Symbolic Governance or Substantive Control? Financial Misconduct in Banking Institutions

Abstract

Financial misconduct within banks shows a persistent tension between the formal adoption of governance mechanisms and their substantive capacity to prevent illicit practices. The study investigates whether corporate governance quality reduces financial misconduct in Indian banks, a context characterised by strong regulatory oversight, persistent concerns about misconduct, and the coexistence of private and public ownership. Following agency and fraud diamond theory, this study argues that governance mechanisms can constrain misconduct by minimising managerial discretion, improving transparency, strengthening monitoring, and limiting opportunity and capability to engage in fraudulent activities. Using bank-level panel data from commercial banks in India from 2015 to 2024, the study investigates the effect of governance quality. The findings show that overall governance quality reduces financial misconduct. The ownership classification further suggests that governance is substantive in private banks, whereas in public banks, it remains more symbolic and compliance-oriented. Among the sub-indices, the board, audit, remuneration, and disclosure mechanisms emerge as particularly effective, while the risk and shareholder dimensions appear insignificant. Overall, the study contributes to the literature by shifting attention from the adoption of governance to its effectiveness.