American Corporate Governance Index Report

The Institute of Internal Auditors
and
University of Tennessee, Knoxville’s Neel Corporate Governance Center
AMERICAN CORPORATE GOVERNANCE INDEX

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.

The Institute of Internal Auditors has partnered with researchers at the Neel Corporate Governance Center at the University of Tennessee-Knoxville to create the annual American Corporate Governance Index. This Index tracks effectiveness and systematic changes in corporate governance at publicly held companies in the United States (companies listed on U.S. stock exchanges). Unlike anything currently available in the United States, the Index is executed from the perspective of Chief Audit Executives (CAEs). Only internal audit offers an independent, objective and enterprisewide lens with which to view and analyze corporate governance practices.

Development of the Index represents an ongoing effort to provide timely and transparent corporate governance information that The IIA expects will be helpful not only for internal auditors, but also boards of directors, investors, regulators, and the general public.

To develop survey questions that will inform the Corporate Governance Index, the Neel Center, along with researchers at the University of Illinois and Virginia Tech, conducted extensive one-on-one, confidential interviews with more than 30 chief audit executive representing a cross section of companies and industries.

The IIA wants to address a number of key components around governance practices and trends among publicly held companies in the United States, for example:

• How does a company evaluate the “quality” of its corporate governance?
• What do companies believe are the strongest measures or indicators of “good” corporate governance?
• What prevents a company from providing the “optimal” level of corporate governance?
• What is the level of boardroom independence and diversity?
• What is the engagement between directors and management and internal audit?

Additional issues:

• Shareholder engagement
• Long-term value
• Leadership quality/breadth of experience

The ACGI is designed to be a reliable barometer of American corporate governance and to provide insight into how companies perform in key areas based on Guiding Principles of Corporate Governance, developed in partnership between the Neel Corporate Governance Center and The IIA. These Principles are based on a compendium of relevant guidance and principles advanced by experts in the field, including the National Association of Corporate Directors (NACD), the New York Stock Exchange, the Committee of Sponsoring Organizations of the Treadway Commission (COSO), the Business Roundtable, the Investor Stewardship Group, UT’s Neel Corporate Governance Center, The IIA, and others.

CAEs are uniquely positioned to provide an independent and objective enterprisewide perspective of the organization. The ACGI itself is calculated using responses to a Principles-based governance survey of chief audit executives (CAEs) at companies listed on U.S. stock exchanges. Survey respondents answered questions anonymously by indicating their level of agreement or disagreement with specific statements and scenarios.

The questions and scenarios were developed based on in-depth interviews with leading CAEs and built around the Guiding Principles of Corporate Governance. A key tenet underlying the ACGI and the accompanying Guiding Principles is that corporate governance affects a company not only in the boardroom or C-suite, but throughout the organization. The more that companies increase their scale and geographic reach, the more difficult it is for boards and executive leadership to directly guide and oversee corporate governance across all levels of the organization. Therefore, questions are designed to capture the effectiveness of corporate governance enterprisewide. Responses to each question are combined to form an aggregate score using a scale of 0 – 100, which is then translated into a letter grade of A through F. The score for each principle is an equal-weighted average of each of the sub-principles, or elements.

This year’s inaugural index is based on survey responses from 128 experienced CAEs working in companies of various sizes, complexities, and industries.

The IIA and the Neel Corporate Governance Center are committed to conducting the survey annually, providing an unbiased examination of the data, and sharing insights about the factors that influence corporate governance over time.

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.

The IIA and the Neel Corporate Governance Center are committed to conducting the survey annually, providing an unbiased examination of the data, and sharing insights about the factors that influence corporate governance over time.

Instrumental in developing the 2020 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 University of Tennessee-Knoxville’s Neel Corporate Governance Center at the Haslam College of Business.

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 conferences internationally.