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

ii
 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

ii
 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.

iii
 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.

v
 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
4.5.5 Influence of Human Capital on Firm Performance as moderated by
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
Table 4.29: Regression results for the moderating effect of Social Capital on the
influence of Human Capital on Return on Equity .............................. 97
Table 4.30: Regression results for the moderating effect of Social Capital on the
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
Table 4.33: Regression output for the test for moderating effect of Employee
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
Table 4.35: Mediating effect of quality of decisions on human capital and firm
performance (Second step) ............................................................. 107
Table 4.36: Mediating effect of quality of decisions on human capital and firm
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
Table 4.38: Joint effect of human capital, social capital, employee
empowerment and quality of decisions on Return on Equity ............ 112

xi
Table 4.39: Joint effect of human capital, social capital, employee
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
Table 4.41: Mediating effect of social capital on human capital and firm
performance (Second step) ............................................................. 118
Table 4.42: Mediating effect of social capital on human capital and firm
performance (Third and Fourth Step) .............................................. 119
Table 4.43: Mediating effect of employee empowerment on human capital and
firm performance (First step) ......................................................... 121
Table 4.44: Mediating effect of employee empowerment on human capital and
firm performance (Second step)...................................................... 122
Table 4.45: Mediating effect of employee empowerment on human capital and
firm performance (Third and fourth step)........................................ 123
Table 5.1: Summary of Research Objectives, Hypotheses and Test Results ........ 140

xii
 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

1
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

2
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

3
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

4
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.

5
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

6
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

7
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,

8
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

9
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

10
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,

11
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

12
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

13
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

14
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.

15
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

16
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

17
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

18
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

19
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

20
 (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.

21
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.

22
 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

23
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

24
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

25
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

26
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

27
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

28
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

29
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

30
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

31
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

32
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

33
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

34
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

35
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).

36
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).

37
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.

38
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

39
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

40
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).

41
 Table 2.1 Summary of Gaps in Knowledge
STUDY FOCUS FINDINGS KNOWLEDGE GAP FOCUS OF CURRENT
STUDY
Roca-Puig, The study aimed at examining The study found that positive effect of The study considered This study focused on the
Beltrán- how temporary employment and human capital on return on sales is greater the moderating role of moderating role of social
Martín and organizational size moderate the in large firms with low temporary temporary employment capital and employee
Cipres, effect of human capital on firm employment than in small firms with high and organizational size empowerment in the
(2011) performance. The authors also temporary employment. on the relationship relationship between human
analyzed the overall effect of between human capital capital and firm
human capital, temporary and firm performance. performance.
contracts and organizational size
on firm performance.
Harris, The study aimed at examining The study found that human capital has a The study considered This study focused on the
McMahan the relationship between various positive influence on team performance. the moderating role of role of social capital,
and Wright aspects of human capital and Further, the study found that organizations overlapping tenure in employee empowerment and
(2012) overlapping tenure and unit with human resources that have higher the relationship quality of decisions in the
performance levels of overlapping tenure may have between human capital relationship between human
higher levels of performance. and team performance. capital and firm
performance.

42
Jamal and The study attempted to explain Results of the study showed that the firms The study focused on This study assessed the
Saif (2011) the relationship between Human Human Capital Management have a how management of relationship between human
Capital Management and significant positive impact on human capital can capital itself and firm
Organizational Performance. organizational performance. affect firm performance, while
performance. introducing other variables at
the same time.
Awan and The aim of the paper was to The study found a strong positive The study considered This study considered the
Sarfraz establish the relationship relationship between human capital the moderating role of combinative effect of human
(2013) between human capital and and firm performance and further employee satisfaction capital, social capital,
firm performance and the found that employee satisfaction on the relationship employee empowerment and
mediating effect of employee mediated this relationship. between human quality of decisions on firm
satisfaction on the human capital and firm performance. The sample
capital-firm performance performance. The was large comprising all
link. sample comprised commercial banks and
only three firms. insurance companies in
Kenya.
Nishantha The study examined the The study found that the The study considered This study considered the
(2011)
effect of entrepreneur’s entrepreneur’s human capital relates the moderating role of combinative effect of human
human capital and social positively and directly to the social social capital on the capital, social capital,
capital on the growth of capital. In addition, the authors relationship between employee empowerment and
Small Enterprises (SEs) in observed direct effects of human human capital and quality of decisions on firm

43
 Sri Lanka. capital on firm growth. Social capital firm performance. performance.
was therefore found to moderate the
relationship between human capital
and firm growth.

Lin and The study aimed at examining Found that people's roles in central The study focused on This study focuses on the
Huang the kind of role social capital network positions were positively related the relationship relationship between human
(2005) played in the relationship to career developmental potential. Further, between human capital capital and firm performance
between human capital and they found that the relationship between and career outcomes, and also introduces
career outcomes, with a human capital and career development and not firm employee empowerment and
particular focus on testing the potential in the organizations was performance. quality of decisions as
mediation and moderation completed through the effect of social additional moderating
models capital, supporting the mediation model. variables.

Gonzalez– To establish the influence of Human capital had a positive relationship What would be the This study will fill this gap in
Alvarez and human capital and social capital with discovery of opportunities. influence of human knowledge, while at the
Solis- on the discovery of There is a positive significant relationship capital and social same time incorporating
Rodriguez opportunities. between social capital and discovery of capital in the additional variables.
(2011) business opportunities. performance of
businesses?

44
Ottosson The study aimed at establishing The study revealed that human capital and The study has not This study focuses on the
and Klyver how human capital influences social capital were co-productive, and focused on the combinative effect of human
(2010) social capital. increased human capital seems to increase combinative effect of capital, social capital,
the level of social capital concurrently. It social and human employee empowerment and
was found that entrepreneurs with higher capital on firm quality of decisions on firm
education, in addition to production of performance. performance
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.

45
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,

46
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.

47
Figure 1 Conceptual Model

48
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

49
 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

50
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).

51
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

52
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.

53
Table 3.1 Operationalization of Variables
Variable Indicators Measurement Questionnaire
Item
Human Capital • Educational Was determined by Question 7-11
(Independent level considering the academic
variable) qualifications held by the
employees.
Was assessed using the
• Tenure length of service.
Number of workshops
• Job-related skills attended in a year.
Number of short courses
attended in a year

Use of Likert scale type of

questions

Social Capital • External social Use of Likert scale type of Question 12-14
(Moderating networks questions
variable) • Internal social
networks
• Resources Number of successfully
obtained through concluded business deals
internal and through internal and external
external social social networks
networks

54
Employee • Delegation Use of Likert scale type of Question 15
Empowerment • Communicating questions
(Moderating relevant job
variable) information
• Fostering
development of
skills
• Employees’
autonomy and
control over
their work
• Suggestions
incorporated in
decisions

Quality of • Decision Likert scale type of Question 16

Decisions effectiveness questions
(Intervening • Degree of
variable) involvement of
stake-holders
• Alignment with
the strategic plan

Firm • Financial Return on Assets, Return on

Performance indicators Equity
(Dependent Quality of service, Customer Question 17
variable) • Non-financial Satisfaction, Efficiency in
indicators service delivery

55
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.

56
 Table 3.2 Summary of statistical tests for hypotheses and interpretation

Objectives Hypotheses Statistical Test Model

To establish the influence of human H1 Human capital has an influence on Simple Linear Firm Performance = f (Human Capital)
capital on the performance of insurance firm performance Regression Y = β0 +β1X1 +ε
firms and commercial banks in Kenya Analysis Y= Firm Performance, β0= intercept, X1= Human
Capital, β1= coefficient, ε= Error term
To establish the relationship between H2: There is a relationship between Pearson’s Product
human capital and quality of decisions Human capital and quality of decisions Moment
Correlation
Analysis
To establish the influence of quality of H3: Quality of decisions influences firm Simple Linear Firm Performance = f (Quality of Decisions)
decisions on performance of insurance performance Regression Y = β0 +β1X1+ε
firms and commercial banks in Kenya Analysis Y = Firm Performance, β0= intercept, X1= Quality
of Decisions, β1= coefficient, ε= Error term

To determine if the influence of human H4: The influence of human capital on Multiple Linear Firm performance = f (HC, SC)
capital on Firm Performance is firm performance is moderated by social Regression Y = β0 +β1X1+β2X2+ε
moderated by social capital capital Analysis Y= Firm performance, β0= intercept, X1= Human
Capital, X2= Social Capital, β1, β2= coefficients,
ε= Error term

To determine if the influence of human H5 : The influence of human capital on Multiple Linear Firm performance = f (HC, EE)
capital on firm performance is firm performance is moderated by Regression Y = β0 +β1X1+β2X2+ε
moderated by employee empowerment employee empowerment Analysis Y= Firm performance, β0= intercept, X1= Human
Capital, X2= Employee Empowerment, β1, β2=
coefficients, ε= Error term

57
Objectives Hypotheses Statistical Test Model
To determine if the influence of human H6: The influence of human capital on Multiple Linear Firm Performance = f (HC, QD)
capital on performance of insurance firm performance is mediated by quality Regression Y = β0 +β1X1+β2X2+ε
firms and commercial banks is mediated of decisions. Analysis Y= Firm Performance, β0= intercept, X1= Human
by quality of decisions Capital, X2= Quality of Decisions (Intervening
Variable), β1, β2= coefficients ε= Error term
To establish the joint effect of human H7: The joint effect of human capital, Stepwise Regression Firm Performance = f (HC, SC, EE, QD)
capital, social capital, employee social capital, employee empowerment Analysis Y = β0 +β1X1+β2X2+β3X3+β4X4+ε
empowerment and quality of decisions and quality of decisions on firm Y= Firm Performance, B0= intercept, X1=Human
on the performance of insurance firms performance is greater than the Capital, X2=Social Capital, X3= Employee
and commercial banks in Kenya individual effects of human capital and Empowerment, X4= Quality of Decisions, β1, β2,
quality of decisions on firm performance β3, β4= coefficients, ε= Error term

58
 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 Cronbach's Alpha No. of

Alpha Based on Items
Standardized Items
Human capital .801 .800 16
Social capital .940 .940 19
Employee empowerment .929 .930 16
Quality of decisions .905 .905 14
Non financial
.921 .927 14
performance indicators

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

59
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

60
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.

61
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.

62
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 Human Capital Percentage
Qualifications categorization Frequency
Certificate Low 2281 7.1%
Diploma Average 6484 20.2%
Bachelors Above Average 17311 53.8%
degree
Masters High 3012 9.4%
degree
Doctorate High 3088 9.6%
degree

63
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 High
1 1.9
yrs
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

64
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- Human
related training Capital
workshops 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.

65
Table 4.10: Average short courses attended in a year
Number of short Human Capital
courses 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.

66
Table 4.11 : Means and standard deviations for measures of Human Capital
Human Capital Indicators N Mean Standard
Deviation
organization considers academic qualifications during
53 4.26 .836
selection
organization keen on matching the right people with
53 4.25 .617
the right job
organization increases competence of workers by
52 4.19 .768
providing training opportunities
organization encourages employees to acquire
54 4.19 .702
additional academic qualifications
Training programs designed to meet the specific
53 4.17 .672
training needs identified
organization encourages employees to join professional
53 3.98 .772
bodies
Training needs assessment done regularly to reveal
54 3.91 .759
training needs of individual employees
Work experience is a key consideration during
53 3.91 .815
selection
organization encourages long tenure by rewarding
52 3.88 1.022
length of service
organization recognizes achievement of additional
54 3.85 .833
academic qualifications through rewards
employees obtain job related skills through
51 3.69 .860
professional membership
organization gives study leave to employees wishing to
54 3.57 1.395
pursue further studies
organization pays annual subscription fee for
54 3.54 1.299
employees who belong to professional bodies
organization has formal career development programs
54 3.50 .966
in place
organization sponsors its employees interested in
53 3.38 1.197
pursuing further studies
organization has mentorship programs aimed at
49 3.29 1.080
increasing job related skills
Grand Mean 3.85

67
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

68
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
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 4.12 below.

69
Table 4.12: Means and standard deviations for measures of Social Capital
Standard
Social Capital Indicators N Mean Deviation
organization shares the corporate goals with its
53 4.19 .652
employees
organization encourages formation of cross functional
53 4.04 .784
teams comprising employees from different departments
there is a high level of trust among teams in the
53 4.04 .678
organization
organization obtains a lot of information from external
53 4.02 .909
social networks
organization encourages sharing of information, ideas
53 3.94 .818
and knowledge among employees
organization encourages sharing of information, ideas
and knowledge between managerial and non managerial 53 3.92 .756
employees
organization has established linkages with other firms 52 3.92 .904
organization shares a lot of information with its
52 3.92 .882
employees
organization has successfully concluded deals previously
54 3.81 .933
facilitated by its employees
organization has established linkages with the firms in
51 3.80 .775
other sectors
organization seeks advice from external social networks 53 3.77 .974
organization obtains a lot of information from firms in
52 3.69 .897
other sectors
organization shares a lot of information with its external
53 3.66 .960
social networks
organization obtains a lot of information from employees
52 3.62 1.051
through their social networks
organization has successfully concluded deals previously
54 3.61 1.071
facilitated by its external social networks
organization obtains a lot of information from other
51 3.59 .898
firms
organization has formed strategic alliances with other
53 3.58 .969
firms
organization shares a lot of information with firms in
50 3.54 .994
other sectors
organization shares a lot of information with other firms
53 3.38 .945
within the sector
Grand Mean 3.79

70
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.

71
Table 4.13: Business deals completed through external social networks in the last
one year.
Number of Social Capital
deals Categorization Frequency Percent
0-20 Low 47 87.0
21-40 Low 1 1.9
41-60 Moderate 1 1.9
61-80 Moderate 0 0.0
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.

72
Table 4.14: Business deals concluded by employees in the last one year

Number of deals Social Capital Frequency Percent

Categorization
0-20 Low 48 88.9
21-40 Low 0 0.0
41-60 Moderate 2 3.7
61-80 Moderate 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

73
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

In this section, the researcher sought the respondents’ perception as regards the
various aspects defining employee empowerment. The respondents expected to
indicate to what extent they agreed to the various statements that defined
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
presented in table 4.15 below.

74
Table 4.15: Means and standard deviations for measures of Employee
Empowerment
Standard
Employee Empowerment Indicators N Mean Deviation
organization provides employees with adequate
54 4.24 .725
resources to do their work
employees are provided with an opportunity to learn
54 4.22 .604
on their jobs
supervisors communicate relevant job information to
54 4.20 .711
their subordinates
authority is delegated equal to the level of
54 4.17 .637
responsibility
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
54 4.07 .669
goals
employees are allowed to exercise control over their
53 4.02 .571
work
employees are allowed to make decisions that they
53 3.98 .747
can handle
supervisors recognize and reward performance 52 3.98 .754
supervisors inspire their subordinates to do more
54 3.93 .773
than they think they can
organizational leadership responds to employee
54 3.91 .853
suggestions without defensiveness and negativity
supervisors have established trust and credibility in
53 3.89 .891
their subordinates
employees are encouraged to openly express their
52 3.87 .991
feeling and concerns
employees are given freedom and flexibility to
53 3.70 .952
experiment
employees' input is sought before major decisions
54 3.50 1.023
that affect them are made
Grand Mean 3.99

75
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

76
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
indicate to what extent they agreed to the various statements that defined
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
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 4.16 below.

77
Table 4.16: Means and standard deviations for measures of Quality of Decisions
Standard
Quality of Decisions Indicators N Mean 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
54 4.30 .743
the external environment
top management monitors the progress of strategic
53 4.25 .731
decisions
top management analyzes all alternatives carefully
54 4.22 .718
before making strategic decisions
strategic decisions are made after careful analysis of
52 4.13 .768
all internal organizational factors
all departments are involved in the implementation
54 4.09 .807
of strategic decisions
top management relies on information from all its
54 4.02 .739
stakeholders when making decisions
top management relies on information from
52 4.00 1.010
regulatory authorities when making decisions
views of all strategic departments are considered
54 3.98 .812
when strategic decisions are being made
top management relies on information from its
54 3.91 .853
customers when making decisions
views of all organizational stakeholders are
53 3.91 .861
incorporated in the decisions
strategic proposals prepared by top management are
54 3.89 .883
ratified by other levels of management
top management relies on information from its
54 3.63 .896
employees when making decisions
Grand Mean 4.08

78
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.,

79
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

In this section, the researcher sought the respondents’ perception as regards the
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.

80
Table 4.17: Means and standard deviations for measures of Non-financial
performance
Standard
Non-financial Performance Indicators N Mean Deviation
there are customers that have done business with the
52 4.54 .641
organization for a period of over five years
there are mechanisms to ensure that customer
53 4.42 .663
complaints are resolved to their satisfaction
there are established mechanisms through which
53 4.36 .787
customers can channel their complaints
customer complains are processed within a reasonable
52 4.31 .701
period of time
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
51 4.24 .737
within the last three years
considerable number of customers are referred to buy
53 4.21 .793
products in the organization by existing customers
there are mechanisms in place to ensure continuous
52 4.12 .704
improvement in service quality
organization obtains frequent feedback from customers
53 4.06 .691
about the quality of services provided
based on the reports of the last customer satisfaction
survey, customers are satisfied with the services 51 3.90 .922
provided
there is a very active quality control section in the
52 3.85 1.055
organization
Customer satisfaction surveys are carried out
53 3.75 1.108
frequently

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

81
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.

82
Table 4.18: Means and standard deviations for measures of Quality of Service
Standard
Quality of Service Indicators N Mean Deviation
organization provides high quality services 53 4.30 .696
the quality of service has improved
51 4.24 .737
tremendously within the last three years
there are mechanisms in place to ensure
52 4.12 .704
continuous improvement in service quality
organization obtains frequent feedback from
customers about the quality of services 53 4.06 .691
provided
there is a very active quality control section in
52 3.85 1.055
the organization
Grand mean 4.11

Table 4.19: Means and standard deviations for measures of Customer Satisfaction
Standard
Customer Satisfaction Indicators N Mean Deviation
there are customers that have done business
with the organization for a period of over five 52 4.54 .641
years
there are mechanisms to ensure that customer
53 4.42 .663
complaints are resolved to their satisfaction
there are established mechanisms through which
53 4.36 .787
customers can channel their complaints
there is a customer care section in the
53 4.28 .907
organization
considerable number of customers are referred
to buy products in the organization by existing 53 4.21 .793
customers
based on the reports of the last customer
satisfaction survey, customers are satisfied with 51 3.90 .922
the services provided
Customer satisfaction surveys are carried out
53 3.75 1.108
frequently
Grand mean 4.21

83
Table 4.20: Means and standard deviations for measures of Efficiency in Service
Delivery
Standard
Efficiency in Service Delivery Indicators N Mean Deviation
Customer complains are processed within a
52 4.31 .701
reasonable period of time
the organization is very efficient in service
53 4.25 .705
delivery
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),

84
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).

85
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= β 0 +β 1 X

86
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
R Adjusted R Std. Error of the
Model R Square Square Estimate
1 .391 .153 .129 .101316
ANOVA
Sum of Mean
Model Squares Df Square F Sig.
1 Regression .067 1 .067 6.494 .015
Residual .370 36 .010
Total .436 37
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B Error Beta
1 (Constant) .452 .147 3.065 .004
Human
.473 .186 .391 2.548 .015
capital
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.

87
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
Sum of
Model Squares Df Mean Square F Sig.
1 Regression .001 1 .001 .204 .654
Residual .126 42 .003
Total .126 43
Coefficients(a)
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
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

88
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

R Adjusted R
Model R Square Square Std. Error of the Estimate
1 .087 .008 -.016 .2039073
ANOVA
Sum of Mean
Model Squares Df Square F Sig.
1 Regression .013 1 .013 .318 .576
Residual 1.746 42 .042
Total 1.760 43
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B Error Beta
1 (Constant) .285 .260 1.097 .279
Human
-.188 .333 -.087 -.564 .576
capital
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

89
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 quality of
capital decisions
human capital Pearson
1 .449(**)
Correlation
Sig. (2-tailed) . .003
N 44 41
quality of Pearson
.449(**) 1
decisions Correlation
Sig. (2-tailed) .003 .
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.

90
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

Std. Error of the
Model R R Square Adjusted R Square Estimate
1 .100 .010 -.011 .0575888
ANOVA
Sum of Mean
Model Squares Df Square F Sig.
1 Regressio
.002 1 .002 .470 .496
n
Residual .156 47 .003
Total .157 48
Coefficients
Standardize
d
Unstandardized Coefficient
Model Coefficients s t Sig.
Std.
B Error Beta
1 (Constant) -.016 .064 -.252 .802
quality of
.053 .078 .100 .686 .496
decisions
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).

91
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

Std. Error of the
Model R R Square Adjusted R Square Estimate
1 .009 .000 -.021 .2228169
ANOVA
Sum of Mean
Model Squares df Square F Sig.
1 Regression .000 1 .000 .004 .950
Residual 2.333 47 .050
Total 2.334 48
Coefficients
Standardize
d
Unstandardized Coefficient
Model Coefficients s t Sig.
Std.
B Error Beta
1 (Constant) .135 .248 .544 .589
quality of
.019 .302 .009 .063 .950
decisions
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.

92
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= β 0 +β 1 X 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
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .661 .437 .423 .084422
ANOVA
Mean
Model Sum of Squares Df Square F Sig.
1 Regression .221 1 .221 31.042 .000
Residual .285 40 .007
Total .506 41
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B Error Beta
1 (Constant) .281 .099 2.834 .007
quality of
.673 .121 .661 5.571 .000
decisions
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

93
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= β 0 +β 1 X+β 2 Z+β 3 XZ
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

94
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
presented in table 4.28 below.

Table 4.28: Regression results for the moderating effect of Social Capital 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 .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
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B 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

95
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:
Y= β 0 +β 1 X+β 2 Z+β 3 XZ
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 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.

96
Table 4.29: Regression results for the moderating effect of Social Capital on the
influence of Human Capital on Return on Equity
Model Summary
Std. Error of the
Model R R Square Adjusted R Square 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
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
B Std. Beta
Error
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.

97
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:
Y= β 0 +β 1 X+β 2 Z+β 3 XZ

Where X= Independent variable (human capital)

β = Coefficient of variation
Z= Moderator (social capital)
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
statistically significant. The regression analysis based on the standardized
scores for the independent and moderating variables yielded the results
presented in table 4.30 below.

98
Table 4.30: Regression results for the moderating effect of Social Capital on the
influence of Human Capital on non-financial Firm Performance
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .542 .293 .220 .092978
ANOVA
Sum of Mean
Model Squares Df Square F Sig.
1 Regression .104 3 .035 4.012 .017
Residual .251 29 .009
Total .355 32
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B 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 .301
1.054
Predictors: (Constant), product of Z score human capital and Z score social
capital, human capital , social capital
Dependent Variable: non financial performance

The results presented in table 4.30 indicate that the influence of human capital
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.

99
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:

Y= β 0 +β 1 X+β 2 Z+β 3 XZ

Where X= the independent variable (human capital)

β = Coefficient of variation
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

The hypothesis would be supported if the effect of the interaction between

human capital and employee empowerment (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
presented in table 4.31 below.

100
Table 4.31: Regression output for the test for moderating effect of Employee
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
Unstandardized Standardized
Model Coefficients Coefficients t Sig.
Std.
B 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.

101
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:
Y= β 0 +β 1 X+β 2 Z+β 3 XZ
Where X= the independent variable (human capital)
Z= moderator (Employee Empowerment)
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
Unstandardized Standardized
Model Coefficients Coefficients t Sig.
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

102
The results presented in table 4.32 indicate that the influence of human capital
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:

Y= β 0 +β 1 X+β 2 Z+β 3 XZ

Where X= the independent variable (human capital)

β = Coefficient of variation
Z= moderator (Employee Empowerment)
XZ= product of the standardized scores for the independent variable
(human capital) and the moderator (employee empowerment)
Y= Non-financial firm performance

The hypothesis would be supported if the effect of the interaction between

human capital and employee empowerment (XZ) on firm performance is
statistically significant. The regression analysis based on the standardized
scores for the independent and moderating variables yielded the results
presented in table 4.33 below.

103
Table 4.33: Regression output for the test for moderating effect of Employee
Empowerment on the influence of Human Capital on Non-financial Firm
Performance

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

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
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B 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

104
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:

105
Table 4.34: Mediating effect of quality of decisions on human capital and firm
performance (First step)
Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .391 .153 .129 .101316
ANOVA
Sum of Mean
Model Squares Df Square F Sig.
1 Regression .067 1 .067 6.494 .015
Residual .370 36 .010
Total .436 37
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B Error Beta
1 (Constant) .452 .147 3.065 .004
Human
capital
.473 .186 .391 2.548 .015
computed as
a composite
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.

106
Table 4.35: Mediating effect of quality of decisions on human capital and firm
performance (Second step)
Model Summary

Std. Error of the

Model R R Square Adjusted R Square Estimate
1 .449 .202 .181 .091406
ANOVA
Sum of Mean
Model Squares Df Square F Sig.
1 Regression .082 1 .082 9.855 .003
Residual .326 39 .008
Total .408 40
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B Error Beta
1 (Constant) .446 .120 3.711 .001
Human
.482 .154 .449 3.139 .003
capital
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.

107
Table 4.36: Mediating effect of quality of decisions on human capital and firm
performance (Third and Fourth step)
Model Summary
Std. Error
R Adjusted of the
Model R Square R Square Estimate Change Statistics
R
Square F Sig. F
Change Change df1 df2 Change
1 .690 .476 .460 .080382 .476 29.939 1 33 .000
2 .719 .516 .486 .078401 .041 2.689 1 32 .111
ANOVA
Sum of Mean
Model Squares Df 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
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B 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
.629 .147 .588 4.265 .000
decisions
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

108
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
human capital, social capital, employee empowerment and quality of decisions
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=β 0 +β 1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4
Where X 1 =human capital
X 2 = social capital
X 3 = employee empowerment
X 4 = quality of decisions
β = Coefficient of variation
Y= Return on Assets
The results from the regression analysis were as presented in table 4.37 below:

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 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 Std. Error of Change Statistics
Square the Estimate
R Square F Sig. F
Change Change df1 df2 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 Df Mean F Sig.
Squares Square
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
Unstandardized Standardized
Model Coefficients Coefficients t Sig.
Std.
B 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

110
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=β 0 +β 1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4
Where X 1 =human capital
X 2 = social capital
X 3 = employee empowerment
X 4 = quality of decisions
The results from the regression run were as presented in the table below:

111
 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 Adjusted Std. Error Change Statistics
Square R Square of the
Estimate
R Square F Sig. F
Change Change Df1 df2 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
Unstandardized Standardized
Model Coefficients Coefficients t Sig.
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 - -
.770 -.528 .177
1.065 1.383
4 (Constant) .331 .444 .745 .462
human capital -.350 .599 -.152 -.585 .563
social capital 1.094 .749 .628 1.462 .155
employee empowerment - -
.799 -.547 .178
1.104 1.381
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

112
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=β 0 +β 1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4

Where X 1 =human capital

X 2 = social capital
X 3 = employee empowerment
X 4 = quality of decisions
β = Coefficient of variation
Y= Firm performance

The results from the regression analysis were as presented in the table below:

113
Table 4.39: Joint effect of human capital, social capital, employee empowerment and
quality of decisions on non-financial firm performance
Model Summary
R Adjusted R Std. Error of
Model R Square Square the Estimate Change Statistics
R Adjusted R R Square Sig. F
R square square Change F Change Df1 df2 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
Sum of Mean
Model Squares Df 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
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
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

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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

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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:

116
Table 4.40: Mediating effect of social capital on human capital and firm
performance (First step)

Model Summary

R Adjusted R
Model R Square Square Std. Error of the Estimate
1 .391 .153 .129 .101316
ANOVA
Sum of Mean
Model Squares Df Square F Sig.
1 Regression .067 1 .067 6.494 .015(a)
Residual .370 36 .010
Total .436 37
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B Error Beta
1 (Constant) .452 .147 3.065 .004
human
.473 .186 .391 2.548 .015
capital
Predictors: (Constant), human capital
Dependent Variable: non financial performance

117
Table 4.41: Mediating effect of social capital on human capital and firm
performance (Second step)
Model Summary
R Adjusted R
Model R Square Square Std. Error of the Estimate
1 .719 .517 .503 .091146
ANOVA
Sum of Mean
Model Squares Df Square F Sig.
1 Regression .320 1 .320 38.500 .000(a)
Residual .299 36 .008
Total .619 37
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B Error Beta
1 (Constant) .024 .121 .199 .843
human
capital
.960 .155 .719 6.205 .000
computed as
a composite
Predictors: (Constant), human capital computed as a composite
Dependent Variable: social capital computed as a composite

118
 Table 4.42: Mediating effect of social capital on human capital and firm
performance (Third and Fourth Step)

Model Summary

Model R R Square Adjuste Std. Error Change Statistics

dR of the
Square Estimate
R Square F df Sig. F
Change Change 1 Df2 Change
1 .508 .258 .234 .092150 .258 10.775 1 31 .003
2 .516 .266 .217 .093149 .008 .339 1 30 .565

ANOVA
Sum of Mean
Model Squares Df 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
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
B Std. Error Beta
1 (Constant) .461 .113 4.096 .000
social capital
computed as a .460 .140 .508 3.283 .003
composite
2 (Constant) .407 .147 2.774 .009
social capital
computed as a .388 .187 .429 2.075 .047
composite
human capital
computed as a .139 .239 .120 .582 .565
composite
Predictors: (Constant), social capital
Predictors: (Constant), social capital , human capital
Dependent Variable: non financial performance

119
The results presented in table 4.40 indicate that the influence of human capital
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).

120
Table 4.43: Mediating effect of employee empowerment on human capital and firm
performance (First step)

Model Summary
R Adjusted R
Model R Square Square Std. Error of the Estimate
1 .391 .153 .129 .101316
ANOVA
Sum of Mean
Model Squares df Square F Sig.
1 Regression .067 1 .067 6.494 .015(a)
Residual .370 36 .010
Total .436 37
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
Std.
B Error Beta
1 (Constant) .452 .147 3.065 .004
human
capital
.473 .186 .391 2.548 .015
computed as
a composite
Predictors: (Constant), human capital
Dependent Variable: non financial performance

121
Table 4.44: Mediating effect of employee empowerment on human capital and firm
performance (Second step)

Model Summary
Adjuste
R dR
Model R Square Square Std. Error of the Estimate
1 .602 .363 .345 .090899
ANOVA
Sum of Mean
Model Squares df Square F Sig.
1 Regression .169 1 .169 20.473 .000
Residual .297 36 .008
Total .467 37

Coefficients
Standardiz
ed
Unstandardize Coefficient
Model d Coefficients s t Sig.
Std.
B Error Beta
1 (Constant) .243 .122 1.996 .054
human
.711 .157 .602 4.525 .000
capital
Predictors: (Constant), human capital
Dependent Variable: employee empowerment

122
Table 4.45: Mediating effect of employee empowerment on human capital and firm
performance (Third and fourth step)

Model Summary
Adjusted Std. Error
R R of the
Model R Square Square Estimate Change Statistics
R
Square F Df Sig. F
Change Change 1 df2 Change
1 .496 .246 .222 .096364 .246 10.130 1 31 .003
2 .511 .261 .212 .096985 .015 .605 1 30 .443
ANOVA
Sum of
Model 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
Standardize
d
Unstandardized Coefficient
Model Coefficients s T Sig.
Std.
B 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
.423 .191 .416 2.219 .034
empowerment
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

123
The results presented in table 4.43 indicate that the influence of human capital
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).

124
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

125
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

126
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

127
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.

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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).

129
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.

4.5.5 Influence of Human Capital on Firm Performance as moderated by

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.

130
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).

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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

132
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=β 0 +β 1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4

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

133
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
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. 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

134
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.

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4.7 Revised Conceptual Model

Figure 2: Revised Conceptual Model

137
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

138
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.

139
 CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

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.

140
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

141
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.

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Table 5.1: Summary of Research Objectives, Hypotheses and Test Results
Research Objectives Hypotheses Hypotheses test
results
Objective 1 Hypothesis 1 CONFIRMED
To establish the influence Human capital has an influence
of human capital on the on firm performance
performance of insurance
firms and commercial
banks in Kenya

Objective 2 Hypothesis 2 CONFIRMED

To establish the There is a relationship between
relationship between human capital and quality of
human capital and quality decisions
of decisions

Objective 3 Hypothesis 3 CONFIRMED

To establish the influence Quality of decisions influences
of quality of decisions on firm performance
the performance of
insurance firms and
commercial banks in
Kenya

Objective 4 Hypothesis 4 NOT

To establish whether the The influence of human capital CONFIRMED
influence of human capital on firm performance is
on Firm Performance is moderated by social capital
moderated by social
capital
Objective 5 Hypothesis 5 NOT
To establish whether the The influence of human capital CONFIRMED
influence of human capital on Firm performance is
on Firm Performance is moderated by employee
moderated by employee empowerment
empowerment

Objective 6 Hypothesis 6 CONFIRMED

To determine if the The influence of human capital
influence of human capital on firm performance is
on performance of mediated by quality of
insurance firms and decisions
commercial banks is
mediated by quality of
decisions

143
 Objective 7 Hypothesis 7 CONFIRMED
To establish the joint The joint effect of human
effect of human capital, capital, social capital,
social capital, employee employee empowerment and
empowerment and quality quality of decisions on firm
of decisions on the performance is different from
performance of insurance the individual effects of human
firms and commercial capital and quality of decisions
banks in Kenya on firm performance

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.

144
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

145
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.

146
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

147
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.

148
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

149
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.

150
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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

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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 Moderate Less Not

large extent extent extent at all
extent
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

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 Very Large Moderate Less Not
large extent extent extent at all
extent
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

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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 Moderate Less Not at

large extent extent extent all
extent
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

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Variables Very Large Moderate Less Not at
large extent extent extent all
extent
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?
…………………………………………………………………………………………

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SECTION FOUR: Employee Empowerment (Human Resource Manager)

15. Please respond to the following statements by ticking in the appropriate box
corresponding to each statement.

Variables Very Large Moderate Less Not

large extent extent extent at
extent 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

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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 Moderate Less Not

large extent extent extent at
extent 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

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SECTION SIX: Non-financial indicators of firm performance (Quality of service,
Customer Satisfaction, Efficiency in service delivery) – Marketing Manager

17. Please respond to the following statements by ticking in the appropriate box
corresponding to each statement.

Variables Very Large Moderate Less Not at

large extent extent extent all
extent
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

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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

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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)

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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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