Final answer:
The board of directors must avoid relationships with company executives, significant business partners, major customers, and primary financiers to remain unbiased and effectively represent shareholders' interests. Corporate governance sometimes fails when these boundaries are not strictly maintained.
Step-by-step explanation:
In order to remain unbiased, the board of directors must not have any relationship with entities that could influence their judgment or lead to conflicts of interest. These entities typically include the company's executive management, substantial business partners, significant customers, and providers of finance, such as banks or significant investors. The essence of corporate governance is to prevent any such entanglements that might compromise the board's ability to prioritize the best interests of the shareholders.
The board of directors is supposed to represent the shareholders and be the first line of oversight for the company's executives. Yet, in reality, top executives often have a substantial role in selecting board candidates, which can undermine this intent. Institutions such as auditing firms and large outside investors, including mutual funds and pension funds, form additional layers of corporate governance to safeguard the shareholders' interests. Notably, failures in these governance mechanisms can result in significant financial misreporting, as was evidenced in the case of Lehman Brothers.