A review of the corporate governance practices of more than 160 of the largest U.S. and Canadian corporations by Moody’s Investors Service reveals that overall improvements have been made in numerous areas, but there are still problems, notably executive compensation.

Moody’s says that, as a group, large companies have improved governance by increasing the expertise, independence, and diversity of their boards of directors; and, in particular, their audit committees. The study also found progress in implementing more bondholder-friendly compensation schemes. However, the study also noted that one out of four companies reviewed still offer executive compensation that is based on formulas that promote a short-term focus or an unhealthy appetite for risk from a creditor perspective.

The primary areas of credit concern raised by the Moody’s review include weaknesses in the oversight or execution of audit controls, risk management, and compliance, and in succession planning. Although controls and compliance are areas in which substantial improvement has been made over the past few years, Moody’s has cited oversight challenges, ranging from the independence and effectiveness of the internal audit function, to the lack of an enterprise risk-management systems, at approximately one out of three companies it has reviewed. Moody’s also raised concerns related to succession planning for about one out of three companies.

“One of the most significant trends we have observed is a general increase in independence, both at the board and the committee level, which is unsurprising given the requirements in place under Sarbanes-Oxley legislation and stock exchange listing requirements,” saie Ken Bertsch, Moody’s senior vice president and head of the rating agency’s corporate governance initiative.

“More difficult to measure, though just as important,” Bertsch added, “is a renewed level of commitment, energy, and attention, which in our opinion is having a material impact on oversight, controls, and risk management.”

Bertsch said that among the companies that Moody’s has reviewed, the average level of board independence is about 73%. This means that approximately three-quarters of the members of a typical board are considered independent according the rating agency’s definition, which Bertsch points out is somewhat more restrictive than the “minimum standards” for listing on the major North American stock exchanges.

Moody’s also points to changes in the recruiting of new directors, including the use of search firms to identify candidates outside the traditional “old boy network” and to bring in talent that complements others on the board. A particular area of focus has been on finding financial experts to add bench strength to the audit committee. “Once the backwaters of the board, audit committees are now home to the most experienced and dedicated directors,” Bertsch said.

Among other positive trends, Moody’s notes that boards and their key committees are meeting more frequently and for longer. They are more involved at an early stage of strategic planning, are less likely to rubber-stamp acquisitions and other large investments, and have instituted more formal procedures for reviewing themselves and management.

Executive compensation has shown improvement, but it also continues to raise concern from the viewpoint of a company’s bondholders. Performance-based stock options can prompt management to take actions that increase the stock price in the near-term, even if these gains are not sustainable, and that sometimes can harm the company’s credit strength, as can be the case with share repurchases. In contrast, restricted stock or other share equivalents, which are increasingly in favor, have value from the start. They are therefore more likely to influence managers to consider the potential downside of their actions.