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American Corporate Governance Index: Failure to Make the Grade

 

Corporate governance encompasses all aspects of how an organization is directed and managed — the system of rules, practices, processes and controls by which it operates. As a result, corporate governance is unique to each organization.

This distinctiveness is part of the reason why many companies may resist legislation and regulations that dictate how they should be run. Indeed, at the heart of the American success story is a free-market system that rewards hard work, ingenuity, innovation and shrewd decision making. But that entrepreneurial story must continue to evolve if the United States expects to remain among the world’s preeminent economic powers.

Companies are under increasing pressure from investors, regulators and special-interest groups to demonstrate value and sustainability, particularly in the context of environmental, social and governance (ESG) metrics. Indeed, sustainable investment in the United States reached nearly $12 trillion in 2018, which accounted for 25.7 percent of the nation’s total assets under management, according to the Global Sustainable Investment Alliance. Investors are seeking assurance that companies are not only providing accurate and transparent accounting of their finances, but also are acting ethically while meeting objectives that align with the needs and interests of stakeholders.

A number of well-established indices offer short-term insight into economic performance, consumer confidence and other aspects of business. Examination of financial reporting and accounting also are well understood. But what is lacking is a comprehensive measure — an index — of the state of American corporate governance, one that examines the effectiveness of interaction between key stakeholders, the board, executive management, internal audit and others. An index that gauges whether the board and management are acting in the best interest of the company, whether there is a vision toward sustainability, a healthy culture, transparent and accurate disclosures and effective policies and structures. The Institute of Internal Auditors (IIA) and the Neel Corporate Governance Center at the University of Tennessee, Knoxville’s Haslam College of Business have answered the call and are proud to present the inaugural American Corporate Governance Index (ACGI).

 

About the Partnership

 

In 2018, the Institute of Internal Auditors and the Neel Corporate Governance Center at the University of Tennessee’s Haslam College of Business in Knoxville, Tennessee, began collaborating on an ambitious project to develop principles and an annual index to measure the qual­ity and effectiveness of corporate governance among publicly held companies in the United States. With more than 200,000 members worldwide, including over 66,000 in the United States, the IIA is the internal audit profession’s most widely recognized advocate, educator and provider of standards, guidance and certifications. The Neel Cor­porate Governance Center was founded in 2003 in the wake of corpo­rate scandals that preceded the Sarbanes-Oxley Act. Its mission is to conduct and disseminate nationally recognized research on corporate governance with a focus on public policy. Instrumental in developing the 2019 American Corporate Governance Index (ACGI) are Terry L. Neal, Ph.D., CPA, Director of Corporate Governance, and Lauren M. Cunningham, Ph.D., CPA, Director of Research at the Neel Center. Neal is the Richard L. Townsend Distinguished Accounting Professor and head of the Department of Accounting and Information Management. His research, which has been published in top-tier academic journals, primarily addresses issues related to corporate governance and audi­tor independence, with a particular emphasis on the role of the audit committee as a corporate governance mechanism. Cunningham is an assistant professor in the Department of Accounting and Informa­tion Management. Her research, which focuses on the effects of audit, corporate governance and regulatory oversight on financial report­ing quality, also has been published in top-tier academic journals and presented at the U.S. Securities and Exchange Commission’s Division of Economic and Risk Analysis as well as at conferences internationally.

 

Find the index here