In a recent Directors & Boards article, GW Law School Professor Emeritus Lawrence Cunningham challenged the idea that there is a single set of corporate governance “best practices” that companies should follow. Anyone who has been in a boardroom during the past couple of decades has heard governance consultants repeatedly explain how the company needs to implement specific actions that may make zero sense for that particular business or else risk being viewed as a governance pariah. How did we get this way? Cunningham points the finger at the rise of what he refers to as the “generalists”:
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 overgeneralized 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.
The article goes on to point out that the empirical studies purporting to identify governance best practices were based on astonishingly bad data, which, once corrected, calls into question many of the received truths about the link between “good governance” and investment returns.
This isn’t the first time that I’ve blogged about this topic, and I admit that articles like this are like catnip to me. That’s because I absolutely agree that a one-size-fits-all approach to corporate governance is one of the dumbest ideas that companies and investors have ever bought into, particularly since nobody really seems to have the vaguest idea about what “good governance” really is.
— John Jenkins, TheCorporateCounsel.net, October 13, 2022