Corporate governance rated only C+ by auditors

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The quality of corporate governance was graded at C+ at best by a group of chief audit executives, according to a new report from the Institute of Internal Auditors and the Neel Corporate Governance Center at the University of Tennessee in Knoxville.

The IIA unveiled a new American Corporate Governance Index in the report Wednesday, based on surveys of chief audit executives, who were asked to rate how well their organizations performed on a set of corporate governance principles. The results were anonymized so the respondents’ ratings of their own organizations’ corporate governance wouldn’t show up in the report. Instead, it deals with perceptions in general by internal audit executives of corporate governance across various industries. The IIA and the Neel Corporate Governance Center plan to update the survey each year to provide annual comparisons that may or may not indicate improvements.

The initial results are tepid at best. The inaugural American Corporate Governance Index graded U.S. companies overall with only a C+, indicating weaknesses over a wide 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).

“We’ve known for a number of years that there’s really no recognized corporate governance code in America,” said IIA president and CEO Richard Chambers during a luncheon Wednesday to present the findings. “We have different legislation and regulations that prescribe corporate governance requirements, but no real corporate governance code like you might see in other regions of the world. One of the things that we knew we needed to do before we could really try to create any kind of index around corporate governance is to come up with some sort of agreed-upon set of principles, if not a code. That was our first step in this process was to collectively agree upon what good corporate governance looks like and the principles outlined in the report. Then we said we really need to take advantage of the unique perspective of America’s internal auditors. I’ve often observed that the chief audit executive and the heads of internal audit at American companies sit at the epicenter of corporate governance. They have a really unique perspective because they report both to the boards of their companies, and they also report to management. It’s this dual reporting relationship that gives them that credible perspective on what’s going on in the boardrooms of corporate America.”

Julie Scammahorn, Wells Fargo’s chief auditor, said she has been in the business for about 25 years and has seen the changes. “The chief audit executive role has really evolved, especially with the financial recession of 2008 to 2009,” she said. “There are expectations of the auditor to know technology, overall credit risk, market risk, operational risk, financial risk and obviously the business in itself, the frontline risk. Internal audit covers all of those areas of the business and reports it out. Do I have to know the strategy of the business? Yes. Do I have to know the risks of the company? Yes. Do I need to know the results? Yes.”

However, the survey found many problems with corporate governance identified by chief audit executives. 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.

The report found that many companies are willing to sacrifice their 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 often fail to verify the accuracy of the information they receive, even though independent boards drive stronger governance. Companies are vulnerable to corporate governance weaknesses or failures, and regulation does not correlate with stronger governance.

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