Question

Why do critics argue that high compensation for boards of directors is a bad thing?

a. It is too expensive for the organization.
b. It could cause conflicts of interest between the directors and the organization.
c. It is not fair to poorly compensated employees.
d. High pay will render the board less complacent.
e. Board of director compensation is not a major issue.

Answer 1

High compensation for boards of directors can create conflicts of interest and undermine the interest of shareholders. It can also result in a lack of independent oversight and corporate governance failure, as evident in historical cases such as Lehman Brothers.

Step-by-step explanation:

Critics argue that high compensation for boards of directors is a bad thing primarily because it could lead to a conflict of interest between the directors and the organization. High compensation can create a scenario where directors are more incentivized to make decisions that maintain their lucrative positions rather than prioritize the best interests of the shareholders. Additionally, excessive pay for board members stands in contrast to the compensation of lower-level employees, which can be a source of internal discontent and perceived unfairness.

Another point of contention regarding board compensation is the influence that top executives have on selecting board candidates. This close relationship can lead to a lack of independent oversight, as boards may feel beholden to the executives who played a part in their appointment. As seen in cases like Lehman Brothers, a lack of stringent corporate governance and oversight can ultimately fail to provide investors with accurate financial information and lead to institutional failure.