Corporate governance measures at publicly traded companies were less effective in 2021, with many companies failing to improve in at least two critical areas.
According to a recent report from the Institute of Internal Auditors and the Neel Corporate Governance Center at the University of Tennessee, companies tracked on their American Corporate Governance Index showed governance lapses related to:
• Failing to provide adequate employee training and/or compensating them in ways that promote ethical decision making; and
• Being slow to address increased activism related to ESG from a broad range of stakeholders.
The survey ranked companies based on their ability to make governance improvements. Last year, the number of companies receiving top scores dropped from 1-in-5 to 1-in-7, with an average score of 81 (based on a 100-point scale), down from a score of 82 in 2020.
In a press release, Anthony Pugliese, president and CEO of the Institute of Internal Auditors, said the one-point decline in governance effectiveness is significant and should not be dismissed. He suggests that companies whose governance has fallen off are “out of alignment with the increased scrutiny on companies to improve their governance as they face continued market and regulatory pressures.”
Pugliese went on to say that many companies are “heading in the wrong direction” noting that boards and executive management must remain committed to improving governance and the internal audit must be an integral part of those efforts.
This report can serve as a reason for boards to consider whether they are giving enough attention to the two areas of governance lapses that were highlighted.
Issues related to employee training and compensation have become more important due to adjustments companies have had to make due to the Covid 19 pandemic and a shift in the labor market that has employees quitting their jobs over poor working conditions and low pay. With more employees working remotely, companies have been forced to review many security measures that safeguard the governance of critical information because lapses in training can lead to data breaches or loss of critical data. Failing to adequately compensate workers can lead to disgruntled employees sabotaging operations or taking the importance of their roles less seriously. Companies may also find that inadequate compensation can lead to an organization’s best employees seeking more lucrative opportunities elsewhere. Trends suggest that boards are being tasked with paying more attention to human capital management issues. Keeping the best and brightest employees happy is a governance issue that may require more innovative solutions that the board will need to debate.
Additionally, many governance observers suggest companies consider using compensation incentives to reach certain governance objectives, such as improving diversity in the workplace or promoting more ethical behaviors.
Perhaps a bigger issue for corporate directors to address is the lack of attention to activism related to ESG issues. Shareholder activism and activism from employees has been growing over the last few years. For 2022, boards may want to try to forecast ESG issues that may be of concern to employees, customers, shareholders and others and conduct an internal risk assessment of key issues to determine the potential impact an activist campaign might have on the company. Creating crisis response plans addressing each specific ESG activism concern will go a long way toward helping management communicate that the governance measures at the company are adequate and the board has the experience and knowledge to deal with stakeholder disruptions.