From a corporate governance perspective, a primary responsibility of the board is to look after the interests of shareholders. For example does it make sense for the corporation to assume a particular risk, given the projected returns of the business activity threat to the Corporation is realised? The board also needs to be sensitive to the concerns of other stakeholders such as debt holders. Death holders are most interested in the extreme round side of risk- how likely is it that the risk-free damage a corporation so badly that it will become insolvent?
So particularly, the board needs to be on the alert for any conflict that may arise between the interest of management in boosting Returns while assuming risks and the interest of the company's longer-term stakeholders.
This kind of conflict of interest is often referred to in the academic literature as an agency risk.
Conflicts of interest can easily happen if are rewarded with options that we can cash in if the share price of the company Rises above a certain level. Such an arrangement gives management and incentive to push the share price up but not necessarily in a sustainable way. For example management might encourage business lines to earn short term rewards in exchange for assuming long-term risks. By the time chickens come home to roost, managers, including CEOs may well have picked up their bonuses or even changed jobs.
The tension between the interest of the CEO and the interests of long-term stakeholders helps to explain why boards of directors need to maintain their Independence from executive teams, and why there is a global pushed to separate the role of the CEO and the chairman of the board.
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