Final answer:
Active institutional investors likely view boards controlled by CEOs and executives with skepticism due to potential conflicts of interest. They prefer an independent board that offers unbiased governance and effective management oversight. Robust corporate governance is essential for protecting investor interests.
Step-by-step explanation:
Active institutional investors, who aim to push for changes when the companies they invest in deviate from value maximization, would likely view a board chaired by the firm's CEO and comprised mostly of the firm's executives with a fair amount of skepticism. Such a board structure suggests a potential for conflicts of interest and a lack of independent oversight, which might not align with the best interests of shareholders. These investors would probably prefer a board with a more significant number of independent directors who can provide unbiased governance and hold top executives accountable.
The board of directors is elected to represent shareholders' interests and is intended to be the first line of corporate governance, overseeing and steering the firm's executives toward the pursuit of shareholder value. When the CEO chairs the board and the board is populated predominantly by executives from the firm, the checks and balances that guard against self-interested behaviors by management may be weakened. This is because the executives have considerable influence over the selection of board members, which can undermine the board's role as an effective monitor of management.
The failure of corporate governance mechanisms, as seen in historical examples like Lehman Brothers, showcases the importance of a robust and independent board for maintaining corporate governance and protecting investor interests.