The Institute of Internal Auditors is giving corporate America only a modestly better grade on governance in 2020 compared to 2019, and any improvement is probably due to the coronavirus pandemic.
The IIA and the University of Tennessee released their second-annual American Corporate Governance Index on Wednesday, scoring companies at an average of B- (82) on a scale of 1-100. That’s only a slight improvement from a C+ (79) a year ago. But the score still falls short of what the IIA and UT’s Neal Corporate Governance Center consider ideal practices for ensuring corporate sustainability, a healthy culture, transparent and accurate disclosures, and effective policies and structures.
“Maybe the pandemic has helped corporate governance a little bit over the last year because it’s resulted in boards and management and internal audit having a lot more conversations around the risks the organization is facing,” IIA president and CEO Richard Chambers told Accounting Today. “We saw this too in our risk report when we saw better alignment in how management, the board and internal audit see risk in a company. What we’re seeing here is that overall there is what would I call a modest improvement. I don’t think going from a C+ to a B- is a dramatic improvement. There are still areas where we think some more work needs to be done. I think boards are still a bit too trusting. They don’t bring enough skepticism to their roles.”
Results of the ACGI indicate gains across the Index’s eight Guiding Principles of Corporate Governance. Compared with last year’s results, company size (revenue) and industry took on larger roles in explaining variations in ACGI scores. The results suggest that, during times of heightened risk like the current pandemic, companies in regulated industries such as financial services, transportation and utilities exhibit stronger governance.
Joshua Ronen is a professor of accounting at New York University Stern School of Business and co-editor of the "Journal of Law, Finance, and Accounting." Professor Ronen teaches courses in managerial accounting, financial accounting, advanced topics in financial accounting, and financial statements analysis. Ronen has been with NYU Stern for nearly 45 years. His primary research areas include capital markets, disclosure, earning management, economic impact of accounting rules and regulations, financial reporting, legal liability of firms, transfer pricing, agency theory, corporate governance, and fair valuation. Ronen has written numerous books including "Accounting and Financial Globalization," "Off-Balance Sheet Activities," "Entrepreneurship," "Smoothing Income Numbers: Objectives, Means and Implications," and "Earnings Management." He has been published in many academic journals including and publications including The New York Times, The Accounting Review, Journal of Accounting Research, Journal of Accounting, Auditing and Finance, Abacus, Management Science, Journal of Public Economics, Journal of Organizational Behavior and Human Performance, Stanford Journal of Law, Business, and Finance, and Journal of Financial Markets. In addition to his work at NYU Stern, Ronen has lectured at University of Canterbury, Tel-Aviv University, Federal University of Rio de Janeiro, National University of Mexico, University of Toronto, University of Chicago, Hebrew University, and London School of Economics among many others. He has also been a consultant for numerous organizations, including especially law firms as expert witness in the area of securities litigation. His suggestions for reform in the accounting profession have received critical acclaim by legislators and in the media. Ronen received his Bachelor of Arts in Economics and Accounting at Hebrew University in Israel, and his Doctor of Philosophy from Stanford University. Professor Ronen is also a licensed CPA in Israel.
David Silberman is senior advisor at the Financial Health Network and former associate director, research, markets and regulations at the Consumer Financial Protection Bureau.
David Stone is Founder and CEO of RetireOne, an independent platform for fee-based insurance solutions.
The most significant improvement on the index was a decline in the number of companies who scored a failing governance grade. In 2019, 10 percent of companies scored an F, compared with only 2 percent last year. As in the first year of the ACGI, the majority of companies scored in the B and C range of governance performance, with less than one-fifth earning an A-range performance.
“This is our second edition of our Corporate Governance Index,” said Chambers. “A little bit of history here: I had been for a number of years impressed by our Corporate Governance Index in South Africa. I kept talking about how we really needed to do the same kind of initiative for corporate governance here in the U.S. That’s how we ended up giving rise to the American Corporate Governance Index. Last year was our inaugural edition. It’s going to be something that I think will provide a real measure over time of the relative strength or weakness of corporate governance.”
The IIA’s South Africa branch has been producing annual Corporate Governance Index reports since 2013, often in partnership with educational institutions such as the University of South Africa and the University of Pretoria. “I travel regularly to South Africa to be part of their conferences and programs, and I was very impressed with the fact that a Corporate Governance Index there was so widely referred to and anticipated,” said Chambers. “That started us on the path to launch the American Corporate Governance Index.”
Chambers will be departing his job as head of the IIA at the end of March. The IIA announced this week that Anthony Pugliese, president and CEO of the California Society of CPAs, will be taking over from Chambers (see story). The two of them will be working together to ease the transition over the next two and a half months.
“I didn’t really know Anthony Pugliese well before he was selected by our board to become the new president and CEO, but he and I have had several opportunities to interact,” said Chambers. “We’ve had some early conversations. We’re planning some good quality transition time between now and March 31 when I step down officially and formally as the president and CEO. Anthony, I think, brings a tremendous amount of association management experience to this job. He’ll be the 10th president and CEO of the IIA, and I can tell you, being a student of the IIA’s history, that he will bring more association management experience to the role than any of his predecessors, so I’m very excited that he’s going to have the opportunity to come in and manage the organization in the future. I certainly am going to wish him well and do everything I can to help prepare him for the role.”
Chambers’ own plans for his career after the IIA are indefinite right now. “If you look back at my career path, since I finished my career in government almost 20 years ago, I have aligned myself with organizations that are advancing the internal audit profession, and who are making investments in the internal audit profession,” he said. “I spent time at the IIA and spent time with PwC’s internal audit practice, so as I look at what I might do in the future, I think I’m going to be attracted to a company or organization that is advancing and investing in the internal audit profession. I don’t know yet exactly what that’s going to look like. It’s still over two months before I step down, so I don’t want to get too far ahead of myself in making definitive plans.”
