Chairman Phil George said the Welsh Government-commissioned independent review of literature and publishing was "deeply disappointing".
It recommended stripping Literature Wales of much of its responsibilities for nurturing writers and promoting their work.
It was suggested the Welsh Books Council (WBC) should handle it instead.
Until now the WBC has focused on grants for publishers and distributing printed works.
The Arts Council of Wales (ACW) was criticised by the review's authors for not properly overseeing Literature Wales' activities, despite giving it a public subsidy of more than Â£700,000 a year.
Mr George said: "I don't think that we failed in our oversight of Literature Wales.
"The first thing to say is that we don't recognise the description of Literature Wales as a kind of dysfunctional organisation not worthy of public funds.
"But that's not because we are complacent about it, we know that all the organisations that we fund get careful attention from us and we look carefully at the way that they operate and there are ambitions that we develop with them."
Chairman of the review panel, Prof Medwin Hughes, declined to comment while its recommendations were still being considered by the Welsh Government.
Mr George did accept some improvements could be made: "We are not saying Literature Wales is perfect. We are working with them on a number of fronts.
"But we certainly don't recognise the description of them and therefore we don't think that we have been neglectful in looking after them."
Economy Secretary Ken Skates declined to be interviewed but First Minister Carwyn Jones was asked about the review's conclusions during an assembly committee meeting.
Responding to a question by Bethan Jenkins about it, Mr Jones said: "I'm aware of the comments.
"Over the years, one of the things I've noticed is that it's a small sector but the comments can often be quite strong when they're made."
He said the government would consider "all the comments made" as part of its formal response to the review, but no date for that response had been decided.
The assembly's culture committee will hold its own inquiry into the review of literature and publishing in September.
Conservative committee member Suzy Davies said: "I think one of the things that's been disappointing about this report, despite it being claimed to have reached a wide section of the public, when you look at the actual figures that have been quoted - 800 people filled in a questionnaire.
"Do you know, they are authors, publishers and journalists. They are not members of the public, so your average readers or consumers of the written word, in whatever format it is, I don't think this has even touched the surface of what they think.
"So before the cabinet secretary [Ken Skates] comes to any conclusions he needs to take some evidence from the outside world as well."
The head of the Arts Council of Wales has defended its oversight of a company at the heart of a damning review.