Final answer:
The board of directors engages in activities such as setting CEO compensation and strategic guidance but their independence can be compromised by the influence of top executives who often have a say in board selection.
Step-by-step explanation:
Members of the board of directors are involved in various activities that are key to corporate governance and the strategic management of a firm. These activities include hiring and firing C-level executives, setting CEO compensation, assisting in setting the strategic direction of the firm, and working to protect shareholder interests.
However, what's key to understand is that the board is elected by the shareholders and should serve as their representative, ensuring that the company is run in such a way that benefits the true owners-the shareholders. Nevertheless, in practice, the top executives often have a substantial influence on the selection of board candidates, which can potentially lead to a conflict of interest and a fundamental challenge in corporate governance.
The nature of this influence is that top executives, who are a part of the day-to-day operations of the company, often recommend or have a say in the selection of board members. This can result in a board that is more sympathetic or aligned with management's views rather than independently protecting shareholder interests. This was exemplified in the case of Lehman Brothers where corporate governance failed to provide accurate financial information, highlighting the importance of a strong and independent board for corporate oversight and governance.