Question

Public corporations are led by Chief Executive Officers (CEO) and other upper-echelon leaders who, in turn report to shareholders and board of directors (BOD). Interestingly, even though the BOD oversees the CEO, decides on the terms of employment and salaries, and monitors the overall performance, the CEO is, more often than not, the person that nominates board members. The justification? The CEO are well placed to know what type of expertise is needed on the board and should have a BOD that will 'fit' and work with. The relationship between BOD and CEO is a complex. What are the potential ethical and conflicts of interest issues arising from the CEO's involvement in the selection of board members?How can these issues be addressed?

Answer 1

There are different ethical and conflict of interest issues due to the complexity of the relationship between BOD and CEO. The first ethical issue is that CEO appoints those, who are going to monitor him. It makes a high probability that BOD will work under the influence of CEO. It also creates a conflict of interest, as CEO can access the information that is collected by the BOD regarding the performance of the CEO. It affects the diligent work to be done by the BOD and it is not good for the organization. The second ethical issue is that there is a high probability that BOD and CEO will have hands in glove and work on a same agenda even if it is not good for the organization. It creates conflict of interest also, as rather that keeping a vigil upon each other, BOD and CEO has joined hand together and partner in all the decisions even if it is not good. Besides, the CEO has the interference in the work of BOD and he remains to be unopposed. So, he is involved, even if the decision is take up against him. So, it affects the decisions taken up by BOD. It is a case of conflict of interest. Besides, selecting individuals for the BOD positions create ethical concerns, as CEO can opt for those only, who are yes man to the CEO. It is not good for the organization.
Though, these issues can be addressed. To resolve these issues, there will be certain number of independent directors who should come from outside of the organization and they will be sole responsible to the shareholders. The BOD should also include the members that are nominated by the concerned government department. It will make a judicious blend of members from different background in the BOD to prevent moral hazard and agency conflict like problems. Besides, the BOD should coordinate with the CEO, but should also report to the promoters, apart from the CEO so that effective control mechanism is established. It will make the BOD to work independently, but in close coordination with the CEO.