January 14, 2022

More on Governance: A Passing Grade

Having just finished grading 19 final exams for the course I co-teach at the Georgetown University Law Center, I can certainly recognize the difficulty in coming up with one letter grade to mark a long semester of work. That challenge doesn’t slow down the Institute for Internal Auditors and the Neel Corporate Governance Center at the University of Tennessee Knoxville, which come up with an annual grade for the state of corporate governance in the United States, which they call the American Corporate Governance Index (ACGI). The ACGI is described as follows:

The ACGI gauges the extent to which companies are effectively achieving each of the Guiding Principles from the perspectives of Chief Audit Executives (CAEs). CAEs are uniquely positioned to provide an independent and objective enterprise-wide perspective of the organization. The index goes beyond the publicly observable aspects of corporate governance to provide an internal perspective on the effectiveness of corporate governance throughout the organization. In forming the survey questions that support the ACGI, it is assumed that corporate governance does not allow for a one-size-fits-all approach and that companies will need to find their own best practices based on the company’s age, size, complexity, extent of international operations, etc.

The 2021 overall ACGI score for corporate governance health in the U.S. is a B- (81), down from an 82 in 2020. The report indicates that this year’s score suggests “that improvements in governance quality may be stymied as companies deal with the ongoing uncertainty of a global pandemic and the complexity of its fallout on supply chains, talent management, economic and political volatility, and more.”

Data from the 2021 ACGI survey signal a number of areas where governance improvements retreated: (i) companies earning “A” grades in governance dropped to 14% from 19% in 2020; (ii) potential declines in important employee-related governance measures were noted, such as providing adequate training and compensating in a way that promotes ethical decisions; and (iii) despite increased activism related to social and environmental issues, companies are slow to address the needs of a broad range of stakeholders in their business decisions.

– Dave Lynn