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Corporate governance best practices are, by their very design, intended to enhance board members' ability to discharge their responsibilities--responsibilities to shareholders, the company, and each other. Despite decades of research, dialogue, and debate regarding board effectiveness, despite recent legislative changes such as the passage of the Sarbanes-Oxley Act in 2002, despite ever-increasing requirements placed on firms by the various listing exchanges (e.g. New York Stock Exchange, NASDAQ), there is little evidence that corporate governance, specifically board effectiveness, has significantly improved over time. At the risk of revisiting the obvious, corporate governance failures at corporations such as Enron, Qwest, Adelphia, Hollinger, and Parmalat provide compelling evidence of the failure of boards that were compliant in regard to multiple elements of "best practice."
What, then, accounts for such failures? What accounts for the lack of supportive research on the efficacy of suggested best practices? Why are boards less effective than is optimally desired? One answer, albeit not likely the answer, is a misplaced focus on structural aspects of the board of directors at the expense of process issues.
Corporate governance best practices have historically focused on issues that include the composition of the board (i.e. the proportion of inside directors to outside directors), whether the CEO concurrently holds the position of board chairperson, the size of the board, the level and type of director equity held in the company, and the composition of the various board committees. While these may be necessary conditions for overall board effectiveness, we submit that they are insufficient conditions for achieving optimal board …