ThinkTWENTY20

Managing change and uncertainty that can potentially disrupt achievement of goals is simply part of doing business, and 2021 proved as great a test in this respect as any in recent years. According to this year’s American Corporate Governance Index (ACGI) survey, “As the toxic effects of a global pandemic continue to stubbornly linger and the fallout from 18 months of business, economic, and social disruption manifests in varied ways, the need for effective governance is clear.” 

Managing change and uncertainty that can potentially disrupt achievement of goals is simply part of doing business, and 2021 proved as great a test in this respect as any in recent years. According to this year’s American Corporate Governance Index (ACGI) survey, “As the toxic effects of a global pandemic continue to stubbornly linger and the fallout from 18 months of business, economic, and social disruption manifests in varied ways, the need for effective governance is clear.” 

But the survey, carried out by the Institute of Internal Auditors and the University of Tennessee Knoxville, points to signs of fatigue as governance improvements seen in 2020 slowed or stagnated across a number of areas examined. “This slowdown is understandable if not anticipated,” says the ACGI survey. “Indeed, governance gains made amid the chaos of COVID-19’s initial onslaught highlighted commendable resilience among publicly traded companies and provided one of the few bright spots in an otherwise distressing year.”

Unfortunately, the ACGI survey notes that those initial successes have given way to potential slips and setbacks. “Grappling with the fatigue factor as wave after wave of pandemic-related ills wash over the economy will be one of the challenges for executive management and boards in the coming year.”

Data from the 2021 ACGI survey signal a number of areas where governance improvements retreated: 

• Companies earning “A” grades in governance dropped to 14% from 19% in 2020. 
• Potential declines in important employee-related governance measures were noted, such as providing adequate training and compensating in a way that promotes ethical decisions. 
• Despite increased activism related to social and environmental issues, companies are slow to address the needs of a broad range of stakeholders in their business decisions. 

This final observation is of particular concern, says the survey’s introduction, “because it does not jibe with the level of shareholder, stakeholder, and regulator interest in environmental, social, and governance (ESG) reporting, nor the observations of many survey respondents.”

According to the survey, “participants report growing awareness and focus in their organization on environmental and social issues as well as increased emphasis on diversity, equity, and inclusion in hiring. What’s more, formation of new committee- and executive-level positions dedicated to overseeing ESG issues was noted by respondents. 

“As yet, however, this has not shown up in improved governance scores. Invariably, the increased focus on social and environmental issues will influence governance, both from the perspective of where they fit into the strategic, operational, regulatory, and reporting aspects of governance as well as from the need to provide independent assurance over such matters.”

Dive deeper into the survey at 2021-ACGI-Report.pdf (theiia.org).