I've always used the three/four paces (ie appox length of a flagstick) as a rule of thumb for fairness
FWIW USGA rules for conducting a competition give guidelines for distance to the edge....
1 Study the design of the hole as the architect intended it to be played. Know the length of the shot to the green and how it may be affected by the probable conditions for the day - that is, wind and other weather elements, conditions of the turf from which the shot will be played, and holding quality of the green.
2 There must be enough putting green surface between the hole and the front and the sides of the green to accommodate the required shot. For example, if the hole requires a long iron or wood shot to the green, the hole should be located deeper in the green and further from its sides than should be the case if the hole requires a short pitch shot. In any case, it is recommended that generally the hole be located at least four paces from any edge of the green. If a bunker is close to the edge, or if the ground slopes away from the edge, the distance should be greater, especially if the shot is more than a pitch. Consideration should be given to fair opportunity for recovery after a reasonably good shot that just misses the green.3 An area two to three feet in radius around the hole should be as nearly level as possible and of uniform grade. In no case should holes be located in tricky places, or on sharp slopes where a ball can gather speed. A player above the hole should be able to stop the ball at the hole.
4 Consider the condition of nearby turf, especially taking care to avoid old hole plugs which have not completely healed.
5 Holes should be cut as nearly on the vertical as possible, not plumb with the contour of the green.
6 There should be a balanced selection of hole locations for the entire course with respect to left, right, central, front and back positions. For example, avoid too many left positions with resulting premium on drawn or hooked shots.
7 For a competition played over several days, the course should be kept in balance daily as to degree of difficulty. In a stroke competition, the first hole of the first round is as important as the last hole of the last round, and so the course should not be set up appreciably more difficult for any round - balanced treatment is the aim. An old concept of making the course progressively harder round after round is fallacious. One form of balanced daily treatment is to select six quite difficult, six which are moderately difficult and six which are relatively easy.
8 During practice days before a competition, locate holes in areas not to be used during the competition and which will not result in areas to be used being impaired by foot traffic.
9 Anticipate the players' traffic patterns. Locate holes for early rounds so that good hole locations for later rounds will not be spoiled by players leaving the green.
10 In match play, a hole location may, if necessary, be changed during a round provided the players in each match play with the hole in the same location. In stroke play, Rule 33-2b requires that all competitors in a single round play with each hole cut in the same position, but see Exception to that Rule. When 36 holes are played in one day, it is not customary for hole locations to be changed between rounds, but there is no Rule to prohibit changing them. If they are changed, all players should be informed.
11 The greenkeeper who cuts the holes should make sure that the Rules of Golf are observed, especially the requirements that the hole not exceed 4 ¼ inches in outer diameter and that the hole-liner be sunk at least one inch below the putting green surface.
full rules for conducting a competition are here (hole location starts on pg 41)
http://www.scribd.com/doc/13179773/How-To-Conduct-a-Golf-Competition