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Best Practice or Best Practices? Does "One Size Fit All?"

It is highly unlikely that a single set of best practices exists for all firms, despite the attempts of some to impose uniform standards. Governance is a complex and dynamic system that involves the interaction of a diverse set of constituents, all of whom play a role in monitoring executive behavior. Because of this complexity, it is difficult to assess the impact of a single component. Focusing an analysis on one or two mechanisms without considering the broader context can be a prescription for failure. For example, is it sufficient to insist that a company separate the chairman and CEO positions without considering who the CEO is and other structural, cultural, and governance features of the company?

Applying a "one-size-fits-all" approach to governance can lead to incorrect conclusions and is unlikely to substantially improve corporate performance. The standards most often associated with good governance might appear to be good ideas, but when applied universally, they can result in failure as often as success. For example, consider the idea of board independence. Is a board consisting primarily of independent directors superior to a board comprised entirely of internal directors? How should individual attributes such as their business acumen, professional background, ethical standards of responsibility, level of engagement, relationship with the CEO, and reliance on director fees to maintain their standard of living factor into our analysis?32 Personal attributes might influence independence of perspective more than predetermined standards.33 However, these elements are rarely captured in regulatory requirements.34

In governance, context matters. A set of governance mechanisms that works well in one setting might prove disastrous in another. This situation becomes apparent when considering international governance systems. For example, Germany requires labor union representation on many corporate boards. How effective would such a system be in the United States? Japanese boards have few outside directors, and many of those who are outside directors come from banks that provide capital to the firm or key customers and suppliers. What would be the impact on Japanese companies if they were required to adopt the independence standards of the United States? These are difficult questions, but ones that investors must consider when deciding where to allocate their investment dollars.

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