The illusion of CORPORATE GOVERNANCE "BEST PRACTICES": The best boards focus on solutions and structures tailored to their companies, ignoring cookie-cutter "gold standards.".

• Author: Cunningham, Lawrence A.
• Position: BIG IDEAS FOR CORPORATE GOVERNANCE

Contrary to what good parents have long taught their children, it's now acceptable in corporate governance to say "everyone else is doing it, you should too." Advocates of so-called good governance urge companies to take specific actions because they "lag behind their peers" on some favored practice.

This is new. A generation ago, the norm in corporate governance was to recognize differences among companies--the need to tailor governance to fit needs, to shun cookie-cutter approaches. In recent years, however, the norm has veered to a universal expectation that all boards should follow identical guidelines, usually anointed as "best practices" or "gold standards."

There are legions of examples, beginning with the rise of independent directors in the 1990s and the structure of the audit committee dating from the early 2000s. They include separating the board chair and chief executive roles and de-staggering board service in the 2010s to valorizing diversity of race and gender today, along with disclosure around fashionable but vague ESG concepts.

Why has this genuflection to best practices and gold standards occurred, and what should we hope for the future of corporate governance?

GENERALISTS AND GENERALIZATIONS

A dominant reason is the expanding power of generalists offering only a macro-perspective. A generalist viewpoint is understandably held by all passive asset managers and proxy advisors, most policy makers and many empirical researchers who favor working with large general datasets. All have incentives to identify and promote universal practices for all boards.

In contrast, specialists take a micro-perspective on particular companies, including stock-picking shareholders, the directors who serve them, and analysts and researchers prepared to immerse themselves in the details of particular companies. Such cohorts would undoubtedly endorse universal practices that work, but they have an interest in resisting over-generalized prescriptions.

In recent years, generalists have wielded far more power than specialists in corporate governance, and their worldview now dominates. As a result, gold standards and best practices are everywhere in governance, even if they are not good for particular companies. A catalog of good governance reigns, including refreshment imperatives, such as director age limits and term limits, and control-related rules, like majority voting in director elections and negative views of dual-class capital structures...