Question

The Chief Executive Officer (CEO) is a top corporate manager whose primary job is to lead the day-to-day running of the corporation and whose primary goal is to maximize shareholder value. To incentivize CEOs, many large corporations have been compensating CEOs with various forms of pay-for-performance in addition to a fixed annual salary. According to some estimates, over the last two decades CEO compensation in the United States has on average increased by 600%, with a disproportionate increase in equity-based compensation (e.g. stock options). These increases in executive compensation, particularly stock options, have generated enormous controversy. The recent high-profile corporate scandals and financial market tsunami have led some observers to argue that the excessive focus on shareholder value maximization in general, and inadequately designed executive compensation in particular, have led to managerial gross misbehavior as well as short-termism. Some argue that rapid increases in executive compensation represent unmerited transfers of shareholder wealth to top executives with limited if any incentive effects, and at times have led to outright frauds. The problem is exacerbated when the CEO is also the chairman of the board of directors. The adverse effects of excessive CEO compensation are particularly severe in countries where institutional checks such as shareholder protection and shareholder activism are weak.

Required：

1. Discuss what the relative strengths and weakness of the corporate governance system are.

2. What respective roles can lawmakers, board of directors, top managers, shareholders, financial intermediaries and the financial media play to ensure a well-functioning financial market? Explain and elaborate each one.

3. Identify any potential conflicts of interest and suggest possible solutions.

Answer 1