Corporate governance and financial performance in the emerging economy: The case of Ethiopian insurance companies

Zelalem, Bayelign Abebe; Abebe, Ayalew Ali; Bezabih, Sitotaw Wodajo Article Corporate governance and financial performance in the emerging economy: The case of Ethiopian insurance companies Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Zelalem, Bayelign Abebe; Abebe, Ayalew Ali; Bezabih, Sitotaw Wodajo (2022) : Corporate governance and financial performance in the emerging economy: The case of Ethiopian insurance companies, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 10, Iss. 1, pp. 1-18, https://doi.org/10.1080/23322039.2022.2117117 This Version is available at: https://hdl.handle.net/10419/303781 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: (Print) (Online) Journal homepage: www.tandfonline.com/journals/oaef20 Corporate governance and financial performance in the emerging economy: The case of Ethiopian insurance companies Bayelign Abebe Zelalem, Ayalew Ali Abebe & Sitotaw Wodajo Bezabih To cite this article: Bayelign Abebe Zelalem, Ayalew Ali Abebe & Sitotaw Wodajo Bezabih (2022) Corporate governance and financial performance in the emerging economy: The case of Ethiopian insurance companies, Cogent Economics & Finance, 10:1, 2117117, DOI: 10.1080/23322039.2022.2117117 To link to this article: https://doi.org/10.1080/23322039.2022.2117117 © 2022 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Published online: 04 Sep 2022. Submit your article to this journal Article views: 14828 View related articles View Crossmark data Citing articles: 12 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 FINANCIAL ECONOMICS | RESEARCH ARTICLE Corporate governance and financial performance in the emerging economy: The case of Ethiopian insurance companies Bayelign Abebe Zelalem 1 *, Ayalew Ali Abebe 2 and Sitotaw Wodajo Bezabih 2 Abstract: The function of the board in financial institutions differs from that of nonfinancial institutions because the board of directors’ discretionary power would be limited, particularly in regulated financial systems where financial institutions must operate under legislative and prescriptive procedures, policies, rules, and regulations. As a result, the goal of this research was to look into the effect of corporate governance on the financial performance of Ethiopian insurance companies that are heavily regulated. The study used an explanatory research design with econometric panel data from nine insurance companies from 2012 to 2020. Random effect estimation technique was used to find out the most significant variable. Return on asset and equity were used to measure the financial performance and board size, management soundness, board remuneration, financial disclosure, debt and dividend policy as explanatory variables. The result revealed that board size, management soundness, board remuneration, and financial disclosure have a positive and significant effect on insurance company financial performance, whereas debt and dividend payout have a negative and significant impact on insurance company financial performance. Thus, the study concludes that all corporate governance measures have a significant impact on insurance companies' financial performance ABOUT THE AUTHORS Bayelign Abebe Zelalem is a fulltime lecturer in marketing management at Mizan-Tepi University, Ethiopia. Along with teaching and community service engagements, he is interested in doing research in the areas of financial markets, corporate finance and governance, business strategy, e-marketing and entrepreneurship. Ayalew Ali Abebe is a fulltime lecturer in cooperative at Mizan-Tepi University, Ethiopia. Financial markets, corporate finance governance, business strategy, entrepreneurship, small business developments and accounting information system are his areas interest in research in line with teaching and community service activities. Sitotaw Wodajo Bezabih is a fulltime lecturer in cooperative at Mizan-Tepi University, Ethiopia. He is interested in doing researches in the areas of corporate finance and governance, accounting information system, audit, taxation and entrepreneurship. PUBLIC INTEREST STATEMENT Insurance companies are essential stabilizers to smooth the financial volatility of businesses and to support the overall emerging economic growth and capital market development. Besides, corporate governance is vital because it creates a system of rules and practices that control how a company operates and how it aligns with the interests of all its stakeholders. Thus, this research was anticipated to survey the effect of corporate governance on the financial performance of insurance firms found in Ethiopia. The study revealed that management soundness and financial disclosure are significant in influencing the financial performance of insurance companies in Ethiopia. So as to increase financial performance Ethiopian insurance businesses should to improve their management soundness/quality and financial disclosure/transparency. Abebe Zelalem et al., Cogent Economics & Finance (2022), 10: 2117117 https://doi.org/10.1080/23322039.2022.2117117 Page 1 of 18 Received: 29 April 2022 Accepted: 22 August 2022 *Corresponding author: Bayelign Abebe Zelalem, Senior Lecturer in Marketing Management, College of Business and Economics, Mizan Tepi University, Addis Ababa, Ethiopia E-mail: [email protected] Reviewing editor: David McMillan, University of Stirling, Stirling, UK Additional information is available at the end of the article © 2022 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. in Ethiopia as measured both by return on asset and equity. The study contributes to managers and stakeholders to improve the financial performance. Therefore, directors and other stakeholders should put in place proper governance frameworks to improve financial performance and regulators and policymakers develop policies and regulations to guarantee that businesses adopt proper governance structures in order to improve performance. Subjects: Corporate Finance; Insurance; Financial Management; Corporate Governance; Business Keywords: board size; corporate governance; disclosure; financial performance and insurance companies 1. Introduction The structure used in governing and guiding organizations’ is referred to as corporate governance (Jiang et al., 2012). It covers the board of directors’ responsibilities as well as the relationship between the directors and the shareholders. By evaluating performance, providing resources, and giving advisory services, directors play a critical role in a company (Ntim, 2015). According to stewardship theory, a company’s directors are supposed to behave as stewards and work toward accomplishing organizational goals (Davis et al., 1997). When the ownership and control of a firm are separated, however, directors (agents) tasked with carrying out the firm’s activities may not behave in the best interests of the principals (owners; Berle & Means, 1932). According to the agency theory, directors (agents) are self-interested and will act opportunistically when their interests differ from those of the investors (principals; Jensen & Meckling, 1976). The basic role of corporate governance lies in regulating the board’s actions. It is a control and monitoring system in which the board of directors oversees the work of management to maximize shareholder value (Jebran & Chen, 2020). Corporate governance is one of the most important dimensions of ESG (environmental, social and governance) indices, revealing its capacity to ensure legitimacy (Brammer & Pavelin, 2008; Akhtaruzzaman et al., 2021; Buallay, 2019; Miralles-Quirós et al., 2019). Corporate governance aims at facilitating effective monitoring and efficient control of business. Its essence lies in fairness and transparency in operations and enhanced disclosures for protecting the interests of different stakeholders (Arora & Bodhanwala, 2018). Moreover, corporate governance structures are expected to help the firm perform better through quality decision-making (Shivani et al., 2017). Firms with better corporate governance procedures achieve organizational objectives and goals more consistently than those without (Bradley (2004)). According to Adams and Mehran (2003b), businesses with better processes and procedures are more likely to perform well. Better policies and procedures have been identified as a key factor in improving an organization’s financial performance. Many authors argue that if an organization priorities having and following systems, it will be able to provide better returns to its shareholders (Matama, 2008; Gompers et al., 2003). Corporate governance is to ensure good business governance as well as compliance with all regulatory body governance requirements for the benefit of all stakeholders, including society. The board of directors plays a critical role in reducing the agency costs that come from firms’ separation of ownership and decision-making control (Cheung & Chan, 2004). In general, corporate governance is considered to be a significant variable influencing growth prospects of an economy because best governance practices reduce risk for investors, improve financial performance and help in attracting investors (Spanos, 2005). (Monda et al., 2013) also documented that better corporate governance results in higher market valuation and financial performance measured by ROA for companies listed in France, Italy, Japan, the UK and the US. Abebe Zelalem et al., Cogent Economics & Finance (2022), 10: 2117117 https://doi.org/10.1080/23322039.2022.2117117 Page 2 of 18 Financial institutions’ corporate governance differs from that of non-financial institutions, due to the larger risk that financial enterprises provide to the economy. As a result, the regulator takes a more active role in establishing standards and rules to make management practices in financial institutions more accountable and efficient, and then, financial-sector regulators assign additional responsibilities to the boards of directors, which frequently result in detailed regulations governing their decision-making practices and strategic goals. Some academics believe that banking regulation is a substitute for corporate governance because of additional regulatory duties for management (Renee Adams & Mehran, 2003). The persistence of business scandals and failures has prompted research into the efficiency of various corporate governance frameworks (Ntim, 2015). The studies’ findings, on the other hand, are inconclusive and yield mixed results. Some studies show that corporate governance variables including board size, composition, diversity, and board independence have a positive impact on performance (Chen et al., 2005; Jackling and Johl, 2009a; Khan and Subhan , 2019; Riyadh et al., 2019; Lozano et al., 2016; Schmidt & Fahlenbrach, 2017). Other studies, on the other hand, show a negative relationship (Afrifa & Tauringana, 2015; Conyon & Peck, 1998; Guest, 2009; Mak & Kusnadi, 2005; Malik & Makhdoom, 2016; O’connell & Cramer, 2010), while others show no relationship (Afrifa & Tauringana, 2015; Conyon & Peck, 1998; Guest, 2009; Mak 2005 ; Bhagat & Black, 2002; Ferrer & Banderlipe, 2012; Ghazali, 2010; Haji, 2014; Chabachib et al. (2019). Furthermore, because of cultures and corporate governance structure difference, most of these studies focus on developed countries and may not be applicable to other countries (Arora & Sharma, 2016; Tricker & Tricker, 2015). Exploring the impact of corporate governance measures on the performance of insurance companies is highly intriguing in Ethiopia since the financial industry is restricted and subject to a strict regulatory regime. The existing literatures only explain the impact of corporate governance on business performance (Matama, 2008; Rashid, 2011). These studies attempted to explain the impact of corporate governance on firm performance in a relatively liberalized economy where the board of directors has more discretionary power to exercise it and make decisions that they believe are more beneficial to their companies. Furthermore, Afrifa and Tauringana (2015) and Abate (2012) investigated the determinants of insurance company performance in Ethiopia, although the study omitted corporate governance-related aspects that affect financial performance. Gardachew (2015), on the other hand, looked at the impact of corporate governance on the financial performance of the insurance industry by combining corporate governance-related variables with a limited number of corporate governance components. Moreover, Enyew etal, (2019) evaluated the financial distress condition and its firmspecific determinant factors in the Ethiopian insurance industry using data ranging from 2007 to 2016 and found that the financial health condition of the insurer’s understudy was not in a safe condition and it shows continuous fluctuations. Therefore, this study is needed because studies on corporate governance are very limited in Ethiopia and contribute to the theories of corporate performance and financial performance and their effect on the profitability and for the perspective investors about investing in a particular corporate precise, effective and efficient investment decision. The study adds to the body of knowledge on corporate governance in a variety of ways. First, the study tries to explain the role of the board of directors in Ethiopia’s highly regulated insurance business, as well as the importance of corporate governance processes in the absence of capital markets in the country’s closed financial sector. Therefore, this finding sheds light on the impact of corporate governance on financial performance in developing countries and presents an empirical evaluation on the effect of alternative governance arrangements, as well as recommendations for policymakers to use in assessing and reviewing corporate governance rules. Second, the study makes recommendations to managers and other stakeholders on how to improve the performance of insurance businesses by changing the board structure. 1.1. Objectives The overall objective of this study was to measure the effect of corporate governance on the financial performance of Ethiopian insurance companies and it specifically aims to: Abebe Zelalem et al., Cogent Economics & Finance (2022), 10: 2117117 https://doi.org/10.1080/23322039.2022.2117117 Page 3 of 18 (1) Assess the effect of board size on the financial performance of insurance companies in Ethiopia. (2) Examine the effect of management soundness on the financial performance of insurance companies in Ethiopia. (3) Investigate the effect of dividend policy on the financial performance of insurance companies in Ethiopia. (4) Determine the effect of debt on the financial performance of insurance companies in Ethiopia. (5) Identify the effect of board remuneration on the financial performance of insurance companies in Ethiopia. (6) Examine the effect of financial disclosure on the financial performance of insurance companies in Ethiopia. 2. Theoretical literature review 2.1. Stewardship theory According to the theory, board members of a corporation behave as stewards, and will not prioritize their own interests over the company. Furthermore, the directors will carry out their responsibilities in a way that promotes collectivism or the accomplishment of organizational utility rather than individual gains (Davis et al., 1997). As the directors work to meet the organization’s goals, their personal needs are met as well (Kluvers & Tippett, 2011). Regardless of the directors’ personal interests, the directors act as honest stewards of the company and are devoted to the collective good of the company’s stakeholders (Davis et al., 1997). The performance of the stewards, on the other hand, is contingent on whether the organizational structure allows proper action (Davis et al., 1997). Stewardship theory assumes that when stewards align their interests with those of the principal, there will be no principal-agency problem (Chrisman, 2019). In essence, when the interests of the steward and the principle coincide, both parties achieve their long-term goals without conflicting interests. Moreover, the theory emphasizes the concept that a company’s managers or executives operate as stewards, and so they should be on the board of directors. This viewpoint is supported by the existing literature, which suggests that executive directors should make up a percentage of the board (Coles et al., 2008; Harvey Pamburai et al., 2015; Mashayekhi & Bazaz, 2008). 2.2. Agency theory The theory is based on Smith’s (1776) that states if a company is run by people who are not shareholders, the managers may not be working in the best interests of the owners. When a shareholder (principal) hires another person (agent) to handle some tasks on their behalf, an agency relationship is formed. If the principal and the agent are both maximizing utility, the agent may not always act in the shareholders’ (principal) best interests (Jensen & Meckling, 1976). According to Berle and Means (1932), distinct risk preferences and actions exist among groups and individuals within an organization. The principal invests their money in a company and accepts risks in exchange for financial gain. Managers (agents), on the other hand, are risk averse and want to maximize their profits. As a result, the agent’s and principal’s risk tolerances are not in sync, resulting in agency conflict. When the managers or executives opt to behave in a manner that drives them towards self-motivation, goal attainment and self-actualization, they will naturally align their ambitions with the organization’s goals (Schillemans & Bjurstrøm, 2020). Therefore, agency theory stated that non-executive directors should be included on the board of directors to oversee managers’ performance. The board should also be structured in a way that ensures decision-making independence, by including independent directors to avoid conflicts of interest and Malik and Makhdoom (2016), found that independent board of directors has a significant impact on a company’s performance. Abebe Zelalem et al., Cogent Economics & Finance (2022), 10: 2117117 https://doi.org/10.1080/23322039.2022.2117117 Page 4 of 18 2.3. Resource dependency theory The theory postulates that the board of a firm is critical because it provides resources to the managers who in turn utilize them to achieve organizational objectives (Hillman & Dalziel, 2003; Hillman & Dalziel, 2003). The theory recommends the board to provide support to the executives, finance, human, and intangible properties. Board members with expertise and professional should provide training and mentoring to executives to help them improve their skills and performance. Board members can also connect the organization with their personal networks, bringing in vital resources. According to the theory, CEOs should be permitted to make the majority of the firm’s decisions, with some being presented to the board for approval. In the case of the banking industry, stakeholder theory consists of satisfying depositors, owners, and other relevant stakeholders based on an effective governance structure that enhances trust and transparency (Vicnente-Ramos et al., 2020). The resource-based view thus promotes the inclusion of professionals on a company’s board of directors, emphasizing the importance of outside directors who bring best practices and connections from other companies. The theory also advocates for a larger board of directors to accommodate more directors with a wide range of experience and knowledge. Non-executive directors and professionals with a wide range of experience and skills should be included on a company’s board of directors Ghazali (2010), Ujunwa (2012), Francis et al. (2015), and Mori (2014). 2.4. Literature review and hypothesis development 2.4.1. Board size By providing policy direction and strategic guidance, the board of directors plays an important role in an institution. According to PfefferJ and Pfeffer’s (1972), an institution can gain enormous and valuable resources from its board of directors, reducing its reliance on the environment. Resource dependency theory states that companies with a large board of directors can access more resources from the outside world. Ciftci et al. (2019), Jackling and Johl (2009a) and 2019 investigated the impact of corporate governance practices on insurance companies’ financial performance in Nepal and found that large board can improve board independence and diversity, resulting in improved firm performance. Moreover, Schillemans and Bjurstrøm (2020) conducted a study on the impact of corporate governance on the performance of insurance companies, and discovered that board size has a beneficial impact. 2.4.2. Debt Creditors, such as banks, have made significant investments in the company and want to see their money back. Their power stems in part from a range of control rights they obtain when companies default or breach debt covenants (Clifford & Jerold, 1979), and in part from the fact that they often lend for a limited period of time, requiring borrowers to return for further funds at frequent intervals. As a result, banks and other large creditors are similar to large stockholders in many ways. et et al. (2020) looked into the corporate governance and financial performance of Pakistani insurers. The findings suggest that debt has a detrimental impact on insurance performance. Jebran and Chen (2020) investigated the influence of corporate governance on the financial performance of Ethiopian insurance companies and discovered that leverage has a significant negative impact on return on investment. Furthermore, Afrifa and Tauringana (2015) and Abate (2012) indicate that leverage has a negative and considerable influence on insurance company profitability in Ethiopia. 2.4.3. Management soundness Good operational systems, control systems, organizational discipline, and culture are typically used to measure sound and efficient management. Ratios such as operating expense to total expense and total spending to total income are important indicators of good management. According to Athanasoglou et al. (2008), the amount of operating expenses is defined by the quality of management, which has an impact on profitability. Abebe Zelalem et al., Cogent Economics & Finance (2022), 10: 2117117 https://doi.org/10.1080/23322039.2022.2117117 Page 5 of 18 Buallay (2019) investigated the factors influencing the performance of 20 short-term insurance businesses in Zimbabwe. The study’s findings imply that a company’s managerial soundness has a negative and significant impact on the performance of insurance businesses. In the same way, Afolabi (2018) investigated the impact of claim payouts on insurance company profitability in Nigeria and the study discovered that return on asset has an indirect link with loss ratio and net claims but a direct association with expense ratio. 2.4.4. Board remuneration Ekundayo (2018) investigated the impact of motivation on employee performance in a number of Nigerian insurance firms. Motivation was found to be the most important factor affecting employee performance. Furthermore, the research revealed a direct, robust, and beneficial link between employee motivation and performance. Dube et al. (2017) looked at the effect of encouraging front-line staff in Jordanian retail businesses on organizational commitment and found that front-line staff motivation has a major impact on organizational commitment. Obikeze (2016) investigated the impact of motivation on sales force performance of mobile telecommunication network in Nigeria. The study used a survey approach that included both primary and secondary data, and the study found that incentive tactics encourage salespeople to focus on prospects that are most likely to yield higher returns on their efforts. 3.4.5. Financial disclosure The financial disclosure index was created using an unweighted approach. This method is best used when no special attention is paid to any one user group (Alexandrina Stefanescu, 2013). Following the creation of the disclosure list, a grading sheet was created to evaluate the amount of insurance companies’ voluntary corporate transparency. If the insurance company gave information on the item on the list, it received a score of 1, and if it did not, it received a score of unlike weighted scores, which were rarely utilized earlier, most prior studies aiming at generating such an index of disclosure support approach (Barako et al., 2006). Arora and Bodhanwala (2018) investigated the impact of corporate governance disclosure on Nepalese insurance performance and found that corporate governance has an impact on the performance of insurance companies. Ciftci et al. (2019) investigated corporate governance disclosure and firm performance in developing market evidence from Turkey and found that financial disclosure has an effect on performance. 3.4.6. Dividend policy Financial transfers to shareholders in the form of dividends may be beneficial in reducing agency issues. Lintner and Gordon (1956) proposed that there is a direct relationship between firm’s dividend policy and its market value, in support of dividend relevance theory. The bird in the hand argument, which indicates that current payouts are less hazardous than future dividends or capital gains, is central to this argument. Dividend policy and financial performance of insurance businesses registered on the Nairobi Securities Exchange in Kenya, Akhtaruzzaman et al. (2021). The study found that paying out dividends has no impact on the performance of insurance businesses listed on the Nairobi Stock Exchange. Afrifa and Tauringana (2015) looked at the relationship between dividend policy and insurance company performance, and found that dividend policy has no impact on the firm’s success. Furthermore, dividend irrelevance theory suggests that dividend payment has an indirect link with performance, contrary to dividend relevance theory. As a result of the review of previous studies, the following hypothesis was designed and the relationship between independent and dependent variableshas been shown below on the conceptual framework in Figure 1: H1: Board size has a significant and positive effect on the financial performance of insurance companies in Ethiopia. Abebe Zelalem et al., Cogent Economics & Finance (2022), 10: 2117117 https://doi.org/10.1080/23322039.2022.2117117 Page 6 of 18 H2: Debt has a negative and significant effect on insurance company’s financial performance in Ethiopia. H3: Management soundness has a negative and significant effect on insurance company’s financial performance in Ethiopia. H4: Board remuneration has a positive and significant effect on insurance company’s financial performance in Ethiopia. H5: Financial disclosure has a positive and significant effect on insurance company’s financial performance in Ethiopia. H6: Dividend policy has a significant and negative effect on the financial performance of insurance companies in Ethiopia 3. Materials and methods This study attempted to investigate the effect of corporate governance on the financial performance of insurance companies in Ethiopia. In light of the research objective and the quantitative nature of the data, this study employed a quantitative approach to identify the effect of corporate governance on insurance companies’ financial performance. Accordingly, this study adopted an explanatory research design to examine the cause and effect relationships between financial performance and the corporate governance. In Ethiopia, there are now 17 insurance companies in operation, and 9 insurance companies that have 9 years of audited financial data from 2012 to 2020 were included in the sample purposively. The study used secondary data, which included the audited annual financial reports of insurance companies under study. The data were strongly balanced panel types, which captured both crosssectional and time-series behaviors. 3.1. Model and measurement of variables To test the hypothesis and explain the association between corporate governance characteristics and financial performance measures, a multi-panel linear regression model was utilized. The independent variables were board size (BS), debt (DEBT), dividend policy (DP), management soundness (MS), board remuneration (BR), and financial disclosure (FD), whereas the dependent variables were return on asset (ROA) and return on equity (ROE). Table 1 summarizes the study variables used in the empirical analysis of this research. The following model was used to determine the relationship between the variables: Own design, 2022 Directors’ remuneration Dividend policy Disclosure Management soundness Debt policy Financial performance ROA and ROE Board size Figure 1. Conceptual framework. Own design, 2022 Abebe Zelalem et al., Cogent Economics & Finance (2022), 10: 2117117 https://doi.org/10.1080/23322039.2022.2117117 Page 7 of 18 5. Conclusions and policy implications The impact of corporate governance on firm performance has become such a hot research issue that it has piqued academics’ and researchers’ interest. Despite the existence of empirical literature, the results of such investigations have remained inconclusive. Few studies have shown that financial institutions’ corporate governance differs from that of non-financial institutions, limiting the directors’ discretionary power, particularly in regulated financial systems where financial institutions are required to operate under legislative and prescriptive procedures, policies, rules, and regulations. As a result, the purpose of this research is to investigate the effect of corporate governance on the financial performance of a tightly regulated Ethiopian insurance firm. A random effect model was used to evaluate nine years of panel data from nine insurance companies. The dependent variables are return on asset and return on equity, while the explanatory variables are board size, debt, board remuneration, dividend policy, management soundness, and financial disclosure. The finding revealed that the size of the board of directors had a considerably favorable impact on the financial performance of Ethiopian insurance businesses, as evaluated both by return on asset and return on equity. This suggests that insurance businesses with a larger board size ratio outperform their peers. The findings also revealed that management soundness and financial disclosure had a positive and significant impact on the financial performance of Ethiopian insurance companies assessed by both return on asset and return on equity. As a result, the study finds that improving the financial performance of Ethiopian insurance businesses through improving management soundness and financial disclosure. Similarly, debt and dividend payments have a negative link with insurance businesses’ return on assets and equity in Ethiopia. This indicates that insurance businesses with a higher dividend ratio will perform poorly. Therefore, insurance companies should employ debt financing rather than stock financing. Finally, the findings revealed that board remuneration has a significant positive effect on Ethiopian insurance companies’ financial performance, as evaluated both by ROA and ROE. The findings imply that the higher the board remuneration, the better the insurance company’s financial performance. Therefore, Ethiopian insurance companies should boost board remuneration. Thus, the study concluded that all of the corporate governance proxies employed in the study had a significant impact on insurance businesses’ financial performance, as assessed both by return on asset and return on equity. 5.1. Policy implications Based on the findings of the study, the following significant policy and operational directions are forwarded. In order to improve financial performance, directors and other stakeholders should put in place proper governance frameworks. The study also suggests that regulators and policymakers develop policies and regulations to guarantee that businesses adopt proper governance structures in order to improve performance. Finally, future research may focus on data from industries other than insurance firms, such as banks, microfinance institutions, and cooperative unions, and other governance variables like gender diversity, age, board education, and shareholding can also be investigated by future studies. Funding The authors received no direct funding for this research. Author details Bayelign Abebe Zelalem 1 E-mail: [email protected] Ayalew Ali Abebe 2 Sitotaw Wodajo Bezabih 2 1 Marketing Management, College of Business and Economics, Mizan Tepi University, Addis Ababa, Ethiopia. 2 Senior Lecturer in Cooperative, College of Business and Economics, Mizan Tepi University, Addis Ababa, Ethiopia. Disclosure statement No potential conflict of interest was reported by the author(s). Citation information Cite this article as: Corporate governance and financial performance in the emerging economy: The case of Ethiopian insurance companies, Bayelign Abebe Zelalem, Ayalew Ali Abebe & Sitotaw Wodajo Bezabih, Cogent Economics & Finance (2022), 10: 2117117. References Abate, G. 2012, Determinants of insurance companies’ profitability in Ethiopia. Master’s thesis. Addis Ababa University. http://etd.aau.edu.et Adams, R., & Mehran, H. (2003). 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Management Science Letters, 10(9), 2045–2052 Abebe Zelalem et al., Cogent Economics & Finance (2022), 10: 2117117 https://doi.org/10.1080/23322039.2022.2117117 Page 17 of 18 © 2022 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. You are free to: Share — copy and redistribute the material in any medium or format. Adapt — remix, transform, and build upon the material for any purpose, even commercially. The licensor cannot revoke these freedoms as long as you follow the license terms. Under the following terms: Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. No additional restrictions You may not apply legal terms or technological measures that legally restrict others from doing anything the license permits. 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