Challenges in Evaluating Corporate Governance: Evidence from Chief Audit Executives

Abstract

Corporate governance research focuses primarily on the inputs into effective governance, yet we know little about how companies monitor and evaluate their governance systems on an ongoing basis. This is important because investors are increasingly relying on information about corporate governance in their portfolio management decisions. To bridge this gap, we interview 29 chief audit executives (CAEs) from publicly traded companies in the U.S. to learn about current practices as well as challenges faced in evaluating corporate governance. Our analysis reveals that internal audit’s current governance evaluation practices are often piecemeal and lack a cohesive view of the full governance system. Key challenges include perceptions that management and the board are not willing participants, concerns that “effective” corporate governance is subjective and hard to measure, difficulties with documenting evidence to support the evaluation, and issues encountered when communicating deficiencies to management and the board. Informed by the concept of decoupling from institutional theory, our findings reveal a need for additional research on corporate governance evaluations as well as consideration of standard setting to enhance the rigor of internal audit’s governance evaluation practices.

Keywords: corporate governance; evaluation; internal audit; institutional theory; decoupling

JEL Classification: G34, M10, M14, M42