Subverting bank corporate governance: A tale of an interplay between sociocultural legacies and neo-patrimonialism in a developing country

Abstract

This paper investigates corporate governance in developing countries by examining how formal and informal social relations shape governance practices in Sri Lanka’s banking sector. Relying on a grounded theory approach and drawing upon interviews, focus groups and documentary analysis, we develop a substantive theory of Subverting Bank Corporate Governance. The theory depicts how formally enacted governance mechanisms primarily manages the uncertainties of a politicised economy rather than resolve presumed conflicts between financiers, regulators and executives. Power dynamics exercised through the state, alongside politically connected elites, foster reciprocal obligations to secure factional support, thereby leading to a context where board objectivity is undermined while covert conflicts of interest are managed. Empirically, we highlight the limitations of mainstream corporate governance principles in such contexts. Formal theory-wise, path dependency firstly illuminates the role of historical legacies in sustaining past economic, ownership and managerial arrangements within contemporary structures. Moreover, neo-patrimonialism highlights the role of clientelism, political entrepreneurship and discretionary exercise of state power. Methodologically, we demonstrate the value of grounded theory in uncovering distinctive governance systems and practices. We call for a more nuanced understanding of governance arrangements in developing countries and exhort policymakers to reflect on the design of conducive strategies and reforms.