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Internal Auditors Warn: Quality of Corporate Governance Backsliding After Previous Improvement

Chris Gaetano
Published Date:
Jan 12, 2022
A recent report from the Institute of Internal Auditors said that, despite gains in 2020, the quality of corporate governance degraded in 2021. Last year the organization's American Corporate Governance Index gave businesses an overall B-, over the previous year's C+. This year's grade remains a B- though a weaker one than before, with the majority of companies scoring between a C and a B. 

The index is scored along eight principles: clear communication across the company; meeting shareholder/stakeholder expectations; board performance; sustainable strategies with long term focus; corporate culture; information given to the board; external disclosures; and evaluating corporate governance. The only area that gained over last year was "evaluating corporate governance," while "information given to the board" remained the same. Every other metric was worse than the previous year, sometimes by a little (corporate culture) and sometimes by a lot (meeting shareholder/stakeholder expectations). 

More granular metrics show worsening scores in other specific areas. For instance, when it comes to employee support, companies did worse in 2021 on ensuring adequate training, crafting compensation policies to support strategic goals, and their ability to respond to crises or disruptions as they arise. 

The report theorized that COVID-19 fatigue is responsible for this backslide. 

"Data from this year’s American Corporate Governance Index (ACGI) survey point to signs of fatigue as governance improvements seen in 2020 slowed or stagnated across a number of areas examined," said the report. "This slowdown is understandable, if not anticipated. Indeed, governance gains made amid the chaos of COVID-19’s initial onslaught highlighted commendable resilience among publicly traded companies and provided one of the few bright spots in an otherwise distressing year. However, those initial successes have given way to potential slips and setbacks. Grappling with the fatigue factor as wave after wave of pandemic-related ills wash over the economy will be one of the challenges for executive management and boards in the coming year." 

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