on non-financial firm performance Model R square

• Effect of human capital on firm performance .153

• Effect of quality of decisions on firm performance .437

• Effect of human capital, social capital, employee empowerment .620 and quality of decisions on firm performance

116

The influence of human capital on non-financial firm performance was

evaluated in hypothesis one and about 15% of the variation in non-financial

firm performance was explained by variation in human capital (R square=

.153). The influence of quality of decisions on firm performance was evaluated

in hypothesis three and the results indicated that 44% of the variation in non-

financial firm performance was explained by variation in quality of decisions.

(R square= .437). The joint effect of human capital, social capital, employee

empowerment and quality of decisions on non-financial firm performance

evaluated in hypothesis seven indicated that 62% of the variation was explained

in the model (R square= .620). Although the influence in joint effect is not a

direct one, there was evidence that the four variables (human capital, social

capital, employee empowerment and quality of decisions) in combination

increase the explained variation and this was evidence that they each have a

contribution to non-financial firm performance. The joint effect of human

capital, social capital, employee empowerment and quality of decisions on non-

financial firm performance as evidenced in the model was greater than the

individual effects of human capital and quality of decisions on non-financial

firm performance, thus confirming hypothesis seven.

In hypothesis four and five the test for moderation was not significant in both

cases. This prompted the researcher to carry out a test for mediation on an

exploratory basis. The Baron and Kenny approach used in hypothesis six was

employed in the testing of social capital and employee empowerment as

possible mediators and results were as indicated in the tables below:

117



Model Summary

Model R

R

Square

Adjusted R


1 .391 .153 .129 .101316

ANOVA

Model

Sum of

Squares Df

Mean

Square F Sig.

1 Regression .067 1 .067 6.494 .015(a)

Residual .370 36 .010

Total .436 37

Coefficients

Model

Unstandardized

Coefficients

Standardized

Coefficients T Sig.

B

Std.

Error Beta

1 (Constant) .452 .147 3.065 .004

human

capital .473 .186 .391 2.548 .015

Predictors: (Constant), human capital

Dependent Variable: non financial performance

118



Model Summary

Model R

R

Square

Adjusted R


1 .719 .517 .503 .091146

ANOVA

Model

Sum of

Squares Df

Mean

Square F Sig.

1 Regression .320 1 .320 38.500 .000(a)

Residual .299 36 .008

Total .619 37

Coefficients

Model

Unstandardized

Coefficients

Standardized

Coefficients T Sig.

B

Std.

Error Beta

1 (Constant) .024 .121 .199 .843

human

capital

computed as

a composite

.960 .155 .719 6.205 .000

Predictors: (Constant), human capital computed as a composite

Dependent Variable: social capital computed as a composite

119


performance (Third and Fourth Step)

Model Summary

Model R R Square Adjusted R Square

Std. Error of the Estimate

Change Statistics

R Square Change

F Change

df1 Df2

Sig. F Change

1 .508 .258 .234 .092150 .258 10.775 1 31 .003 2 .516 .266 .217 .093149 .008 .339 1 30 .565

ANOVA


Mean Square F Sig.

1 Regression .092 1 .092 10.775 .003 Residual .263 31 .008 Total .355 32 2 Regression .094 2 .047 5.442 .010 Residual .260 30 .009 Total

.355 32

Coefficients



B Std. Error Beta 1 (Constant) .461 .113 4.096 .000 social capital

computed as a composite

.460 .140 .508 3.283 .003

2 (Constant) .407 .147 2.774 .009 social capital

computed as a composite

.388 .187 .429 2.075 .047

human capital computed as a composite

.139 .239 .120 .582 .565

Predictors: (Constant), social capital Predictors: (Constant), social capital , human capital Dependent Variable: non financial performance

120


on firm performance is significant (R Square= 0.153, F= 6.494, p<0.05) and

the beta is also significant (β= 0.473, t= 2.548, p<0.05) thus satisfying the first

condition in testing for mediation, which states that the independent variable

should be significantly related to the dependent variable in the absence of the

mediating variable. The results presented in table 4.41 show that the second

condition which states that the independent variable should be significantly

related to the mediator variable was also satisfied, because human capital

indeed significantly influenced social capital (R Square= 0.517, F= 38.500,

p<0.05) and the beta was significant (β= 0.960, t= 6.205, p<0.05). The results

for the third and fourth steps as presented in table 4.42 show that in the third

step social capital influences firm performance significantly (R Square= 0.258,

F= 10.775, p<0.05) and the beta is also significant (β= 0.460, t= 3.283, p<0.05)

thus satisfying the third condition which states that the mediator variable

should be significantly related to the dependent variable. The fourth condition

stating that when controlling for the effects of the mediating variable on the

dependent variable, the effect of the independent variable on the dependent

variable should be insignificant in the presence of the mediating variable was

also satisfied because the influence of human capital on firm performance in

the presence of social capital was not significant (R Square= 0.266, F= 5.442,

p>0.05). The beta was also not significant (β= 0.139, t= 0.582, p>0.05).

121

Table 4.43: Mediating effect of employee empowerment on human capital and firm


Model Summary

Model R R

Square Adjusted R

Square Std. Error of the Estimate 1 .391 .153 .129 .101316

ANOVA

Model

Sum of

Squares df

Mean

Square F Sig.

1 Regression .067 1 .067 6.494 .015(a)

Residual .370 36 .010

Total .436 37

Coefficients

Model

Unstandardized

Coefficients

Standardized

Coefficients T Sig.

B

Std.

Error Beta

1 (Constant) .452 .147 3.065 .004

human

capital

computed as

a composite

.473 .186 .391 2.548 .015


Dependent Variable: non financial performance

122



Model Summary

Model R

R

Square

Adjuste

d R


1 .602 .363 .345 .090899

ANOVA

Model

Sum of

Squares df

Mean

Square F Sig.

1 Regression .169 1 .169 20.473 .000

Residual .297 36 .008

Total .467 37

Coefficients

Model

Unstandardize

d Coefficients

Standardiz

ed

Coefficient

s t Sig.

B

Std.

Error Beta

1 (Constant) .243 .122 1.996 .054

human

capital .711 .157 .602 4.525 .000


Dependent Variable: employee empowerment

123


performance (Third and fourth step)

Model Summary

Model R R

Square

Adjusted R

Square

Std. Error of the

Estimate Change Statistics

R Square Change

F Change

Df1 df2

Sig. F Change

1 .496 .246 .222 .096364 .246 10.130 1 31 .003 2 .511 .261 .212 .096985 .015 .605 1 30 .443

ANOVA

Model Sum of Squares df Mean Square F Sig.

1 Regression .094 1 .094 10.130 .003 Residual .288 31 .009 Total .382 32 2 Regression .100 2 .050 5.303 .011(b) Residual .282 30 .009 Total .382 32

Coefficients


Coefficients

Standardized

Coefficients T Sig.

B Std.

Error Beta 1 (Constant) .423 .129 3.283 .003 employee

empowerment .505 .159 .496 3.183 .003

2 (Constant) .351 .160 2.201 .036 employee

empowerment .423 .191 .416 2.219 .034

human capital .176 .226 .146 .778 .443

Predictors: (Constant), employee empowerment computed as a composite Predictors: (Constant), employee empowerment computed as a composite, human capital computed as a composite Dependent Variable: non financial performance computed as a composite

124


on firm performance is significant (R Square= 0.153, F= 6.494, p<0.05) and the

beta is also statistically significant (β= 0.473, t= 2.548, p<0.05) thus satisfying

the first condition in testing for mediation, which states that the independent

variable should be significantly related to the dependent variable in the absence

of the mediating variable. The results presented in table 4.44 show that the

second condition stating that the independent variable should be significantly

related to the mediator variable was also satisfied because human capital indeed

significantly influenced employee empowerment (R Square= 0.363, F= 20.473,

p<0.05), and the beta was also significant (β= 0.711, t= 4.525, p<0.05). Table

4.45 presents the results for the third and fourth conditions for mediation. In

the third step employee empowerment influenced firm performance

significantly (R Square= 0.246, F= 10.130, p<0.05) and the beta was also

significant (β= 0.505, t= 3.183, p<0.05) thus satisfying the third condition,

which states that the mediator variable should be significantly related to the

dependent variable. The fourth condition stating that when controlling for the

effects of the mediating variable on the dependent variable, the effect of the

independent variable on the dependent variable should be insignificant in the

presence of the mediating variable was also satisfied, because the influence of

human capital on firm performance in the presence of employee empowerment

was not significant (R Square= 0.261, F= 5.303, p>0.05) and the beta was also

not significant (β= 0.176, t= 0.778, p>0.05).

125

4.5 Discussion of the research findings

4.5.1 The influence of Human Capital on Firm Performance

The first objective of the study was to establish the influence of human capital

on the performance of insurance companies and commercial banks in Kenya.

This was achieved by asking the respondent organizations to indicate the extent

of adoption of human capital practices in their organizations. Majority of

employees in the financial services sector are Bachelors degree holders. These

are the academic qualifications that have been held by majority of employees

within the last three years. It can be deduced that the level of human capital in

this sector considering the academic qualifications is above average. In terms

of employee work experience in the sector, most of the employees had less than

10 years of work experience. This clearly indicates that the financial services

sector absorbs a younger, vibrant and energetic workforce that would be

capable of responding swiftly to the changes that the external environment

presents and the dynamic business environment considering the volatility of

this industry. Technological advancement in this sector has been very dynamic

and organizations in an attempt to remain competitive have strived at

embracing technology as it unfolds. Younger workers are more technology

savvy, hence this may explain the reason the sector prefers to attract a younger

workforce. A younger work force may also cope easily with the work pressure

and emerging trends in this sector.

Considering work experience as a human capital measure, human capital in this

sector, ranges from low to average. Majority of the respondent organizations

conducted less than five job-related training workshops for each employee in a

year. The human capital in this sector, considering the average job-related

training workshops attended by employees in a year is low. Short courses

attended by each employee in a year did not exceed five for most of these

organizations. The human capital in this sector, considering the average short

courses attended by employees in a year is low. Overall the adoption of

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practices regarding human capital variable had a grand mean of 3.85. From an

organizational perspective, human capital is the result of a firm's deliberate

investment through the selective hiring of employees with high general skills

(or formal education) plus a firm investment in training of more specific skills

through training activities (Lepak and Snell, 1999, 2002; Skaggs and Youndt,

2004).

Human capital generates value through investments in increasing individuals’

knowledge, skills, talents and know-how (Roos et al., 1997). One type of

investment is education. Higher levels of education reflect greater investments

in human capital (Bontis, 1998, 1999). An individual who is highly educated is

more knowledgeable and performs better than others, and gets more

opportunities to move upward (Hitt et al., 2001; Wayne et al., 1999). Also, rank

and tenure are forms of investment that can enhance an individual's human

capital. The contention is that individuals with higher rank or longer tenure

may better understand the whole company, learn from their work, develop

expertise in their positions, and obtain valuable firm-specific experiences,

which all increase developmental opportunities (Judge and Bretz, 1994).

The study hypothesized that human capital has an influence on firm

performance. The influence of human capital on non-financial measures of firm

performance was statistically significant, therefore it can be inferred that as

human capital increases, non-financial firm performance increases too. These

results are consistent with existing literature which points out a positive effect

of human capital on firm performance. Recent research suggests that human

capital attributes (including training, experience and skills) and in particular

the executives' human capital have a clear impact on organizational results

(Barney, 1991; Finkelstein and Hambrick, 1996; Huselid, 1995; Pennings et al.,

1998; Pfeffer, 1998; Wright et al., 1995). A firm's human capital is an important

source of sustained competitive advantage (Hitt et al., 2001) and therefore

investments in the human capital of the workforce may increase employee

127

productivity and financial results (Black and Lynch, 1996; Pfeffer, 1998; Snell

and Dean, 1992). The rise of the knowledge-based economy is attributed to the

increasing importance of intellectual capital as an intangible and important

resource for companies’ sustainable competitive advantages (Roos and Roos,

1997). The results of a study by Backman (2013) indicate that firms with a

higher level of human capital, measured by education, experience, and

cognitive skills, perform better in terms of productivity. These firms therefore

experience a competitive advantage compared to other firms. Thus, the

importance of having skilled individuals in-house is emphasized.

4.5.2 Relationship between Human Capital and Quality of Decisions

The second objective of the study was to establish the relationship between

human capital and quality of decisions. On the basis of this objective, the

study hypothesized that there is a relationship between human capital and

quality of decisions. On the assessment of quality of decisions, respondent

organizations were provided with a set of statements evaluating the quality of

decisions in their respective organizations. Overall, there was agreement on

organizations’ practices regarding quality of decisions with a grand mean of

3.79 and the indication was that organizations in this sector were keen on

enhancing the quality of their decisions. The scores for human capital and

quality of decisions were subjected to a correlation test and the results yielded

a positive and moderate relationship between human capital and quality of

decisions that was statistically significant. The hypothesis that there is a

relationship between human capital and quality of decisions was therefore

confirmed. These results are in line with existing literature which links quality

of decisions to the skills and competencies possessed by the decision makers.

Rogers and Blenko (2006) contend that making good decisions means being

clear about which decisions really matter. It requires getting the right people in

terms of skills and competencies focused on those decisions at the right time.

High-performance organizations routinely find people who think and act like

owners, people with high aspirations who make decisions and take prompt

128

action. It requires companies to consider what types of people they need to

succeed, selecting for skill as well as will for capability and attitude.

Companies expanding from products into services, for instance, need to become

more customer focused and less product driven. That requires a certain set of

people skills that won’t just happen, they need to be developed.

Helping individuals to develop knowledge, skills and competences increases

the human capital of the organization. People are better equipped to do their

jobs (if the process works) and this is generally of value to the organization.

However, we know that merely developing the human capital of the

organization is not enough to guarantee success. Strategic and operational

choices of small organizations are quite often limited by resource constraints,

but there are evidences that human capital development facilitated by training

can play a pivotal role in innovation and consolidation of small and medium

size organizations (Baldwin and Johnson, 1996).

4.5.3 Influence of Quality of Decisions on Firm Performance

Objective three was to establish the influence of quality of decisions on firm

performance. This was achieved by testing the hypothesis using regression

analysis. The results showed that the influence of quality of decisions on non-

financial firm performance was significant with 44% of the variation in non-

financial performance being explained by variation in quality of decisions. The

hypothesis that quality of decisions influences firm performance was therefore

confirmed because there was a statistically significant influence of quality of

decisions on non-financial firm performance. These findings seemed to agree

with existing theoretical and empirical literature. Strategic decision-making is

essential to firm performance. A study by Rogers and Blenko (2006) found that

high performers are decision-driven organizations, built for effective decision-

making and execution. What sets apart the high performers is the quality of

their decision-making. They make the most important decisions well, and then

they make them happen, quickly and consistently.

129

4.5.4 Influence of Human Capital on Firm Performance as moderated by Social

Capital

The fourth objective was to determine whether the influence of human capital

on firm performance was moderated by social capital. The study revealed that

social capital does not moderate the influence of human capital on firm

performance, considering both financial and non-financial measures. The Baron

and Kenny approach in testing for moderation was employed and the results

yielded an insignificant interaction between human capital, social capital and

firm performance in spite of a statistically significant model. The hypothesis

that the influence of human capital on firm performance is moderated by social

capital was therefore not confirmed. In the current study the researcher further

tested for mediating effect of social capital on the influence of human capital

on firm performance informed by the fact that the test for joint effect yielded

insignificant results, showing that social capital and human capital are not

independent variables, but they interact to influence firm performance. The

tests yielded positive results for mediation.

These findings seem to agree with previous studies that have found a link

between human capital, social capital and firm performance. Cabello-Medina,

Lopez-Cabrales and Valle-Cabrera (2011) argue that social capital and human

capital are not independent variables; rather, they interact to improve

innovative performance. High levels of social capital can enhance the skills and

capabilities of individuals (human capital). Moreover, Baldwin et al. (1997)

have indicated that an individual who is central in the social network is, over

time, able to accumulate knowledge about task-related problems and workable

solutions. This expertise not only enables the central individual to solve

problems readily, but also serves as a valued resource for future exchanges with

coworkers. Although human capital may be the origin of all knowledge,

learning requires that individuals exchange and share insights, knowledge and

mental models, which represent social capital (Senge, 1990).

130

There are still very insufficient results regarding the impact of social capital on

human capital. Although some authors (Florin et al., 2003) make the distinction

between human capital and social capital, both Coleman (1988) and Nahapiet

and Goshal (1988) recognize that conceptually and in practice they are difficult

to disassociate. Burt (1997) argues more vehemently that human capital needs

social capital, saying that human capital becomes worthless without the

opportunities to apply it afforded by social capital. Moreover, he suggests that

there is an interactive effect whereby managers with more social capital obtain

greater benefits from their human capital. There is minimal empirical evidence

of moderating effect of social capital on the influence of human capital on firm

performance. However, Lin and Huang (2005) did a study on the role of social

capital in the relationship between human capital and career mobility, where the

moderating and mediating effect were tested. The findings revealed that social

capital mediates the relationship between human capital and career mobility.


Employee Empowerment

Objective five sought to establish whether the influence of human capital on

firm performance was moderated by employee empowerment. The Baron and

Kenny approach was used to test the hypothesis that the influence of human

capital on firm performance is moderated by employee empowerment. The

results yielded an insignificant interaction between human capital, employee

empowerment and firm performance considering non-financial measures in

spite of a statistically significant model, while considering financial measures,

the model was statistically insignificant. The hypothesis that the influence of

human capital on firm performance is moderated by employee empowerment

was therefore not confirmed. There is minimal literature that attempts to link

human capital, employee empowerment and firm performance. However studies

have been done linking employee empowerment to firm performance.

131

Empowering employees enables organizations to be more flexible and

responsive (Mathieu et al., 2006) and can lead to improvements in both

individual and organizational performance (Conger and Kanungo, 1988; Dainty

et al., 2002; Ozaralli, 2003; Bordin et al., 2007). Cameron (2010) contends that

employee involvement can be done by identifying several strategic firm

initiatives and delegating authority to employees across all levels of the firm

through task forces to develop those initiatives. This process encourages

employees to generate ideas, put plans into action, and create further beneficial

initiatives for the firm. The idea of getting employees involved in the firm's

business, plus technical training, is what drives a high billing rate and

ultimately profitability. When leaders involve everyone in moving the

organization forward, it builds synergy and commitment at all levels. By

fostering a culture of involvement, firms can engage employees at all levels in

the business of achieving quality service, increased productivity, and realized

purpose.

The researcher further tested for mediation exploring the possibility of a

mediating effect of employee empowerment in the influence of human capital

on firm performance. The Baron and Kenny approach in testing for mediation

was employed. The results provided sufficient statistical evidence to signify a

mediation relationship. This implies that human capital, employee

empowerment and firm performance do not have a direct relationship, and that

the interaction of human capital and employee empowerment increases the

influence on firm performance. Employee empowerment should happen where

employees have the necessary knowledge, skills and competencies so that they

can contribute to increased firm performance. These findings are in line with

existing literature that posits that employee empowerment may produce

exemplary results where human capital is high. High skills in the workforce are

a requirement for empowerment, and benefit from delayering the organization

(Appelbaum et al., 2000).

132

Every organization has a pool of knowledge from past experiences, individual

know-how and work processes. If an organization wants to create an

empowerment structure it must be able to set up an architecture that facilitates

its knowledge concerning the skills and competences of its workforce. The

organization must know what it wants to empower. On the other hand

employees must know what skills and competency profiles are defined for the

various tasks within the company and must be able to perform some kind of

matching that will support them in choosing the right development

(Houtzagers, 1999). It is assumed that workers have the opportunity to

contribute to organizational success and as they are closer to the work situation

they may be able to suggest improvements which management would be unable

to by virtue of their position in the hierarchy. Rather than trying to control

employees, they should be given discretion to provide better service and

achieve a higher standard of work (Wilkinson, 1998). In instances where

employees do not possess the basic competence to make a decision or perform

an activity, empowerment goes out of the window. For empowerment and trust

to be extended there has to be a basic competence on behalf of the person who

is actually empowering others to make decisions and take actions (Diab, 2011).

4.5.6 Mediating effect of Quality of Decisions on Human Capital and Firm

Performance

Objective six sought to establish whether the influence of human capital on

firm performance is mediated by quality of decisions. The Baron and Kenny

approach in testing for mediation was employed for the purposes of this study.

The test thus satisfied all the four conditions that were to be met for a

mediation relationship to be considered and therefore it was concluded that the

quality of decisions mediates the influence of human capital on firm

performance. The hypothesis that the influence of human capital on firm

performance is mediated by quality of decisions was therefore confirmed.

Decision quality is enhanced when the decision makers have the relevant

knowledge, skills and competencies, thereby resulting to increased firm

133

performance. Developing the human capital of the organization is not enough to

guarantee success.

There is empirical evidence that the quality of decisions depends on human

capital. Strategic and operational choices of small organizations are quite often

limited by resource constraints, but there are evidences that human capital

development facilitated by training can play a pivotal role in innovation and

consolidation of small and medium size organizations (Baldwin and Johnson,

1996). Rogers and Blenko (2006) contend that making good decisions means

being clear about which decisions really matter. It requires getting the right

people focused on those decisions at the right time. That is true whether the

decisions involve the largest issues that a company faces or more tactical, day-

to-day concerns. Decision-driven organizations are distinguished by the

consistency and caliber of their decision-making and execution at every level.

4.5.7 Joint effect of human capital, social capital, employee empowerment and

quality of decisions on firm performance

Objective seven sought to establish the joint effect of human capital, social

capital, employee empowerment and quality of decisions on firm performance.

Stepwise regression analysis was carried out guided by the equation:

Y=β0 +β1X1 + β2X2 + β3X3 + β4 X4

Quality of decisions contributed more in explaining the influence of human

capital on non-financial firm performance than all other variables. Employee

empowerment was the least contributor. The overall model remained largely

significant on every addition of variables but the coefficients of variation

moved from being statistically significant to being insignificant as more

variables entered the model. In the third addition both social capital and

employee empowerment were largely insignificant. In the fourth addition both

social capital and employee empowerment were largely insignificant but quality

of decisions was significant when added as the last variable. This gave an

indication of social capital and employee empowerment not having a direct

134

interaction with human capital when explaining influence on non-financial firm

performance.

The influence of human capital on non-financial firm performance was

evaluated in hypothesis one and about 15% of the variation in non-financial

firm performance was explained by variation in human capital. The influence of

quality of decisions on firm performance was evaluated in hypothesis three and

the results indicated that 44% of the variation in non-financial firm

performance was explained by variation in quality of decisions. The joint effect

of human capital, social capital, employee empowerment and quality of

decisions on firm performance evaluated in hypothesis seven indicated that

62% of the variation in non-financial firm performance was explained in the

model. Although the influence in joint effect is not a direct one, there was

evidence that the four variables (human capital, social capital, employee

empowerment and quality of decisions) in combination increased the explained

variation in non-financial firm performance and this was evidence that they

each had a contribution to non-financial firm performance. The joint effect of


on non-financial firm performance as evidenced in the model was greater than

the individual effects of human capital and quality of decisions on non-

financial firm performance, thus confirming hypothesis seven. The joint effect

could not be established using the financial measures because the model was

insignificant, and the predictor coefficients were also insignificant.

Social capital and employee empowerment not having a direct relationship with

human capital when explaining influence on performance prompted a

mediation test on an exploratory basis. The Baron and Kenny approach was

employed in the testing of social capital and employee empowerment as

possible mediators. The mediation test confirmed that social capital and

employee empowerment mediate the influence of human capital on firm

performance. Having a highly skilled workforce may not guarantee a higher

level of performance because employees should be willing to share the

135

knowledge and skills that they possess with other coworkers and managers,

hence contributing to high quality decisions. Adler and Kwon (2002) highlight

information as being the first direct benefit of social capital. They argued that

social capital facilitates access to broader sources of information and improves

information’s quality, relevance and timeliness. These conditions allow

individuals to enhance their knowledge through everyday interactions with

colleagues. Similarly, Reed et al. (2006) state that the inimitable value of

human capital can be enhanced by social relations. Their argument is that,

given competent and credible participants from a diverse set of disciplines, a

network of rich, social connections can reduce the amount of time and

investment required to gather information and can serve as a valuable conduit

for knowledge diffusion and transfer. Contributions by empowered employees

are believed to have a significant impact on business productivity, revenue and

the organization's overall effectiveness. An organization’s human and social

capital influence the quality of decisions made. Employees with the relevant

knowledge, skills and competencies are encouraged to obtain and share

information through the social networks that organizations establish to achieve

greater synergy in increasing competitiveness (Knack and Keefer, 1997).

The findings of this study are in line with the resource-based theory which

emphasizes the critical importance of internal resources for sustainable

competitive advantage. This perspective argues that firm performance is a

function of how well managers build their organizations around resources that

are valuable, rare, inimitable, and lack substitutes (Barney, 1991). Intangible

resources like human capital are more likely to produce a competitive

advantage because they are rare and socially complex, and therefore difficult to

imitate (Hatch and Dyer, 2004; Hitt et al., 2001). Networks are fundamental in

social capital because networks can provide resources, which may facilitate

investment, can provide access to information, and reduce transactional costs.

Firms therefore obtain sustainable competitive advantage by building their

human capital base and enhancing their social networks.

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4.6 Chapter Summary

Chapter four has presented the descriptive and inferential analysis, as well as a

discussion of the findings of the study. The descriptive findings have been

discussed where each variable was measured using likert type of questions and

mean scores and standard deviation computed indicating the extent of adoption

of practices associated with the various variables of the study. As for the

closed-ended questions, frequencies and percentages were obtained. The

hypotheses were tested using correlation and regression analysis. Based on the

results hypotheses one, two, three, six and seven were confirmed, while

hypotheses four and five were not confirmed. The interpretations have been

made using statistical knowledge and the existing body of theoretical and

empirical literature.

137

4.7 Revised Conceptual Model

Figure 2: Revised Conceptual Model

138

Having a highly skilled workforce may enhance firm performance when

employees are willing to share the knowledge and skills that they possess with

other coworkers and managers, hence contributing to high quality decisions.

The study found that the influence of human capital on non-financial measures

of firm performance was statistically significant, therefore it can be inferred

that as human capital increases, non-financial firm performance increases too.

A firm's human capital is an important source of sustained competitive

advantage (Hitt et al., 2001) and therefore investments in the human capital of

the workforce may increase employee productivity and financial results (Black

and Lynch, 1996; Pfeffer, 1998). There is a positive and moderate relationship

between human capital and quality of decisions. Organizations make better

decisions when those involved in decision-making have the right knowledge,

skills and competencies thus contributing to high quality decisions. Existing

literature also links quality of decisions to the skills and competencies

possessed by the decision makers. Rogers and Blenko (2006) contend that

making good decisions requires getting the right people in terms of skills and

competencies focused on those decisions at the right time.

The study found that quality of decisions significantly influences non-financial

firm performance. Rogers and Blenko (2006) found that high performers are

decision-driven organizations, built for effective decision-making and

execution. Social capital and employee empowerment do not moderate the

influence of human capital on firm performance. The test results confirmed a

mediation effect. The conclusion was that the influence of human capital on

firm performance is mediated by social capital, employee empowerment and

quality of decisions. Contributions by empowered employees are believed to

have a significant impact on business productivity, revenue and the

organization's overall effectiveness. An organization’s human and social capital

influence the quality of decisions made. Employees with the relevant

knowledge, skills and competencies are encouraged to obtain and share

information through the social networks that organizations establish to achieve

139

greater synergy in increasing competitiveness (Knack and Keefer, 1997). The

study also found that the joint effect of human capital, social capital, employee

empowerment and quality of decisions on non-financial firm performance was

greater than the individual effects of human capital and quality of decisions on

non-financial firm performance.

140

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATI ONS

5.1 Introduction

This chapter presents the summary of findings, conclusions, recommendations

and policy implications, limitations of the study and suggestions for future

research.

5.2 Summary of Findings

The hypotheses tested the effect of social capital, employee empowerment and

quality of decisions on the influence of human capital on firm performance.

Firm performance was evaluated using both financial and non-financial

indicators. The financial indicators that were used in the evaluation were return

on assets and return on equity. Non financial performance indicators included

quality of service, customer satisfaction and efficiency in service delivery.

Non-financial performance indicators had various attributes that were

aggregated and a composite score computed.

The first objective of the study was to establish the influence of human capital

on firm performance. The results evidenced a statistically significant influence

of human capital on firm performance in so far as non-financial performance

was concerned. The evidence however, did not show any statistical significance

in the influence of human capital on financial performance indicators i.e.

return on assets and return on equity. The second objective sought to establish

the relationship between human capital and quality of decisions. The results

evidenced a positive and moderate relationship that was statistically

significant.

Objective three sought to establish the influence of quality of decisions on firm

performance. The results evidenced a statistically significant influence of

quality of decisions on non-financial firm performance. The evidence however,

did not show any statistical significance in the influence of human capital on

financial performance indicators i.e. return on assets and return on equity.

141

Objective four sought to establish whether social capital moderated the

influence of human capital on firm performance. Both financial and non-

financial measures were used. The test employed the Baron and Kenny

approach in testing for moderation. The results based on non-financial

measures did not provide sufficient statistical evidence to indicate a moderation

effect, while the results based on the financial measures yielded insignificant

results.

Objective five sought to establish whether employee empowerment moderated

the influence of human capital on firm performance based on the Baron and

Kenny approach also. Both financial and non-financial measures were used.

The results in this case based on non-financial measures failed to provide

sufficient statistical evidence to indicate a moderation effect, while the results

based on the financial measures yielded insignificant results. Objective six

sought to establish whether quality of decisions moderated the influence of

human capital on firm performance The Baron and Kenny approach of testing

for mediation was also employed in this evaluation. The results provided

sufficient evidence based on the testing model to signify a mediation

relationship.

Objective seven evaluated the joint effect of human capital, social capital,

employee empowerment and quality of decisions on firm performance. Step

wise regression analysis was carried out and the results showed quality of

decisions as significantly contributing more in explaining the influence of

human capital on non-financial firm performance than all other variables.

Employee empowerment was the least contributor and the contribution was

insignificant. The overall model remained largely significant on every addition

of variables but the coefficients of variation moved from being statistically

significant to being insignificant as more variables entered the model. In the

third addition both social capital and employee empowerment were largely

insignificant, while in the fourth addition both social capital and employee

empowerment were largely insignificant but quality of decisions was

142

significant when added as the last variable. This gave an indication of social

capital and employee empowerment not having a direct interaction with human

capital when explaining influence on non-financial firm performance.

The influence of human capital on non-financial firm performance indicated

that 15% of the variation in non-financial firm performance was explained by

variation in human capital. The influence of quality of decisions on non-

financial firm performance indicated that 44% of the variation in non-financial

firm performance was explained by variation in quality of decisions. The joint

effect of human capital, social capital, employee empowerment and quality of

decisions on non-financial firm performance indicated that 62% of the variation

was explained in the model. Although the influence in joint effect is not a direct

one, there was evidence that the four variables (human capital, social capital,

employee empowerment and quality of decisions) in combination increase the

explained variation and this was evidence that they each have a contribution to

non-financial firm performance. The joint effect of human capital, social

capital, employee empowerment and quality of decisions on non-financial firm

performance as evidenced in the model was greater than the individual effects

of human capital and quality of decisions on non-financial firm performance.

In objective four and five the test for moderation was not significant in both

cases. This prompted the researcher to carry out test for mediation on an

exploratory basis. The Baron and Kenny approach in testing for mediation was

again employed. The results provided sufficient statistical evidence to signify a

mediation relationship in both cases. Based on the outcomes the results

statistically indicated that firm performance is influenced by human capital and

this influence is mediated by social capital, employee empowerment and quality

of decisions.

143

Table 5.1: Summary of Research Objectives, Hypotheses and Test Results

Research Objectives Hypotheses Hypotheses test results

Objective 1 To establish the influence of human capital on the performance of insurance firms and commercial banks in Kenya

Hypothesis 1 Human capital has an influence on firm performance

CONFIRMED

Objective 2 To establish the relationship between human capital and quality of decisions

Hypothesis 2 There is a relationship between human capital and quality of decisions

CONFIRMED

Objective 3 To establish the influence of quality of decisions on the performance of insurance firms and commercial banks in Kenya

Hypothesis 3 Quality of decisions influences firm performance

CONFIRMED

Objective 4 To establish whether the influence of human capital on Firm Performance is moderated by social capital

Hypothesis 4 The influence of human capital on firm performance is moderated by social capital

NOT CONFIRMED

Objective 5 To establish whether the influence of human capital on Firm Performance is moderated by employee empowerment

Hypothesis 5 The influence of human capital on Firm performance is moderated by employee empowerment

NOT CONFIRMED

Objective 6 To determine if the influence of human capital on performance of insurance firms and commercial banks is mediated by quality of decisions

Hypothesis 6 The influence of human capital on firm performance is mediated by quality of decisions

CONFIRMED

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Objective 7 To establish the joint effect of human capital, social capital, employee empowerment and quality of decisions on the performance of insurance firms and commercial banks in Kenya

Hypothesis 7 The joint effect of human capital, social capital, employee empowerment and quality of decisions on firm performance is different from the individual effects of human capital and quality of decisions on firm performance

CONFIRMED

5.3 Conclusions

Human capital was measured by considering the academic qualifications held

by employees in the last three years, length of service, average number of job-

related training workshops attended by each employee in a year, average

number of short courses attended by each employee in a year and the extent of

adoption of various human capital practices. The sector seems to be doing well

considering academic qualifications since majority of employees in the sector

are Bachelors degree holders. These are the academic qualifications that have

been held by majority of employees within the last three years. It can be

deduced that the level of human capital in this sector considering the academic

qualifications is above average. Most of the employees had less than 10 years

of work experience. Considering work experience as a human capital measure,

human capital in this sector, ranges from low to average. Majority of the

respondent organizations conducted less than five job-related training

workshops for each employee in a year. The human capital in this sector,

considering the average job-related training workshops attended by employees

in a year is low. Short courses attended by each employee in a year did not

exceed five for most of these organizations. The human capital in this sector,

considering the average short courses attended by employees in a year is low.

The adoption of human capital practices in the financial services sector was

moderate.

145

By virtue of organizations in the financial services sector having embraced

social capital practices and obtaining a grand mean of 3.79 is a clear indicator

of their appreciation that high social capital can lead to superior organizational

outcomes through the resources and information obtained from the social

networks established. However, this sector does not seem to be doing very well

in terms of obtaining resources through the social networks established.

Resources obtained in the form of the number of successfully concluded deals

as a result of both internal and external social networks seem to be low. The

results indicated that majority (89%) of the respondent organizations concluded

less than 40 deals in a year, while only 11% concluded over 40 deals in a year.

It can be deduced that the social capital of the sector was low going by the

number of successfully concluded deals as a result of external social networks.

The indication is that despite the fact that organizations in the sector tried to

establish linkages and strategic alliances with other firms, not a lot of resources

were obtained as a result of such external social networks. The results also

indicated that about 89% of the respondent organizations concluded below 40

deals in a year, while only 11% concluded over 60 deals in a year. It can be

deduced that the social capital of the sector was low going by the number of

successfully concluded deals as a result of employees. Overall there was

moderate adoption of social capital practices.

Organizations in this sector seem to have empowered their employees highly.

This high level of employee empowerment has facilitated swift responses to the

dynamic nature of the environment within which this sector operates. This kind

of flexibility is critical for survival of firms in this sector. It is increasingly

important for organizations to respond rapidly to changes in the environment

and empowering employees represents a logical way to achieve such objectives

as it eliminates extensive communication up and down the organizational

hierarchy. Lower level employees receive timely information about operations,

have the relevant knowledge of their work area, and bear the consequences of

the decisions made. Empowerment of these employees also provides

146

management with more time to consider broader strategies and the long-term

objectives of the company.

Overall there was a high agreement on organizations’ practices regarding

quality of decisions with a grand mean of 4.08. This inclusive nature of

decision making is necessary because of the volatility of the environment in

which this sector operates. The sector ’s performance considering non-financial

indicators, revealed that organizations in this sector are customer-focused hence

are keen on ensuring a high level of customer satisfaction, service quality and

greater efficiency in service delivery. This is because the sector depends a lot

on repeat business as well as referrals through established networks.

The findings revealed a statistically significant relationship between human

capital and quality of decisions using the non-financial measures. The influence

of quality of decisions on firm performance was found to be statistically

significant which means that firm performance may improve if high quality

decisions are made. Organizations that have a high human capital may record a

higher level of performance as a result of high quality decisions made by the

workforce. The findings also revealed that social capital and employee

empowerment do not moderate the influence of human capital on firm

performance. This is because these variables interact with human capital and

quality of decisions hence improving firm performance. Quality of decisions

mediates the influence of human capital on firm performance. The joint effect

of human capital, social capital, employee empowerment and quality of

decisions on non-financial firm performance is different from the individual

effects of human capital and quality of decisions on non-financial firm

performance. Firm performance is therefore bound to improve upon the

introduction of each new study variable. The influence of human capital on

non-financial firm performance gets stronger as each new variable is added.

The mediation test confirmed that social capital and employee empowerment

mediate the influence of human capital on firm performance.

147

5.4 Contribution to knowledge

This study contributes to understanding the link between human capital and

firm performance, while at the same time confirms the findings of previous

studies that have found a significant link between human capital and firm

performance. Subramaniam and Youndt (2005) found that the human capital of a firm

becomes a strategic asset when that knowledge is valuable and unique, thus generating

greater competitiveness and ultimately more profit. Previous studies focused on

examining one or two variables, such as temporary employment, organizational

size and overlapping tenure and how they affect the relationship between

human capital and firm performance, while the current study examines the

interrelationships among four variables namely, human capital, social capital,

employee empowerment, quality of decisions and firm performance. This study

therefore brings out an increased understanding that the combinative effect of

the study variables is greater than the individual effects.

This study tested the moderating effect of social capital and employee

empowerment on human capital and firm performance relationship, and since

the findings revealed that social capital and employee empowerment do not

moderate this relationship, the researcher further tested for possible mediation

that was confirmed. Nishantha (2011) found that social capital moderates the

relationship between human capital and firm growth. This study has contributed

to existing knowledge by empirically confirming that social capital and

employee empowerment are not moderators but mediators of the relationship

between human capital and firm performance. The study also tested the

mediating effect of quality of decisions on human capital and firm performance,

which was confirmed. In this study, a comparative analysis of the insurance and

banking industries based on the study variables has also been done, which no

other study known to the researcher has attempted to do. Most of the previous

related studies have been done in the developed countries, hence the findings of

these studies may not be applicable to organizations in developing countries

148

due to contextual differences. The findings of this study would therefore be

more relevant in the Kenyan context.

5.5 Limitations of the study

The study had some limitations. The study did not attain 100% response rate

because the financial services sector which was the context considered

information sought on some aspects of human capital and number of previously

concluded deals as highly confidential. Few organizations were willing to

respond to some questions that were very critical in the study.

The financial measures of firm performance that were used were Return on

Assets (ROA) and Return on Equity (ROE). These measures yielded

statistically insignificant results when they were regressed with the various

study variables. The study therefore considered non-financial measures of firm

performance only.

Return on Assets (ROA) and Return on Equity (ROE) were obtained for a three year

period as financial indicators of firm performance, after which an average score was

computed. For the commercial banks the period considered was 2010, 2011 and 2012,

while for the insurance companies the period considered was 2009, 2010 and 2011. The

choice of 2011 was informed by the fact that the annual report for 2012 had not yet been

compiled by the Insurance Regulatory Authority. The researcher could not therefore

get uniform data for the two industries in the financial services sector.

Despite the above limitations, the quality of the study was not compromised.

The study has made an immense contribution to the existing body of

knowledge, especially in the area of human capital which has not been fully

exploited.

149

5.6 Recommendations and Policy Implications

The research results showed that human capital significantly influences firm

performance considering the non-financial indicators. The implication of this to

the practice is that building a firm’s human capital is an effective strategy for

improving firm performance. Organizations should strive at increasing their

human capital because high human capital can generate superior organizational

outcomes. It has been demonstrated empirically that the human capital of a firm

becomes a strategic asset when that knowledge is valuable and unique, thus

generating greater competitiveness and ultimately more profit (Subramaniam

and Youndt, 2005). The human resource professionals can help their respective

organizations in achieving this by embracing rigorous selection procedures and

matching the right people with the right jobs. Academic qualifications and work

experience should be considered during selection. Organizations could also

reward length of service as a retention strategy aimed at building work

experience. Intensive training programs aimed at imparting job-related skills

should be designed after proper needs assessment has been done. Such training

programs should also be offered regularly. Organizing as many relevant short

courses as possible with an aim of imparting job-specific skills would enhance

the human capital base.

The findings revealed a statistically significant relationship between human

capital and quality of decisions. The influence of quality of decisions on firm

performance was also statistically significant. This implies that if organizations

build their human capital, the decision quality will improve, which in turn

translates into improved firm performance. The research findings revealed that

social capital mediates the influence of human capital on firm performance. The

implication of this to theory and practice is that firms should strengthen their

social networks and linkages so as to maximize on resources that may be

obtained through such networks. Employees with the relevant knowledge, skills

and competencies should be encouraged to obtain and share information

150

through the social networks that organizations establish to achieve greater

synergy in increasing competitiveness.

The research findings also revealed that employee empowerment mediates the

influence of human capital on firm performance. Organizations should therefore

be keen on increasing the level of employee empowerment because

contributions by engaged employees are believed to have a significant impact

on business productivity, revenue and the organization's overall effectiveness.

People have a fundamental need to contribute to the firm's success and see the

tangible results of their work (Cameron, 2010). Empowerment largely depends

on the knowledge and skills that employees possess because this influences the

quality of decisions that they make. Upon building a high human capital base,

such highly skilled workers should be empowered to make the decisions that

they can handle. Firm performance is therefore improved by having a high

human capital, high social capital, high level of employee empowerment and

making high quality decisions. Organizations should enhance the quality of

strategic decisions by carefully evaluating the various alternatives,

understanding environmental influences and obtaining as much information as

possible through their social networks. The quality of strategic decisions

depends on the amount of human capital possessed by the social networks

whose input organizations heavily rely on.

5.7 Suggestions for Future Research

This study considered only the financial services sector. Future researchers

could consider carrying out a similar study in a different sector or sectors to

assess any variation in responses. Future researchers could also introduce

different variables other than social capital, employee empowerment and

quality of decisions, and testing for moderation or mediating effect of such

variables on the relationship between human capital and firm performance.

Studies using other organizational characteristics as moderators can be carried out to gain

further insights into the relationship between human capital and firm performance.

151

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APPENDICES

APPENDIX 1: QUESTIONNAIRE

SECTION ONE: ORGANIZATION DATA

1. Name of the organization _________________________________________________________________

2. For how long has the organization been in existence?

………………………………………………………………………………………………

……………………………………………………………………………………………...

3. How many employees are in the organization?

……………………………………………………………………………………

……………………………………………………………………………………

4. How would you classify your organization in regard to ownership?

( ) Locally owned

( ) Foreign owned

( ) Combination of local and foreign

Other Please

specify____________________________________________________

5. Incase your organization is a joint venture between foreign and local investors,

what is the proportion of ownership?

( ) Largely foreign owned

( ) Largely locally owned

( ) Equally owned

6. How would you rate your organization according to the value of assets owned?

( ) Assets over Ksh. 5000 M

( ) Assets between Ksh. 3000 M and Ksh. 4999.9 M

( ) Assets between Ksh. 0 and Ksh. 2999.9 M

170

SECTION TWO: Human Capital (Human Resource Manager)

7. How many employees have held the following academic qualifications in the last three years?

Certificate…………………………………………………………………………

Diploma…………………………………………………………………………… Bachelors degree…………………………………………………………………… Masters degree……………………………………………………………………... Doctorate degree……………………………………………………………………

8. What is the average number of years that majority of employees have served in your organization?

……………………………………………………………………………………… ………………………………………………………………………………………..

9. On average how many times does each employee attend job-related training workshops in a year?

………………………………………………………………………………………………

10. On average how many short courses does each employee attend in a year?

………………………………………………………………………………………...

11. Please respond to the following statements by ticking in the appropriate box

corresponding to each statement. Variables Very

large extent

Large extent

Moderate extent

Less extent

Not at all

a) The organization is keen on matching the right people with the right jobs

b) The organization considers academic qualifications during selection

c) Work experience is a key consideration during selection

d) The organization increases the competence of workers by providing training opportunities

171

Very large extent

Large extent

Moderate extent

Less extent

Not at all

e) Training needs assessment is done regularly to reveal the training needs of individual employees

f) Training programs are designed to meet the specific training needs identified

g) Employees obtain job-related skills through professional membership

h) The organization encourages employees to acquire additional academic qualifications

i) The organization recognizes achievement of additional academic qualifications through rewards

j) The organization encourages long tenure by rewarding length of service

k) The organization has mentorship programs aimed at increasing job-related skills

l) The organization has formal career development programs in place

m) The organization encourages employees to join professional bodies

n) The organization pays the annual subscription fee for employees who belong to professional bodies

o) The organization sponsors its employees who are interested in pursuing further studies

p) The organization gives study leave to employees wishing to pursue further studies

172

SECTION THREE: Social Capital (Operations Manager) 12. Please respond to the following statements by ticking in the appropriate box

corresponding to each statement. Variables

Very large extent

Large extent

Moderate extent

Less extent

Not at all

a) The organization has established linkages with other firms

b) The organization obtains a lot of information from other firms

c) The organization shares a lot of information with other firms within the sector

d) The organization has established linkages with firms in other sectors

e) The organization obtains a lot of information from firms in other sectors

f) The organization shares a lot of information with firms in other sectors

g) The organization has formed strategic alliances with other firms

h) The organization obtains a lot of information from external social networks (customers, suppliers, Regulatory body)

i) The organization obtains a lot of information from employees through their social networks

j) The organization seeks advice from external social networks (customers, suppliers, Regulatory body)

k) The organization shares a lot of information with its employees

l) The organization shares a lot of information with its external social networks (customers, suppliers, Insurance body)

m) The organization encourages sharing of information, ideas and knowledge among employees

173

Variables

Very large extent

Large extent

Moderate extent

Less extent

Not at all

n) The organization encourages sharing of information, ideas and knowledge between managerial and non-managerial employees

o) The organization shares the corporate goals with its employees

p) The organization encourages formation of cross-functional teams comprising employees from different departments

q) There is a high level of trust among teams in the organization

r) The organization has successfully concluded deals previously facilitated by its external social networks

s) The organization has successfully concluded deals previously facilitated by its employees

13. How many deals has the organization successfully concluded in the last one year that have been facilitated by its external social networks?

.......................................................................................................................................

14. How many deals has the organization successfully concluded in the last one

year that have been facilitated by its employees? …………………………………………………………………………………………

174

SECTION FOUR: Employee Empowerment (Human Resource Manager)


corresponding to each statement. Variables Very

large extent

Large extent

Moderate extent

Less extent

Not at all

a) Authority is delegated equal to the level of responsibility

b) Employees are provided with an opportunity to learn on their jobs

c) Employees are allowed to exercise control over their work

d) Employees are allowed to make decisions that they can handle

e) Supervisors communicate relevant job information to their subordinates

f) Employees are encouraged to believe in themselves

g) Employees are given freedom and flexibility to experiment

h) Supervisors have established trust and credibility in their subordinates

i) Employees are encouraged to openly express their feelings and concerns

j) Employees’ input is sought before major decisions that affect them are made

k) The organization values the contribution of employees

l) The organization provides employees with adequate resources to do their work

m) Supervisors help their subordinates to set meaningful goals

n) Supervisors inspire their subordinates to do more than they think they can

o) Supervisors recognize and reward performance

p) The organizational leadership responds to employee suggestions without defensiveness and negativity

175

SECTION FIVE: Quality of Decisions (Operations Manager)

16. Please respond to the following statements by ticking in the appropriate box corresponding to each statement.

Variables Very large extent

Large extent

Moderate extent

Less extent

Not at all

a) Strategic decisions are made by the top management

b) Strategic decisions are aligned to the strategic plan

c) Strategic decisions are made after careful analysis of the external environment

d) Strategic decisions are made after careful analysis of all internal organizational factors

e) The top management relies on information from its customers when making decisions

f) The top management relies on information from the Regulatory body when making decisions

g) The top management relies on information from its employees when making decisions

h) The top management relies on information from all its stakeholders when making decisions

i) The views of all departments are considered when strategic decisions are being made

j) The top management analyzes all alternatives carefully before making strategic decisions

k) The strategic proposals prepared by top management are ratified by other levels of management

l) The views of all organizational stake holders are incorporated in the decisions

m) All departments are involved in the implementation of strategic decisions

n) The top management monitors the progress of strategic decisions

176

SECTION SIX: Non-financial indicators of firm perf ormance (Quality of service,

Customer Satisfaction, Efficiency in service delivery) – Marketing Manager


corresponding to each statement.

Variables Very large extent

Large extent

Moderate extent

Less extent

Not at all

Quality of service a) There is a very active quality control section in the organization

b) The organization provides high quality services

c) The organization obtains frequent feedback from customers about the quality of services provided

d) There are mechanisms in place to ensure continuous improvement in service quality

e) The quality of services has improved tremendously within the last three years

Customer Satisfaction f) There is a customer care section in the organization

g) There are established mechanisms through which customers can channel their complaints

h) There are mechanisms to ensure that customer complaints are resolved to their satisfaction

i) Customer satisfaction surveys are carried out frequently

j) Based on the reports of the last customer satisfaction survey, customers are satisfied with the services provided

k) There are customers that have done business with the organization for a period of over five years

l) A considerable number of customers are referred to buy products in the organization by existing customers

Efficiency in service delivery m) Customer claims are processed within a reasonable period of time

n) The organization is very efficient in service delivery

177

APPENDIX 2: INSURANCE FIRMS IN KENYA

1. African Merchant Assurance Company (AMACO)

2. APA Insurance Company

3. Apollo Life Assurance Company

4. British American Insurance Company

5. Cannon Assurance Company

6. CFC Life Assurance Company

7. Chartis Kenya Insurance Company

8. Concord Insurance Company

9. CIC General Insurance Company

10. CIC Life Assurance Company

11. Corporate Insurance Company

12. Directline Assurance Company Ltd

13. East Africa Reinsurance Company Ltd

14. Fidelity Shield Insurance Company

15. First Assurance Company

16. Gateway

17. Geminia Insurance Company

18. GA Insurance Company

19. Heritage Insurance Company

20. ICEA LION General Insurance Company Ltd

21. ICEA LION Life Assurance Company Ltd

22. Intra Africa Assurance Company

23. Invesco Assurance Company Ltd

24. Jubilee Insurance Company

25. Kenindia Assurance Company

26. Kenya Reinsurance Corporation Ltd

27. Kenya Orient Insurance Company

28. Kenyan Alliance Insurance Company Ltd

29. Madison Insurance Company

30. Mayfair Insurance Company

178

31. Mercantile Insurance Company

32. Metropolitan Life Insurance Kenya Ltd.

33. Monarch Insurance Company Limited

34. Occidental Insurance Company

35. Old Mutual Life Assurance Company

36. Pan Africa Life Assurance Company

37. Pacis Insurance Company Ltd

38. Phoenix of East Africa Assurance Company

39. Pioneer Life Assurance Company

40. REAL Insurance Company

41. Shield Assurance Company

42. Takaful Insurance of Africa

43. Tausi Assurance Company

44. Trident Insurance Company

45. UAP Insurance Company Ltd

(www.ira.go.ke)

179

APPENDIX 3: COMMERCIAL BANKS IN KENYA

1. Kenya Commercial Bank Ltd 2. Equity Bank Ltd 3. Cooperative Bank of Kenya Ltd 4. Barclays Bank of Kenya Ltd 5. Standard Chartered Bank (K) Ltd 6. CFC Stanbic Bank Ltd 7. Citibank N. A. 8. NIC Bank Ltd 9. Diamond Trust Bank Ltd 10. I & M Bank Ltd 11. Commercial Bank of Africa Ltd 12. National Bank of Kenya Ltd 13. Baroda Bank Ltd 14. Chase Bank Ltd 15. Family Bank Ltd 16. EcoBank Kenya Ltd 17. Bank of India 18. Prime Bank Ltd 19. Imperial Bank Ltd 20. Bank of Africa (K) Ltd 21. Victoria Commercial Bank Ltd 22. Trans-National Bank Limited 23. Giro Commercial Bank Ltd 24. African Banking Corporation Ltd 25. Fina Bank Ltd 26. Gulf African Bank (K) Ltd 27. Habib AG Zurich 28. K-Rep Bank Ltd 29. Development Bank of Kenya Ltd 30. Jamii Bora Bank Ltd 31. Habib Bank Ltd 32. Guardian Commercial Bank Ltd 33. UBA Bank (K) Ltd 34. Credit Bank Ltd 35. Consolidated Bank of Kenya Ltd 36. Oriental Commercial Bank 37. Fidelity Commercial Bank Ltd 38. Paramount Universal Bank Ltd 39. Middle East Bank (K) Ltd 40. First Community Bank Ltd 41. Dubai Bank Ltd 42. Equatorial Commercial Bank Ltd 43. Charterhouse Bank Ltd (Central Bank of Kenya Annual Supervision Report, 2012)

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