How Effective are Boards of Directors?

Directors are supposed to represent shareholder interest. Isn’t it ironic then that new directors are usually a) handpicked by the CEO and b) not shareholders? How can a director represent shareholder interest when they haven’t been a shareholder? The situation is even worse when a hired CEO who has little share ownership himself is picking directors.

I recently read Dear Chairman, which is a great book about corporate governance (or lack thereof) on public company boards. One of the examples from the book was Steve Jobs inviting someone to join Apple’s board. But after that person mentioned some of his ideas to improve corporate governance, Jobs rescinded the offer. He wanted directors who were yes-men, not ones who wanted to change things. This happens all the time and it shouldn’t be a surprise. Humans are selfish and we look out for ourselves first (and that’s how it should be, our self-preservation instinct is a good thing). A CEO wants to keep his cushy position making way too much money every year—why would he want to shake up the group of people that “oversee” him? It makes perfect sense when you think about it from a psychology standpoint.
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