After improvements during the first year of the pandemic, US corporate governance has deteriorated, according to new research, which suggests “crisis fatigue” is eating away at the gains made.

In fact, results of the 2021 American Corporate Governance Index (ACGI), show governance backsliding across seven of the eight major indicators used by researchers.

According to the ACGI report, the overall score for governance slid to a B-. The number of companies scoring A-, A or A+ fell from 19% overall in 2020 to 14% last year.

US companies lost ground on “meeting shareholder/stakeholder expectations”, and on communications between decision-makers. Board performance scores fell as did corporate culture and external disclosures. Companies held their ground on information handed to board members and made advances on evaluating their own corporate governance.

The report, compiled by the Institute of Internal Auditors and the Neel Corporate Governance Center, Tennessee, says the research points to “signs of fatigue as governance improvements seen in 2020 slowed or stagnated”.

One of the biggest areas of concern is the decline in governance related to employees. US companies saw declining scores for provision of training, pay and the perception among workers that their companies are able to respond to “crises or disruptions”.

The report says the results come after the pandemic created “heightened awareness” of worker well being and workplace culture. “This,” it says, “will continue to be a challenge as the pandemic lingers and prolongs uncertainty.”

Stakeholders and ESG concerns

There was room for improvement elsewhere too. The report’s authors worry whether information is being shared inside companies in a “timely” manner, noting delays at a time of crisis could affect employees, customers and other stakeholders as well as profits.

They also say US companies have fallen short on considering the interests of key stakeholders. They note 2021 saw shareholders increase efforts to voice concerns. “Perhaps disappointingly this increased activism has not yet led to observable improvement to the extent to which key leadership members are regularly cognisant of and actively pursuing ways to minimise negative impacts at their companies,” the report says.

But the report reserves special attention for corporate America’s focus on ESG (environmental, social and governance) issues. The survey reveals most companies are “in the early stages of their ESG journey” though the research also found efforts were underway to create new board committees and executive-level roles dedicated to environmental and social issues. Other observations include the need for better analysis and reporting of ESG data.

That is a poignant observation. Since Joe Biden was elected president, the Securities and Exchange Commission (SEC) has been consulting on proposals to introduce mandatory ESG reporting to the US, a catch-up move that could bring companies into line with counterparts in the EU already subject to the Non-Financial Reporting Directive, which is also set to be revised this year. However, there has been strong push-back from many observers against the idea.

Given the demands of the pandemic it might seem inevitable that governance standards might dwindle as crisis fatigue sets in. Corporate leaders only have so much bandwidth for holding standards together. Nevertheless, gains were made during 2020 in attitudes and policy. It would be a tragedy if they were lost.