Question

what is the most important piece to consider about corporate governance to ensure than board members are acting in the best interest of shareholders?

Answer 1

The crucial piece of corporate governance to ensure that board members act in the shareholders' interest is the independence and robustness of the board, alongside external audits and active investor oversight.

Step-by-step explanation:

The most important aspect of corporate governance to ensure that board members act in the best interests of shareholders is to establish a robust and independent board of directors. While boards are elected by shareholders, they can be influenced by top executives, potentially leading to conflicts of interest and a lack of proper oversight. One of the core principles of corporate governance is the separation between ownership and control, ensuring that decisions made by top executives are aligned with shareholders' interests. In order to avoid issues like those seen in the Lehman Brothers case, it is crucial to have external audits and active investors monitoring company activities. External audits by reliable auditing firms can help verify financial records and provide reassurance that the company's financial information is accurate. Moreover, investors, particularly large institutional shareholders, can exert influence and demand accountability, thus fostering transparency and aligning executive actions with shareholder value.

Answer 2

The key aspect in ensuring board members act in the best interest of shareholders is independent oversight, exemplified by a board of directors that is not unduly influenced by company executives. An auditing firm's role in reviewing financial records and the vigilance of external investor institutions are also pivotal. Failures such as the Lehman Brothers case indicate the severe consequences of neglecting these governance mechanisms.

Step-by-step explanation:

The most important piece to consider about corporate governance to ensure that board members are acting in the best interest of shareholders is the establishment and enforcement of strong oversight mechanisms. The board of directors, primarily elected by the shareholders, should serve as an independent oversight body to hold top executives accountable. However, this may be compromised if top executives heavily influence the selection of board members. To combat potential conflicts of interest, shareholders need power to nominate and elect truly independent board members who are invested in safeguarding their interests. Additionally, the employment of an auditing firm to review and validate the company's financial records serves as a secondary safeguard. It proves crucial that external institutions like auditing firms and large shareholders, for instance, those managing mutual funds or pension funds, maintain a vigilant role in reviewing the company's operations. Failures in corporate governance, such as the case with Lehman Brothers, highlight the consequences of inadequate oversight and the lack of accurate financial information for investors. Ensuring transparency, accountability, and the inclusion of genuinely independent board members are essential to prevent such failures and protect shareholder interests.