Attention FAE Customers:
Please be aware that NASBA credits are awarded based on whether the events are webcast or in-person, as well as on the number of CPE credits.
Please check the event registration page to see if NASBA credits are being awarded for the programs you select.

Corporate Governance Gets a C+ Grade from Institute of Internal Auditors

Chris Gaetano
Published Date:
Dec 12, 2019
The Institute of Internal Auditors, after surveying 128 chief audit executives at public companies, graded the quality of corporate governance today at C+, which it said reflects weaknesses over a broad range of basic corporate governance principles and suggests that many companies’ systems of corporate governance are inadequate. 

The survey asked executives to evaluate their own organizations' performance with regard to eight principles: 

*  Effective corporate governance requires regular and constructive interaction among key stakeholders, the board, management, internal audit, legal counsel and external audit and other advisers; 

* The board should ensure that key stakeholders are identified and, where appropriate, stakeholder feedback is regularly solicited to evaluate whether corporate policies meet key stakeholders’ needs and expectations; 

* Board members should act in the best interest of the company and the shareholders while balancing the interests of other key external and internal stakeholders; 

* The board should ensure that the company maintains a sustainable strategy focused on long-term performance and value; 

* The board should ensure that the culture of the company is healthy, regularly monitor and evaluate the company’s core culture and values, assess the integrity and ethics of senior management, and, as needed, intervene to correct misaligned corporate objectives and culture; 

* The board should ensure that structures and practices exist and are well-governed so that it receives timely, complete, relevant, accurate and reliable information to perform its oversight effectively;

* The board should ensure corporate disclosures are consistently transparent and accurate, and in compliance with legal requirements, regulatory expectations, and ethical norms; and

* Companies should be purposeful and transparent in choosing and describing their key policies and procedures related to corporate governance to allow key stakeholders an opportunity to evaluate whether the chosen policies and procedures are optimal for the specific company.

While the report noted that C+ is slightly above average, it said, "American business has never been about being average" and added that anything less than an A+ indicates some level of corporate governance deficiency. It suggested thinking of the grade similarly to a health grade at a restaurant. 

"While C+ may be a “passing” score, it is not one that engenders trust in the way food is prepared or handled at the restaurant," said the report. 

It also noted that there was significant variance among companies to generate the C+ score. For instance, no company received an A+, just 10 percent got an A, and 6 percent got an A-. In contrast, 10 percent failed outright. Overall, the results indicate that 2 in 10 firms have a high quality of corporate governance, and 1 in 10 has very low-quality governance. 

There was also variance with regard to which principles companies performed well on and which they did not. Companies overall did the best with transparency and accuracy of external disclosures, receiving a B grade overall. Following closely behind was corporate culture, at B-. In contrast, maintaining sustainable long-term strategies scored a C, and evaluation of corporate governance got a C-.

The report highlighted another finding that the IIA found disturbing: When presented with specific scenarios in which a CEO wanted to delay reporting negative news, respondents believed that only 64 percent of board members at their company would push back on the CEO, meaning that more than one-third (36 percent) of board members would not. 

While one might think regulation could be a possible answer, the report found no statistically significant correlation between corporate governance scores and the extent of regulation. Dividing companies between minimally, moderately and heavily regulated companies produced corporate governance scores of 80, 79, and 79 respectively. 

One positive that the report did find was that there is a correlation between board independence and strength of governance. The data overall indicated that companies with a higher percentage of independent board members had stronger scores on corporate governance. 

Click here to see more of the latest news from the NYSSCPA.