Audit chiefs see corporate governance declining

Corporate governance received a grade of B- and has slipped over the past year, according to a new survey of chief audit executives.

The American Corporate Governance Index survey, released Tuesday by the Institute of Internal Auditors and the Neel Corporate Governance Center at the University of Tennessee, Knoxville’s Haslam College of Business, found that the number of companies earning A grades in governance dropped to 14% in 2021 from 19% in 2020. The average ACGI score for U.S. companies in 2021 stayed at a B- but dipped to 81 on a 100-point scale, down from 82 in 2020. The pandemic has left many areas of corporate America exposed, with less ability for shareholders to meet with corporate executives and hold them to account or to train their employees in proper ethics. The survey found some companies not providing adequate employee training or compensating them in a way that promotes ethical decision making. Companies have also been slow to address increased activism related to environmental, social and governance issues from a wide array of stakeholders.

“Although a decline of one point seems small, it’s out of alignment with the increased scrutiny on companies to improve their governance as they face continued market and regulatory pressures,” said IIA president and CEO Anthony Pugliese in a statement. “They’re heading in the wrong direction and the solution is already in house. Boards and executive management must remain committed to improving governance across all the areas examined in the ACGI and independent assurance provided by internal audit must be an integral part of those efforts.”

The Institute of Internal Auditors

Many of the improvements seen in 2020 on the index either slowed in 2021 or showed signs of receding to pre-pandemic levels of governance quality. That occurred even though shareholders have pressed companies for increased accountability of ESG issues facing companies, which should have brought further improvement in governance quality. Several of the ACGI’s eight Guiding Principles scored lower overall in 2021, including clear communication across the company, meeting shareholder or stakeholder expectations, board performance, sustainable strategies with a long-term focus, corporate culture and external disclosures.

“Particularly interesting to us are some consistent associations that we can now see with three years of ACGIdata,” said Terry Neal, director of corporate governance at UT’s Neel Corporate Governance Center, in a statement. “Specifically, companies where CEO-chair duality is accompanied by strong board independence, as well as those where the hiring, firing and compensation decisions of the head of internal audit reside with the CEO or the audit committee, continue to exhibit higher ACGIscores.”

The report found that companies with stronger governance quality recognized the value of the internal audit function and elevated chief audit executives to positions where they had direct administrative reporting access to the CEO and audit committee. Companies with simpler reporting structures and those lacking the complexity of operating internationally had the benefit of accelerated communication lines, so it was easier to monitor and improve governance quality across the organization.