By Bob Souster

Both the Malaysian Code on Corporate Governance and the Asian Institute of Chartered Bankers (AICB) Code of Professional Conduct refer to objectivity and independence. This article explains the importance and significance of these terms and explores some of the challenges that banks face when applying these important qualities.

The intended outcome of Principle A of the Malaysian Code on Corporate Governance states:

‘Board decisions are made objectively in the best interests of the company taking into account diverse perspectives and insights’.

It also states that:

‘An effective board should include the right group of people, with an appropriate mix of skills, knowledge and experience and independent elements that fit the company’s objectives and strategic goals’.

The AICB Code of Professional Conduct includes objectivity as one of its six principles, defined as follows:

‘Objectivity: Members shall act impartially and not allow self-interest, bias or conflicts of interest to influence business decisions or judgements.’

While the Malaysian Code of Corporate Governance focuses on how companies are directed and controlled, the AICB Code of Professional Conduct is binding on members of the Institute.

Objectivity and independence are distinctive concepts, but views differ on how they relate to one another. Some use the terms interchangeably, which may depend on the context in which they are used. However, according to Mike Jacka, writing in a 2023 article for Internal Auditor, ”Independence is a sub-set of objectivity. Yes, independence is crucial to the work we do. But it is only one of the aspects of objectivity we must consider”. However, both terms are highly relevant to professionals, irrespective of their fields of expertise.

The key terms in the AICB definition are self-interest, bias, and conflicts of interest. If an individual applies any of these in forming a judgement then their ability to be objective may be compromised.

+ Self-interest arises when there is a conflict between their personal interests and those of stakeholders, who may include customers, colleagues or other stakeholders. An oft-cited example of this arose during the global financial crisis when some bankers were accused of mis-selling products and services in order to generate lucrative bonuses based on sales performance.

+ Bias is exhibited when an individual has a personal preference which influences their judgement or decisions. Most people would admit to some bias in relation to their personal or business lives, but biases become material when they influence judgements concerning strategic options and choices. For example, one major European supermarket chain admitted that the board’s insistence on continuing to operate physical stores and not develop online services resulted in them being five years behind its competitors, which created significant problems when the Covid-19 pandemic forced many customers into online shopping.

+ Conflicts of interest arise when a professional undertakes services for two or more people whose interests are in conflict, or when the professional’s own interests are in conflict with those of a party with whom they are dealing. The latter is, of course, an example of self-interest.

Several professional bodies in the field of accountancy also regard undue influence as a threat to objectivity. For example, the International Federation of Accountants (IFAC) includes undue influence in its definition of objectivity alongside bias and conflicts of interest. Undue influence may occur when a person’s influence is such that it can sway the judgement of a professional. It can occur when the influence comes from a respected person or one in a position of actual or perceived authority.

In its code and guidelines, IFAC goes on to describe five threats to objectivity of which professionals should be aware and be prepared to mitigate. These are:

Self-interest, as described above.

Self-review, which may inhibit a professional from properly evaluating the results of a previous judgement (such as their own input into a decision or process).

Advocacy, through which the professional promotes the interests of a party to the point of compromising their own objectivity.

Familiarity, arising from having a long-term close relationship with a client or other stakeholder that may lead to having a more sympathetic view of their interests (this is one of the reasons why the Malaysian Code on Corporate Governance states that directors should serve on a board for no longer than nine years, as the ability to remain truly independent diminishes over time).

Intimidation, through which the professional may be deterred from exercising truly objective judgement due to actual or perceived pressure from another person or organisation.

While these threats were codified by accountancy bodies, all are extremely relevant in the banking industry. For example, an internal auditor could be asked to audit a team with which they worked in the recent past and might even have developed some of the team’s procedures and processes. Likewise, a corporate banker may be asked to conduct a credit assessment on a client whose initial public offering was handled by the bank. Historically, many financial institutions have fostered close relationships with other companies and this may result in both familiarity threat and intimidation threat.

These factors are important at all levels of banking. Just as all directors of a bank (not just non-executive directors) should be prepared to exercise independent judgement, employees and agents at operational level may be confronted by situations in which their objectivity is challenged. Examples from the past include employees short-cutting (or ignoring) customer due diligence procedures because they know the customer well and lines of credit being approved based on reciprocal business arrangements with powerful or influential persons.

In particular, conflicts of interest can never be eliminated entirely, but best practice suggests that conflicts should be managed appropriately, with adequate safeguards developed and implemented to minimise their potential adverse effects.

For many people in banking, the global financial crisis is a distant memory, but new problems emerge as old ones recede and are consigned to the history books. The demise of Silicon Valley Bank and the forced takeover of Credit Suisse by UBS arose from those organisations taking unsound decisions or making uninformed strategic choices. At the highest levels of organisations, individuals and small groups of individuals take decisions which are driven and backed by their own knowledge, skills and experience, but an increasingly complex environment coupled with an accelerating pace of change will almost inevitably result in decision takers requiring the support of more external experts, some of them highly specialised.

How can we make sound, objective decisions about the future when we have little idea of how the external environment will change? A good example of this is blockchain technology, which is in its infancy in conventional banking but an established feature of cryptocurrency markets. Three years ago, blockchain was introduced into the syllabus of a professional examination offered by a European institute. The two main tuition providers were asked to include content on blockchain in their teaching materials. While both adopted similar approaches to explaining how blockchain works, one set of materials focused heavily on the benefits that blockchain would bring while the other emphasised the problems that would be created. In like manner, regulators have similar issues to confront when adapting the regulatory environment for developments that cannot be regulated in conventional ways.

With the development of Sustainable Development Goals and the introduction of the Principles for Responsible Banking, how can directors and executives approach decisions that they want to be consistent with environmental, social, and governance commitments without engaging an army of technical advisers, specialists, and academic subject experts? A simple answer is, of course, that decision-takers will continue to make professional judgements as objectively as possible and make important ‘calls’ in good faith.

Robert (Bob) Souster is a Partner in Spruce Lodge Training, a consultancy firm based in Northampton, England. He lectures on economics, corporate and business law, management, corporate governance and ethics. He has worked extensively on the Chartered Banker MBA programme at Bangor University, Wales, since its inception, serving as both a Module Director and, currently, as a Moderator for ‘Ethics, Regulation and Compliance’ and ‘Financial Institutions’ Risk Management.’