The assertion made by Tangeman and Winkelman is valid – one of the two main objectives of corporate governance is to eliminate or reduce conflicts of interest. The two primary areas for potential conflicts of interest in a corporation are conflicts between shareholders and management and conflicts between directors and shareholders.

Winkelman’s statement is incorrect. Executive compensation in the form of large amounts of stock options can cause managers to take on too much risk as the asymmetric payoff of those options means that managers can reap huge rewards if the risks pay off, but will not share in the losses if the risky projects fail. Note that managers taking too little risk is also a concern, but taking too little risk is a symptom of managers holding too much stock – not stock options. If the manager has the bulk of their wealth tied to company stock, the manager may want to avoid risky projects to protect the value of the stock even though the risky projects may do a better job of maximizing value for the firm’s shareholders.

Tangeman’s statement is incorrect in two respects. The most important roles for the board of directors is to institute long-term strategic objectives for the company and institute corporate values that will insure that business is conducted in an ethical and fair manner. Also – the board should not “balance shareholder and management needs” when negotiating with management in areas such as compensation. The board needs to determine management compensation with shareholders’ best interest as their sole consideration.