A new measure of the quality of corporate governance grades U.S. public companies overall with only a C+, with many even reporting no formal mechanism for monitoring or evaluating governance.
The inaugural American Corporate Governance Index, developed by the Institute of Internal Auditors and the University of Tennessee Knoxville’s Neel Corporate Governance Center, gives only 16% of companies included in the review a score of A- or better. One in 10 companies scored an F.
The IIA said the poor overall grade reflected weaknesses over a broad range of basic corporate governance principles and suggested that many companies’ systems of corporate governance are inadequate.
“Our results suggest that many companies are not consciously talking about or evaluating corporate governance,” Terry Neal, director of corporate governance at the Neel Center, said in a news release.
The index grades companies on eight “Guiding Principles of Corporate Governance” and is calculated from the responses of chief audit executives to a survey. “CAEs are uniquely positioned to provide an independent, objective, and enterprise-wide perspective of the organization,” the IIA noted.
According to the Institute, the worst grade (C-) was 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.
Second lowest, rating only a C, was Principle 4, which deals with boards ensuring that companies maintain sustainable strategies focused on long-term performance and value.
The report also found many companies are willing to sacrifice their long-term strategy in favor of short-term interests and that more than one-third of corporate board members are not willing to offer contrary opinions or push back against the CEO.
- Corporate boards often fail to verify the accuracy of the information they receive;
- Indepdendent boards drive stronger governance;
- Companies are vulnerable to corporate governance weaknesses or failures; and
- Tighter regulation of a company does not correlate with stronger governance.
“The results may not offer much comfort to organizations, investors, or the public,” the IIA said.