Good judgment – The heart of good governance
Article By: Professor Sir Andrew Likierman, London Business School

The 18th May Feedback Statement from the Malta Financial Services Authority (MFSA) sets the stage for the next phase of corporate governance development for regulated entities. The MFSA will be issuing a List of Principles with “supporting provisions acting as guidance for achieving the main principles”. These will be supported by “sector-specific complementing Guidance Notes and or updates to the Governance section of the MFSA rule books (as applicable) and/or sectoral Codes”. It also intends “to drive change in the culture of entities authorized by the MFSA, making also sure that the industry will be committed to the highest standards of Corporate Governance.”

The feedback statement deals with each of the main aspects of Corporate Governance, including all aspects of the Board (structure, responsibilities, the Chairman, performance etc) as well as shareholders engagement and internal controls. In covering these, Malta is pursuing a parallel path to most countries which regulate capital markets with a combination of principles, rules and guidance. What we also know from other countries is that a great deal of interpretation is available, both by the regulator and by the regulated entities. How are these choices to be made in Malta?

My interest in answering this question stems from an unexpected invitation, over 30 years ago, to join a Committee headed by Sir Adrian Cadbury in the UK. What became known as the Cadbury Committee Report set out principles which have been widely used as the basis for corporate governance codes round the world. The Committee was aware of the need for a balance between the commercial needs of organisations, those of wider stakeholder groups and the national interest.

Over the years I have watched how the balance has shifted, reflecting changing forces in Society, corporate scandals and the needs of, and pressures on, governments, regulators and regulated entities. It has also been clear that judgment in how the principles, rules, and guidance are interpreted matters a great deal in the effectiveness of the corporate governance framework. My observation stems from having been on the Board of three regulated financial entities as well as a regulator. I have had personal experience of getting on well with the regulator and not getting on so well. I have seen good and bad judgment by Boards.

To find illustrations of what all this means from the 18th May Feedback Statement, here are some phrases that will need judgment by both the regulator and the regulated entities: “best efforts basis” (page 8), “a more discretionary application” (page 9), “principle drafted in a general way….but .. not … prescriptive” (page 18), “flexibility in the implementation of the requirement (page 19), “the principle of proportionality” (page 22), “holistic approach… overarching principle (page 22), “sufficient level of flexibility” (page 27), “consideration …. given to proportionality” (page 28).

To be clear, the above phrases are not indications of weakness, but the need, within any workable Code, to allow for flexibility. Flexibility means choice. And choice requires judgment. This applies particularly when regulation is carried through by principles. Principles, in contrast to rules, are flexible. Even rules require interpretation to reflect the diversity of organisations and circumstances. That interpretation, too, requires judgment.

What judgment is

So what is judgment and how would you recognise it? (We’re not just talking financial services here.) It’s the combination of relevant knowledge and experience to take decisions and form opinions. In my talk to the FinanceMalta Conference on July 20th I’ll be explaining what that means in practice.

Covid has provided an unexpected, unwelcome and dramatic stress-test on the quality of judgment over the past year. Striking the right balance in the middle of an existential threat to many organisations has been a tough call. For those regulated, how to adjust risk models, plan for different timescales for restoring normality (whatever that looks like), organise their operations and take account of the changing financial landscape has demanded judgment of the highest order. Governments, as we know, have intervened to mitigate the threat of crisis, but the quality of organisations’ judgment will soon be evident when, in Warren Buffet’s memorable phrase, the tide goes out and we will see who has not been wearing a bathing suit.

In applying the forthcoming List of Principles and the all-important guidance notes, here are a dozen ways of applying judgment (potentially for both regulators and regulated entities) taken from the judgment framework in one of my recent articles*:

What I take in:
  • Being aware of information filters, including biases, defensiveness, and excessive reliance on the familiar.
  • Making sure you are not just taking in what you want to hear or see (confirmation bias).
Who and what I trust
  • Encouraging diversity of knowledge and experience in the team to provide challenge and avoid Groupthink.
  • Looking at the quality of information, including through delegation, and avoiding reliance on a single person.
What I know about this
  • Questioning whether analogies, comparisons, and proxies are appropriate, including with previous business cycles.
What I feel and believe
  • Understanding the biases of key people involved in the choice (including yourself) and in particular any tendency for systematic optimism or pessimism.
  • Acknowledging that, if the facts and circumstances change, you should change your mind.
The choice
  • Checking whether the right number of choices has been presented. This might be too many, causing overload, or too few because important choices have been eliminated.
  • Checking for consistency, including “noise” (unwanted variability).
  • Testing the “feel” of a decision by the reaction to the opposite being decided.
  • Anticipating what’s necessary to react and/or follow-through, including the evidence and implications of the proposed speed of action.
  • Where relevant, identifying ways of mitigating delivery risk, including unintended consequences.

Of course, judgment is not the only quality necessary for regulators or regulated entities. But the difficulty in any of the aspects of judgment will cause problems in implementing the new regulatory regime. Judgment is a quality that may not always have been identified in the past as essential to good regulation. This may be because it has been felt to be too difficult to define and measure. The approach to judgment above sets out just that, hopefully enabling regulators and regulated alike to incorporate it in their thinking about how to achieve a set of complex objectives. That might well include specifying judgment as a desirable quality in selecting colleagues, making it an explicit part of the appraisal, and using it as a criterion for promotion.

Can artificial intelligence (AI) help with judgment?

The impact of AI will be felt in many areas of financial services. It has already transformed many of the aspects of our lives and this will continue. But judgment is one of the things that AI can’t “do”**, so judgment will continue to be important as a key element in the regulatory environment. AI may help to assemble and analyses data but the quality of regulation will continue to be based on judgment.


In Malta, as everywhere else in the world, corporate governance is a balancing act between the commercial needs of organisations, the relationships with the wider stakeholder groups, and the national interest. In its Feedback Statement, it’s clear that the MFSA has tried to strike a balance between excessive regulation which might make Malta uncompetitive, and the need for a credible set of principles which will give confidence to those doing business in and with Malta. Judgment is needed on how the framework will be implemented and applied. Those regulating and those being regulated might do well to consider how to increase their capacity to exercise that judgment.

* “The elements of good judgment; How to improve your decision making” Harvard Business Review January 2020 pp 102-11
** The relationship between judgment and AI is the subject of a forthcoming article.
London, July 2021.