U.S. Companies miss mark on Corporate Governance

New index of publicly held companies rates performance inadequate on key principles

The Institute of Internal Auditors (IIA) and the Neel Corporate Governance Center unveiled a comprehensive annual index that, for the first time, measures the quality of corporate governance among publicly held companies in the United States. The results may not offer much comfort to organizations, investors, or the public.

Inadequate systems

The inaugural American Corporate Governance Index (ACGI) graded U.S. companies overall with only a "C+", reflecting weaknesses over a broad range of basic corporate governance principles and suggesting that many companies’ systems of corporate governance are inadequate. Only 16 percent of companies included in the review received a score of A- or better (90 or above) while 1 in 10 scored an F (below 60).

Core actions and responsibilities

"While there are many measures of business and economic health, such as securities-related indices, the IIA-UT American Corporate Governance Index is the first to truly probe – and grade – core actions and responsibilities that are crucial to successful, ethical, and sustainable organizational practices among American businesses," said IIA President and CEO Richard F. Chambers, CIA, QIAL, CGAP, CCSA, CRMA.

8 key Guiding Principles of Corporate Governance

The ACGI scores corporate performance using eight key "Guiding Principles of Corporate Governance." Like the Index, these Principles were developed in partnership between The IIA and the Neel Corporate Governance Center at UT’s Haslam College of Business in Knoxville, TN. The Principles are based on a compendium of guidance and principles advanced by experts in the field, including the National Association of Corporate Directors (NACD), the New York Stock Exchange, the Business Roundtable, and others.

Survey among chief audit executives

The Index is calculated using responses to a Principles-based governance survey of chief audit executives (CAEs) at companies listed on U.S. stock exchanges. CAEs are uniquely positioned to provide an independent, objective, and enterprisewide perspective of the organization.

In gauging the extent to which companies are effectively achieving each of the Guiding Principles, the ACGI found:

• The worst performance among the eight principles was a "C-" for Principle 8, which calls for companies to regularly evaluate their full system of corporate governance and to commit to addressing deficiencies in a timely manner. The majority of respondents reported no formal mechanism for monitoring or evaluating overall corporate governance.
• The second lowest-scoring principle, rating only a "C," was Principle 4, which deals with boards ensuring that companies maintain sustainable strategies focused on long-term performance and value. Survey respondents said they lacked confidence in their company’s ability to do so.

Other key ACGI findings gleaned from analysis of elements examined in the Principles:

• Many companies are willing to sacrifice long-term strategy in favor of short-term interests.
• More than one-third of corporate board members are not willing to offer contrary opinions or push back against the CEO.
• Corporate boards fail to verify the accuracy of information they receive.
• Independent boards drive stronger governance.
• Companies are vulnerable to corporate governance weaknesses or failures.
• Regulation does not correlate with stronger governance.

No one-size-fits-all approach

"Corporate governance does not allow for a one-size-fits-all approach, and companies will need to find their own best practices based on their age, size, and complexity," said Terry L. Neal, Ph.D., CPA, Director of Corporate Governance at UT’s Neel Corporate Governance Center. "The ACGI allows us to benchmark companies’ corporate governance health, not just in the boardroom or C-suite, but throughout the organization. Our results suggest that many companies are not consciously talking about or evaluating corporate governance, but hopefully this index gets that conversation started."

Visit www.theiia.org/ACGI for a full copy of the American Corporate Governance Index, including the Guiding Principles of Corporate Governance.

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