A model for effective
board governance in Uganda’s

services sector firms
Stephen K. Nkundabanyanga

Makerere University Business School, Kampala, Uganda

Augustine Ahiauzu
Rivers State University of Science and Technology,

Port Harcourt, Nigeria, and

Samuel K. Sejjaaka and Joseph M. Ntayi
Makerere University Business School, Kampala, Uganda

Abstract

Purpose – The present study was carried out with the purpose of establishing a model of effective
board governance in Uganda’s service sector firms.
Design/methodology/approach – This study is cross-sectional. The analysis was conducted using
Analysis of Moment Structures (AMOS) software on a sample of 128 service firms in Uganda. The
perceived effective board governance in Uganda was measured by the perceptions of 128 respondents
who are managers or directors in each of those service firms. Three confirmatory factor analysis
models were tested and fitted.
Findings – The three-dimensional model of effective board governance in Uganda – consisting of
control and meetings’ organization, board activity and effective communication – was determined to
be the best fitting model. Evidence in support of relevant theories of board governance was adduced.
Research limitations/implications – Although plenty of literature on corporate governance exists,
there is scarce literature on effective board governance conceptualization and this together with imprecise
terminology regarding this area may have affected the authors’ conceptualization of the study. The
authors’ study was limited to the service sector firms registered and operating in Kampala, Uganda and it
is possible that their results are only applicable to this sector in Uganda. Nevertheless, policy makers of
Uganda dealing with financial markets, academicians, company directors, company owners and even
general readers interested in the area of effective board governance might find this paper handy.
Practical implications – The authors believe that application of their model should improve the
quality of board governance in Uganda and can also apply to other sectors of Uganda’s firms to help
avert the problem of ineffective boards as evidenced by consistent firm failures in Uganda. By
improving the quality of board governance, Ugandan boards will demonstrate their relevance in
company direction and improvement of company value to the benefit of all stakeholders.
Originality/value – The present study provides one of the few studies that have analysed with
confirmatory factor analysis (CFA) using AMOS to test effective board governance measurement model
and provides a benchmark for Uganda’s service firms yearning to leverage the use of their boards.

Keywords Board governance, Service firms, AMOS, Uganda, Boards

Paper type Research paper

1. Introduction and motivation
The Ugandan services sector has since early 2000s gained a significant share of
Uganda’s GDP growth and in 2009/2010 contributed 49 percent to GDP and to its
growth by 13 percent. According to Cali et al. (2008) services constitute over 50 percent
in low-income countries and accounted for 47 percent of economic growth in
sub-Saharan Africa over the period 2000-2005 while industry contributed 37 percent
and agriculture 16 percent in the same period. This implies that growth in Africa and

The current issue and full text archive of this journal is available at
www.emeraldinsight.com/2042-1168.htm

Journal of Accounting in Emerging
Economies

Vol. 3 No. 2, 2013
pp. 125-144

r Emerald Group Publishing Limited
2042-1168

DOI 10.1108/20421161311288857

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indeed Uganda relies as much on services as on natural resources or agriculture, in spite
of those countries benefiting from trade preferences in primary and secondary goods. The
services sector could therefore provide important benefits to the Ugandan economy. For
example, employment might adjust to the changes and people find more work in the
services sector. This job creation is particularly useful as it often provides employment for
low-skilled labor in, for example, retail sectors. This benefits the poor in particular and
represents a net increase in employment. As the services sector remains the sector with
the highest demonstrated potential; the importance of this sector creates much of the
interest by the government and other stakeholders especially with regard to its board
governance in order to gain reasonable assurance that the sector’s firms continue to
register impressive results. But this assurance can be jeopardized because services firms
have been vulnerable to ineffective board governance.

The issue of ineffective board governance in Uganda came to the fore between
September 1998 and May 1999 when four Ugandan banks were closed for imprudent
banking practices (Habyarimana, 2003) and poor internal governance (Bank of Uganda,
1999; Brownbridge, 1998) and recently, there have been consistent reports of poor
performance of service firms. This has often lead to some of these firms closing business
(see Kasita and Emojong, 2010; Among, 2009; Tentena, 2010) and the consequent
accusations that boards are not doing their jobs. Indeed even the recent “meltdowns” of
significant companies in the USA, UK and the late 1990s banking crisis in Asia raised the
finger to the governing boards of companies as in most cases, the governing boards were
found ineffective as far as discharging their duties was concerned. Thus, effective board
governance has been noted to be significant for firms in developing countries because it
can lead to managerial excellence (Okpara, 2011). This is consistent with the realization of
Aram and Cowen (1986) that the primary role of a board is to be a supporter of
management in increasing the economic value of the firm. But, although a considerable
amount of efforts have been spent on studying governing boards (Hung, 1998), there is no
single, competent and integrative model of effective board governance that would act as a
benchmark for effective board governance in Uganda’s service firms.

Therefore, the purpose of this study was to develop a model of qualitative factors
that are relevant to effective board governance in Ugandan service firms. This was
necessary because a paucity of empirical qualitative board governance models has
often led to the perceived attrition of credibility of board governance among firms.
Moreover, understanding the nature of effective board governance is important in
management research that focuses directly on what boards need to do in order to
perform their roles more effectively (Ong and Wan, 2008). More so, previous attempts
to solve the problem of ineffective boards often resulted in normative guidelines (for a
review, see Van den and Baelden, 2005) that did not reflect empirical evidence because
they were a response to a wave of well-publicized corporate scandals (Hauswald and
Marquez, 2006). The effect of normative guidelines was to lead managers to embrace
governance policy documents and codes of practice more as “a survival strategy than a
first preference” (Mamdani, 2007, p. 3) in a process of trial and error and less of a linear
development (Mamdani, 2007). This means that whereas there was much emphasis
created by the need for assessment of effectiveness of boards of directors (e.g.
Walker, 1999), there is little reliable information readily available to boards on how to
be effective, with many of the evaluations having been performed with simplistic
checklists and poorly constructed, and/or inappropriately analyzed surveys that focus
on processes and directors’ duties (e.g. Holland and Jackson, 1998; Herman and Renz,
2000; Scissons, 2002), rather than on “how and what to do” to achieve the outcomes of

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effective board governance. Indeed, as Garber (2002) pointed out, using normative
evaluations and externally imposed criteria may do more to confuse and waste
valuable time than help the board of directors achieve effective board governance.
Accordingly, this study provides a model for what and how effective board governance
might be for the Ugandan service sector firms and therefore contributes to academic
research by producing empirical evidence to support theories relevant to board
governance. This paper’s focus on relevant factors for effective board governance in an
African third-world setting adds new insights into roles of the predominantly unitary
boards and this contributes to the scarcity of board governance literature on the
African experience. Besides, most of the sample firms selected for this study are either
small or medium sized hence this paper throws more light on board governance of a
neglected sector which has been for years unduly ignored by most of the researchers.
We believe that our model of effective board governance which ascertained important
scores for conduct and meetings’ organization, board activity and effective board
communication can also apply to other sectors of Uganda’s firms, and by so doing it
could help to avert the problem of ineffective boards.

The rest of the paper proceeds as follows: Section 2 is a brief description of the
features of board governance in Uganda and Section 3 is theoretical framework and
literature review. This is followed by Section 4, research methodology. Section 5 is the
results and discussion. Finally, Section 6 is the summary and conclusions.

2. Features of board governance in Uganda
There are two major sources of features of board governance in Uganda: The
Companies Act Cap.110 and the Institute of Corporate Governance of Uganda (ICGU,
2001) Manual on corporate governance. Board governance in Uganda can be traced
from the commencement of the Companies Act Cap.110, Laws of Uganda (The
Companies Act, 1961). Board governance is explicitly stated under part V of the said
Act. Among the provisions is included the number of directors, appointment and
removal of directors and age limit, directors’ duties and assignment of duties by
directors. According to the Uganda Country Assessment Report and Programme of
Action (Uganda APRM National Commission, 2007) unitary boards are the dominant
structure for public corporations, public and private limited liability companies in
Uganda. In order for both public and private companies to be registered, the Act
stipulates a minimum of two directors. Critics might interpret this requirement just for
companies to register. Similarly, this law is silent on how to ensure performance of the
duties for which such board members are required on a company. Moreover, there is no
statutory requirement for executive and non-executive or other categories of members
on the board of directors. There is no law prescribing the appointment of executive and
non-executive directors of companies. The number of directorships tenable is also
unlimited except for under the Capital Markets Authority Regulations limit of not more
than five directorships and two chairmanships for listed companies. Under the Articles
of Association, the board is usually permitted to delegate power to committees which
exercise powers as may be required by the board. Similarly, the Act requires that every
company shall have a secretary and it is optional for single-member companies to have
a company secretary but mandatory for public companies. Additionally the Act
contains prohibitions, restrictions and qualifications relating to the appointment of
directors, their powers and duties, and their conduct. Some of these include the
eligibility criteria, the criteria for composition of boards and the criteria for
remuneration of directors. However, the Act does not provide term limits for directors

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but prescribes the director’s age limit at 70 years, only applicable to public companies.
Other companies may if they wish provide upper age limits in their memorandum and
Articles of Association.

However, as noted in “Introduction” to this paper, the issue of board governance came
to prominence in Uganda between September 1998 and May 1999 when four Ugandan
banks, were closed ostensibly for imprudent banking practices (Habyarimana, 2003) and
poor internal governance (Bank of Uganda, 1999). In responding to this banking crisis in
Uganda, the ICGU printed its first issue of corporate governance manual in 2001. This
was aimed at providing a basic framework for the establishment and development of
corporate governance in Uganda. The introduction to the manual points out that
corporate governance is needed in Uganda because it is bridled with inefficient board of
directors. This manual, however, reflects a “copy-cat” syndrome because it includes three
sets of principles accepted elsewhere in the world and simply upholds international best
practices in corporate governance as its mission. Hence the ICGU might be faulted for
lack of originality and might indeed be faulted for lack of innovativeness. Critics might
therefore question the relevance of this manual to effective board governance in Uganda.
Nevertheless the ICGU Manual contains guidelines for internal systems and controls, the
boards’ roles and responsibilities and the committee system of the board among others.
For example, the manual indicates that the board should meet regularly and frequently as
is necessary for the directors to execute their duties and responsibilities; recommending
that: first, there must be adequate notice to all directors of the dates and time of the
meetings and of issues to be discussed at the meeting; and second, directors (or alternates
where permissible) should be physically present at meetings and should effectively
participate through preparation before the meeting and in the proceedings of the meeting.

Although the manual recommends that candidates for election to the board should
have the background, experience or specialized knowledge that corresponds closely
with the business of the company, it is not binding. The Companies Act, which is a
binding document, seems to be silent on the matter. Persons below the age of 21 years,
declared bankrupt by a court of law, disqualified by the Act or Articles of Association
of the company are barred from being a directors and are disqualified for election as
directors. Given the current law, it seems highly unlikely for Ugandan company boards
to fulfill their obligations as espoused under the ICGU Manual. Besides, the lack of
home-grown understanding of factors for effective board governance might be a recipe
for inefficient boards in Uganda. The idea of adopting principles from elsewhere can
stifle home-grown solutions and lead to unpleasant firm performance arising from
problems of board governance. Therefore, the present study was necessary to establish
a model for effective board governance in services firms of Uganda.

3. Theoretical framework and literature review
Theoretical framework
The framework relevant to board governance is dominated by six perspectives,
namely: agency, stewardship, managerial hegemony, resource dependency, stakeholder
and institutional theories. Ensuing is a brief review of these perspectives.

Agency theory recognizes the imperfection of governance structures in protecting
shareholders’ interests and is concerned with the consequences from the conflict of
interests between managers and shareholders ( Jensen and Meckling, 1976; Farma,
1980; Farma and Jensen, 1983). Agency theory supposes that the interests of managers
are not necessarily aligned with the interests of shareholders and hence the board of
directors is considered to be an efficient mechanism for monitoring a firm’s managers

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on behalf of its investors. Accordingly, effective board governance should ensure
maximization of shareholders’ wealth, reduce agency costs, select or dismiss the chief
executive officer (CEO), evaluate the CEO and company performance, and also
participate in the strategic decision process and control (Kamardin and Haron, 2011) –
effectively ensuring control of the organization. Nevertheless agency-led studies
privilege the end result, not a process and hence effective board governance under this
perspective is (uncritically) viewed a monitoring device.

While agency theorists see managers as self-seeking, proponents of the competing
stewardship theory argue that it is possible for managers’ interests to be similar to those
of shareholders (Davis et al., 1997). The argument here is that managers need authority
and desire recognition from peers and bosses. Thus, their motivation transcends mere
monetary considerations. Stewardship theorists accordingly suggest a collaborative
approach between directors and managers (Ong and Wan, 2008). Such an approach
stresses service, calling for boards to advise the managers (Sundaramurthy and Lewis,
2003) and vice versa. Stewardship theory postulates that managers are motivated by a
desire to achieve and gain intrinsic satisfaction by performing challenging tasks. Thus,
the role of the board of directors in matters of strategy is seen as contributing to this
managerial perspective of effective communication.

Managerial hegemony advocates that boards of directors are just statutory
additions that are dominated by the management; boards play only a passive role in
strategy or directing the corporation (Mace, 1971; Vence, 1983; Lorsch and MacIver,
1989). This theory indicates that owners and managers have different interests, but
managers control the main levers of power.

Resource dependence theory is premised on the cogent adaptation to exogenous
changes in the environment (Zinn et al., 1998). Resource dependence theory views board of
directors as “boundary spanners” who extract resources from the environment (Pfeffer, 1973).
Thus, according to this theory the interaction of the board with the environment can be a
source of strategic information, and this theory derives its insight from the fact that board
members are also members of the boards of other firms, and this creates a web of linkages to
competitors and other stakeholders. Linkages which are created with the firm’s external
environment help access important resources and create buffers against adverse external
changes (Riana, 2008). In this vein, effective board governance is about the boundary
spanning as one of the activities of the board. However, this is the view that is normally
taken by studies looking at the human capital of the board (e.g. Nicholson and Kiel, 2004).

Stakeholder theory is underpinned by the notion that stakeholders are important to
organizational performance and require explicit consideration in corporate strategy
formulation (Cuganesan, 2006). Contemporary understandings of stakeholder theory
derive from the definition of a stakeholder as “any group or individual who can affect or is
affected by the achievement of the firm’s objectives” (Freeman, 1984, p. 25). Therefore the
achievement of a service company’s objectives might be dependent on its board. And the
firm might be considered as a coalition in which the different stakeholders participate to
gain their own benefit (Freeman, 1984) which should, ideally, include managers and the
company CEO. That is probably why Herman (1981) argues that managers make the vast
majority of important decisions on behalf of the firm, even though shareholders may be
able to wrest control from them under extreme circumstances by gaining control of the
board of directors. In this breath, effective board governance should be about the board’s
performance evaluation in a bid to continually satisfy key stakeholders.

Institutional theory can be traced back from Olsen and Peters (1996), and from
sociologists like DiMaggio and Powell (1983), Scott (1995) and Zucker (1987).

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According to Mizruchi and Fein (1999) firms constantly aim to maintain and increase
legitimacy through complying with pressures that arise from their institutional
environment. Three types of pressures exist which are mimetic, normative and
coercive pressure (DiMaggio and Powell, 1983). In the context of institutional theory,
norms of society must be followed for companies to obtain legitimacy and resources
(DiMaggio and Powell, 1983). Two ways corporations comply with norms is through
the decision-making process and the structure of firm (Nwabueze and Mileski, 2008).

Given the foregoing review, this study is underpinned primarily by agency,
stewardship, resource dependency, stakeholder, managerial hegemony and
institutional theories to provide a relevant framework for understanding effective
board governance in Uganda. The support for a multi-theory approach is provided by
Neville (2011) in the study of SMEs. And the majority of service firms in Uganda are
small and medium. However, board governance scholars often falter when they adopt
as well as modify these theories to suit their own purpose; as in doing so they are likely
to be forced into ignoring some important roles of governing boards which are not
compatible with the induction or deduction of any one of the theories they have chosen
as their theoretical base (Hung, 1998).

Literature review
The epistemology of effective board governance shows it is derived from governance.
There are, however, various qualifying adjectives of governance: corporate governance
(Barrett, 1997), organizational governance (Sharp, 1999), polity governance (Sharp, 1999),
policy governance (Carver, 1999), etc. Barrett (1997) defined corporate governance as the
management representation of the legal entity and control of the management of an
organization especially under the corporation laws of the country; Sharp (1999) argued
that “[y] organizational governance is not an end in itself but a means of exercising
stewardship professionalism” in the control of an organization as a part of a system on
behalf of the stakeholders in that system. According to Sharp (1999) polity governance is
government’s legal and political representation and leadership of the polity (the people or
the citizens). Carver (1999) explains that policy governance is a guide on the role of boards
of directors for not-for-profit organizations emphasizing their responsibility to the
ownership of the assets. The adjectives attendant to governance that different authors use
in order to operationalize governance indicates that there is not a global consensus on the
definition of governance. Accordingly this paper conceptualizes effective board
governance in line with the definition provided by Barrett (1997), Sharp (1999) and
Carver (1999). This study also defines a board in light of Conger et al. (1998, p. 140)
observation: “A board is a team of knowledge workers, and to do its job, the board needs
the same resources and capabilities that any other successful team of knowledge workers
needs. Research [y] indicates that to do their jobs effectively, such groups need
knowledge, information, power, motivation, and time.”

The study by Cornforth (2001) suggested that board inputs and three process
variables are important in explaining effective board governance, namely: board members
have the time, skills and experience to do the job, clear board roles and responsibilities, the
board and management share a common vision of how to achieve their goals; and the
board and management periodically review how they work. The other processes involved
in his study were communication; in particular that communication between the board
and management is good and there are rare misunderstandings between them, meeting
practices: in particular that board has adequate notice of important issues to be discussed
at board meetings; meetings have a clearly structured agenda; important items are

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prioritized on board agendas and it is clear who has responsibility for follow-up actions
agreed by the board. Cornforth (2001) delineated the board outputs in form of strategy
and policy making, stewardship, supervising and supporting management, board
maintenance and external relations and accountability. Of particular significance,
Cornforth (2001) found that process variables significantly accounted for variations in
board effectiveness and that overall effectiveness of the board is best judged by how
effectively the board carries out the following functions: setting the organization’s
mission and values; helping raise funds or other resources for the organization;
overseeing financial management; reviewing and deciding strategic direction; and
reviewing board performance.

Clearly, and arising from studies like that of Cornforth (2001), the central issue to
effective board governance is how to ensure accountability of senior managers to their
stakeholders while simultaneously providing executives with the autonomy and
incentives they need to produce wealth-producing strategies (Epps and Ismail, 2009;
Cremers and Nair, 2005). Literature concerning board structures indicates that the
number or size of the board is crucial for effective board governance. Lipton and
Lorsch (1992) and Jensen (1993) observed that when firm boards expand beyond seven
or eight people, they are less likely to function effectively as a curb on management
overtime. As regards to the composition of the board Bhagat and Black (1999) argued
that there is no empirical support for proposals that firms should have “supermajority-
independent boards” with only one or two inside directors, but Tusiime et al. (2011),
found that a high proportion of executive directors negatively relates to performance of
firms. This is at odds with Farma (1980) and Farma and Jensen’s (1983), who
understood that boards’ effectiveness in monitoring management is a function of the
mix of insiders and outsiders who serve on the board. Moreover, Dalton and Dalton
(2011), noted four meta-analytic studies that had addressed the relationship between
board composition and corporate performance (i.e. Dalton et al., 1998; DeRue et al.,
2009; Rhoades et al., 2000; Wagner et al., 1998) and concluded that there was no
evidence of systematic relationships between board composition and firm financial
performance. Nevertheless, it can be argued that directors should be qualified persons
reflecting a diversity of training, experience and backgrounds to reflect their boundary
spanning roles (Pfeffer, 1973) and so it might be desirable for the board to include a
balance of executive and non-executive directors to mitigate against dominance of
individuals or interest blocs in the decision making and as Murphy and Mclntyre
(2007) noted, provide advice on new ways of identifying and developing talent and
have the ability to act as an external source of knowledge that is bolstered by the
network of contacts that the board can access. Consistent with this argument,
governance literature (e.g. Huse, 2005; Roberts et al., 2005) sees board roles as created
by individual board of directors. This means, within this literature, individual director
contribution is essentially about creating roles that a board needs to perform (Petrovic,
2008). But the effectiveness of a director involved on several boards simultaneously
and the potential created for conflicting situations and competing interests can negate
benefits of effective board governance. Indeed agency theorists contend that the
obligations attendant on outside directorships distract CEOs from obligations to their
own firms and create the potential for managerial optimism (Geletkanycz and Boyd,
2011). Additionally, the development of resource dependence theory indicates that
the understanding of board roles and responsibilities has changed. The resource
dependence theory comprehends the board as a mechanism for co-opting important
external organizations with which the company is interdependent. One strategy here is

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to appoint representatives of competitors, key suppliers or customers to the board
(Babic et al., 2011). According to Pfeffer and Salancik (1978) board members provide
advice and expertise, access to resources, and legitimacy, and also contribute to
strategic decision making by providing access to key resources (Pugliese et al., 2009).
This means that the board has a service role related to management decision-making
activities: co-opting external influences, realizing contacts between board members
and relevant individuals to ensure pivotal company resources, ceremonial activities,
and enhancement of the company’s reputation, and advising the management during
the strategic decision-making process. While the management bears the responsibility
for the development of new strategy, the boards’ advisory role enables their indirect
influence over the strategic decision-making process (Nicholson and Newton, 2010).

The separation of the roles of CEO from chairperson is a key monitoring mechanisms
(Abidin et al., 2009). However, Dalton and Dalton (2011) stated that there is no evidence of
substantive, systematic relationships between corporate financial performance and
board leadership structure. Others hold the view that the two roles be separated, arguing
that if the two roles are not separated, it means that the CEO also chairs the group of
people in charge of monitoring and evaluating the CEO’s performance, and hence duality
exists giving rise to a possible conflict of interest and impairing the independence of the
monitoring group (Abidin et al., 2009). This is because in such a situation, the ability of
the CEO to exercise independent self-evaluation is questionable (Rechner and Dalton,
1989). Fosberg and Nelson (1999) discovered that firms that switch to the dual leadership
structure to control agency problems experienced a significant improvement in
performance as measured by the operating income before depreciation, interest and
taxes to total assets ratio. Conversely, board processes have been posited to be important
for firm performance. Vafeas (1999) examined the association between board activity
(measured by the frequency of meetings) and firm performance. He found that one way
in which boards react to poor performance is by increasing the frequency of board
meetings. He also found that frequency of board meetings are followed, in turn, by
enhanced operating performance.

A key feature of the foregoing discourse is that the majority of studies on board
governance have employed quantitative predictors at the expense qualitative factors
predicted to improve board governance and hence firm performance. Yet, as the study
by Cornforth (2001) indicated, process factors, which are essentially qualitative in
nature, might provide a better explanation of the variance in effective board
governance. Directors do not manage a company, they provide direction to those who
do so (Beaver et al., 2007) and we would like to believe that how they (boards) provide
direction is itself board governance. Moreover, complying with most prescriptions of
good governance does not assure companies in different settings of consistent
performance results. For example, Aluchna’s (2009) study indicated that complying
with corporate governance practice is associated with lower return on investment.
These results do not assure that companies having best supervisory board structure
and its processes deliver higher returns as compared to the companies that do not. The
results failed to support the qualitative observation, which indicates high predictive
potential of corporate governance best practices. Conversely, Abor and Biekpe (2007),
show that board size, board composition, management skill level, CEO duality, inside
ownership, family business and foreign ownership have significantly positive impacts
on profitability of SMEs in Ghana. Thus, although there is a growing literature
confirming the validity of effective board governance there is, equally, a growing
diversity of results. Furthermore, Uganda’s regulatory regime is weak and contains less

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of the provisions of effective board governance; besides, the recommendations of the ICGU
are not binding. This, together with equivocal validity of prescribed best corporate
governance practices and the need to apply subjective measures of effective board
governance warranted further research into the investigation of factors relevant to
effective board governance in a third-world setting – Uganda.

4. Methodology
The questionnaire, sample and measures of board governance
This study utilized 128 responses from a sample of 377 service firms generated using
Yamane’s (1973) sample selection approach from a population of 6,534 formal service
firms in Kampala region according to Uganda Bureau of Statistics – Uganda Business
Register 2006/2007. A five-point Likert-scale-type (1961) questionnaire, designed to
measure the opinion or attitude of respondents (Burns and Grove, 2009), was utilized to
obtain self-reported information on selection criteria, performance evaluation of the
board, meetings structure and decision making, board roles and nature of Ugandan
boards. The questionnaire consisted of two sections. The first section (background
information) contained six questions about the respondents’ background relating to
education, age, gender, service sector of their organization, position and board
characteristics (number of directors in the company, non-executive directors in the
company, male directors in the company, foreign directors on the board and number of
times their company’s board met in a year) (results are not reported for reasons of
parsimony). The second section was board governance and consisted of 88 items. The
item scales for effective board governance were developed consistent with the ICGU’s
manual on corporate governance (2001), the Companies Act Cap.110, Laws of Uganda
(1961), the works of Cornforth (2001), Murphy and Mclntyre (2007), Petrovic (2008),
Huse (2005), Heuvel et al. (2006) and practitioners like Jacobs et al. (2007). For example
we utilized some of Jacobs et al. (2007) depictions of nature of boards. Principal
component analysis was then performed to identify patterns in data and to reduce data
to a manageable level and achieve parsimony and hence explained the maximum
amount of common variance using the smallest number of explanatory constructs
(Field, 2009). The resulting components were interpreted as conduct and meetings’
organization, board performance evaluation, board activity/roles, effective
communication and leadership board with control and meetings organization
emerging the most important element of effective board governance. In total 19
questions from the original 88 explained 66.77 percent of the variance in board
governance. Confirmatory factor analysis finally retained control and meetings’
organization, effective communication and board activity in an effective board
governance model and the nine scales described in Figure 1.

Statistical modeling
To estimate the model of effective board governance in line with our objective, we
employed SEM. SEM addresses the issue of measurement error, and simultaneously
estimates a system of structural equations. SEM is a comprehensive statistical
approach to testing hypotheses about relations among observed and latent variables
(Hoyle, 1995). According to Rigdon (1998) it is also a methodology for representing,
estimating and testing a theoretical network of (mostly) linear relations between
variables and according to MacCallum and Austin (2000) tests hypothesized patterns
of directional and non-directional relationships among a set of observed (measured)
and unobserved (latent) variables. SEM therefore helps in understanding the patterns

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of correlational/covariance among a set of variables and according to Kline (2011)
explains as much variance as possible with the model specified. We used the
estimation procedure in AMOS 18 (Arbuckle, 2009) to construct the model. The
measurement and structural models were estimated sequentially to reduce
interpretational confounding and to limit complexity (Anderson and Gerbing, 1988).
Missing values were not an issue as only complete questionnaires for 128 respondents
were used. The overall fit of our models were tested using the following fit criteria: The
w2-test which is an absolute test of model fit requires that the model is rejected if the

e3

0.55

bv6

bv5

bv4

tb20

tb21

tb22

biv2

biv4

biv3

e2

e1

e10

e9

e8

e13

e12

e11

0.78 0.88

Notes: Board governance model for Uganda’s Service Sector Firms:
COM_: control and meetings’ organization; BA_CT: board activity; EF_COM: effective
communication; bv4: there is good time-management for meetings; bv5: there is clear
dialogue and communication; bv6: voting results in full commitment of all decisions;
bv3: board papers are delivered to members in advance; biv4: notices of board meetings are
sent in advance; biv2: our board makes clear minutes; tb21: our board is rigorous in 
delegating operational management to the executive group; tb22: our board builds stronger
controls and processes that ensure that power supports the needs of the company and not 
the ambitions of individuals; tb20: our board makes greater use of a management committee,
chaired by the chief executive directors and key managers and the deliberations are reported
to board in full. �2 =24.197, df =24, p=0.450, GFI =0.958, AGFI =0.922, RMR =0.010,
TLI =0.999, CFI =1.000, NFl =0.952, RMSEA =0.008

0.76
0.57

0.81

0.65

0.49 0.70

0.76
0.58

0.70

0.49

0.63
0.80

0.81

0.74
0.66

CMO_

BA_CT

EF_COM

0.48

0.61

0.55

Figure 1.
A model of board
governance

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p-value is o0.05; root mean square error of approximation (RMSEA) should be o0.06
and Tucker-Lewis index (TLI) values of 0.95 or higher (Hu and Bentler, 1999).

Because we used self-reported data and a questionnaire a post hoc procedure enabled
us to detect whether common methods variance (CMV) was present. We performed a
Harman’ one-factor test (Sejjaaka, 2010). Results indicated that CMV is not an issue in this
study. We also tested for discriminant validity by, first of all using a method proposed by
Anderson and Gerbing (1988), that “discriminant validity can be assessed for two
estimated constructs by constraining the estimated correlation parameter [y] between
them to 1.0 and then performing a chi-square difference test” (p. 416). Using this procedure
we in pairs compared all constructs, in all of those cases the fit of the models
(dramatically) worsened. Thus, we concluded that our measures are sufficiently different
from each other and could be used separately. Second, we used average variance extracted
(AVE) (Fornell and Larcker, 1981) and in this case AVE for effective board governance
model was 0.60 which is above 0.50 as recommended. Further, convergent validity was
performed using Bentler-Bonett normed fit index (NFI); a measurement model which
shows strong convergent validity with a NFI value above 0.90 (Mark and Sockel, 2001).
We performed a normality test on our data. The scatter plot in Figure 2 indicates a
balanced spread of scores and according to Tabachnick and Fidell (2007), when assessing
bivariate scatter plots if they are oval shaped, they are normally distributed and linearly
related. The plot shows that this was the case. Indeed although the plot is far from
excellent, there is no evidence of true curvilinearity.

5. Results and discussion
The present study was carried out with the purpose of establishing a model of effective
board governance in Uganda’s service sector firms. This section presents the results
and discussion. The model in Figure 1 describes board governance in Uganda’s service
firms and a summary of the fit statistics for the measurement models is to be found in
Table I and also on the model. Observed variables/factors corresponding to each
construct can also be found in Figure 1.

Our model shows an NFI of 0.952, which indicates strong convergent validity. The
w2 value of 24.197 is non-significant at the 0.05 level: its p-value is 0.450 suggesting that
the model fits the data acceptably in our population. This is substantiated by other fit
indices: RMSEA¼ 0.008, TLI¼ 0.999, GFI¼ 0.958 and AGFI¼ 0.922. The Hoelter
(1983) index indicated that 192 and 226 are the largest sample sizes for which one could
accept at the 0.05 and 0.01 levels, respectively, the hypothesis that our model is correct.

5.0

4.0

3.0

2.0

1.0

1.0 2.0 3.0 4.0 5.0

This company has a clear criteria for evaluating the board

O
ur

 b
oa

rd
 m

ak
es

 c
le

ar
 m

in
ut

es

Figure 2.
Bivariate scatter plots

testing for multivariate
normality

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And so if our sample size were any bigger than 192 and 226 we would reject our model
at the 0.05 and 0.01 level, respectively. Accordingly the model of effective board
governance is substantiated for the case of service firms in Uganda.

In this study all the critical ratios were 41.96 and p-values were o0.001 connoting
significance. The observed factor loadings compared with their standard errors revealed
evidence of an association between effective board governance and its respective
constructs (Koufteros, 1999). As for item reliability an R2 value above 0.5 is considered an
acceptable reliability for each item (Bollen, 1989; Koufteros, 1999). Except for tb20 and
tb22, the other items turned out to be well over the criterion of 0.05 and thus each item
was a reliable factor for effective board governance. The construct reliability of effective
board governance items was 0.827, 0.834 and 0.845 for CMO_, BA_CT and EF_COM,
respectively. Our results confirm that board governance is a multi-dimensional concept
consisting of control and meetings organization, effective communication and board
activity. Thus effective board governance in Ugandan service sector firms can be defined
as the way the meetings are conducted and controlled, clear and effective communication
to and among board members including proper recording of board minutes; and the way
the board conducts its activities and roles.

From the agency theory perspective, the proper conduct of meetings and effective
communication as measures of effective board governance confirms the board as a
mechanism of transparency. In this case where, for example, the minutes of the board
meeting are clear, transparency in form of minutes’ disclosures to the shareholders is an
important mechanism for aligning shareholder and management interests. This study
supports that application of agency theory as relevant framework in the study of board
governance even in SMEs and developing economies, for that matter. Indeed, agency
theory ( Jensen and Meckling, 1976) argues that boards are relevant in agency problems
and therefore board power should be used to the benefit of the company as a whole; and
because of this Cadbury (1992) proposed a committee system which should ensure
informed formulation of decision making (Zahra and Pearce, 1989). To ensure
accountability of senior managers to their stakeholders while simultaneously providing
executives with autonomy and incentives, this study confirms rigorousness in delegation
as a wealth-producing strategy (Epps and Ismail, 2009) in service firms. The study
confirms the need for proper flow of information between board structures (Maassen,
1999) as evidenced by the need to have board papers and notices delivered in advance of
meetings together with proper recording of minutes and the need for the committees’
decisions to be communicated fully to the full board. In this way the board is able
to implement decision making (Kakabadse and Kakabadse, 2001) thereby ensuring
separation of decision control from decision management (Maassen, 1999).

From a stakeholder perspective, well written and clear minutes of the board might
guide properly the management and other stakeholders as to the direction the company
is taking and act accordingly. This is consistent with the observation of Brennan and

Model df w2 p TLI GFI AGFI RMSEA

Five-factor CFA model (CMO_ ) 5 10.046 0.74 0.959 0.971 0.912 0.089
Four-factor CFA model (EF_COM) 2 2.662 0.264 0.990 0.990 0.951 0.051
Four-factor CFA model (BA_CT) 1 0.282 0.595 1.032 0.999 0.989 0.0001
Overall three-factor model
(board governance) 24 24.197 0.450 0.999 0.958 0.922 0.008

Table I.
Summary of fit statistics
for the models

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Solomon (2008) that one of the effective governance variables predicted to influence
disclosure and transparency is the board of directors.

True with the stewardship perspective, this study confirms that effective board
governance is about making greater use of the management committee and executive
directors who should report their deliberations in full to the board. This allows
management to add value to top decisions/strategy and hence management should be
considered as having similar interests with owners of service firms. Indeed, Abor and
Adjasi (2007) have argued, that the application of the broader view of effective board
governance should not be limited to the board room so as to allow boards to encourage
firm entrepreneurship. Thus, stewardship theory is particularly relevant to service firms
especially with regard to the intangibility of services provided. Similarly, the board should
be rigorous in delegating operational management to the executive group so that it is left
with the core activity/role of controlling the firm. This is ensured by building stronger
controls and processes that stifle individual ambitions relative to the needs of the firm.
This is because managers tend to chose projects which have immediate results as their
performance is tied to the projects they choose (Abor and Adjasi, 2007). This implies that
effective board governance is about supervising and holding to account those who direct
and control management. This study coins this as board activity/roles. In the context of
SMEs (and service firms for that matter), this is about setting rules and procedures as to
how the firm is run – putting checks and balances in place to prevent abuses of authority
(Abor and Adjasi, 2007). Attention must, however, be paid to the possible tensions that
normally exist between owners and the board in case of sole proprietors particularly in an
economy like Uganda where traditional cultural practices about ownership tend to scoff
into businesses. Our model of effective board governance therefore can result in reaping
the benefits of effective board governance and thus attract other SMEs into adopting the
model because it is home grown.

Although traditional research finds the structural factors, e.g. composition,
leadership structure and board size, to be the most relevant influences on board
effectiveness (Babic et al., 2011) the results of this study support behavioral approaches
that emphasize as the key factors of board effectiveness those influencing the processes
within boards (e.g. effort norms and other behavioral characteristics). This study
provides an integrative framework for board effectiveness evaluation and responds to
the argument made by Babic et al. (2011) that a proper model (of effective board
governance) is contingent upon given socio-economic circumstances. Similarly, our
study does not confirm board’s culture on evaluation of director’s and board’s
performance as a good practice proposed by Vence (1983) and Pettigrew (1992) – likely
to be a valid perception as most of the board members are family members, close
friends and their services appear voluntary; typical of small and medium firms or
developing country firms. The study also does not confirm that boards are appointed
to ensure clear definition of roles and functions of chairman and board of directors and
also to assess top personnel and appointments based on their training, qualification,
skills and integrity. Again this is likely to be the case for family boards, close friends
and where the service of board members is viewed as voluntary thereby not attracting
better brains that would require commensurate remuneration. More so, the ICGU’s
manual which recommends this is not binding but the Companies Act which is binding
is silent on the matter. Thus this study lends support for resource dependency theory
as a relevant framework for studies on boards in service firms in Uganda in so far as
the board is competent in delegating and building stronger controls, consistent with
what is done elsewhere and experience, and performance of a service role related to

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management decision-making activities such as advising the management during the
strategic decision-making process (Babic et al., 2011).

6. Summary and conclusions
The present study was carried out with the purpose of establishing a model of effective
board governance in Uganda’s service sector firms. The results show a good model fit
and Figure 1 defines the model of effective board governance in Uganda and is
comprised of three dimensions of effective board governance, namely, control and
meetings’ organization, board activity and effective communication; and the nine
scales by which to gauge the three conceptual dimensions. The results are consistent
with the notion that improvements in the way board meetings are organized and
controlled, improvements in communications of the board and effective performance
of board activities will improve board governance in Uganda’s service sector firms.
Thus, the relevancy of effective board governance cannot be over emphasized since it
constitutes the organizational climate for internal activities of the company.

This study has resulted in important academic and managerial contributions. On
the academic front it contributes to academic research by producing empirical evidence
to support theories relevant to board governance. Its focus on factors for effective
board governance in an African third-world setting adds new insights into roles of the
predominantly unitary boards and we hope this contributes to the scarcity of effective
board governance literature on the African experience. On the managerial front,
service firms in Uganda, policy makers, company boards and management could use
these findings as a guideline, which is, what to focus on in the context of improvements
in board communication, performance of board roles or activities and improvements on
the ways of conducting and organizing meetings. Effective board governance can
easily assist the service sector firms by infusing better board communication
processes, meetings’ processes and better performance of board roles or activities. For
example, companies should use effective communication strategies like the ones
confirmed in this study to improve transparency at board level. If service firms adhere
to meetings’ organization that result in commitment to decisions and the performance
of proper board roles relevant to the service sector, this will bring a new strategic
outlook of Ugandan boards. Boards should establish policies, use time for the company
wisely, make decisions about issues that are strategic and significant, delegate non-
governance types of decisions to operations management and periodically review the
structure and functions of the committees. For example, policies can define focus and
differentiate responsibilities among the board, the management and other employees.
More so, the evidence in study imply that the Ugandan service sector boards will be
effective, if in return for their service, they expect proper flow of communications,
advance preparation for board discussions, judicious use of time and hence
opportunity to contribute. Furthermore, the results of this study should provide an
input into the review and amendments to company law and the manual on corporate
governance in Uganda. The current study presents the board of directors with the
ability to embrace full commitment of all decisions and to leverage the use of
management committees in furtherance of their duties. We believe that our model of
effective board governance can also apply to other sectors of Uganda’s firms, because
by so doing it could help to avert the problem of ineffective boards as evidenced by
consistent firm failures in Uganda. It can be predicted that firms in Uganda should be
able to perform better and remain competitive as studies have indicated that effective
board governance has a positive impact of firm performance. By improving the quality

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of board governance, Ugandan boards will demonstrate their relevance in company
direction and improvement of company value to the benefit of all stakeholders.

As with any study, there are a number of limitations with the present paper. Although
there is plenty of literature on corporate governance, there is scarce literature on effective
board governance conceptualization especially with regard to the behavioral perspective
and this together with imprecise terminology regarding this area may have affected our
conceptualization of the paper. Second, although we self-administered the questionnaire,
we did not undertake follow-up interviews which would have informed us the reasons
why the respondents held certain views. Third, our study was limited to the service sector
firms registered and operating in Kampala, Uganda and it is possible that our results are
only applicable to this sector in Uganda. Finally, the present study is cross-sectional; it is
possible that the views held by individuals may change over the years. In spite of the
limitations, policy makers of Uganda dealing with financial markets, academicians,
company directors, company owners and even general readers interested in the field of
corporate governance might find this study handy. Future research may wish to test our
model in predicting firm financial performance.

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Further reading

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Corresponding author
Stephen K. Nkundabanyanga can be contacted at: hodaccounting@mubs.ac.ug

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