Directors sometimes misuse their power for personal gain primarily due to weak shareholder associations and the indifference of investors. When the people who own the company—the shareholders—aren't actively involved, it creates a lack of oversight, allowing directors to prioritize their own interests over the company's.
Weak Shareholder Associations
Shareholder associations are groups formed to represent the collective interests of small, individual investors. When these associations are weak or nonexistent, individual shareholders have little power to challenge a board's decisions. This makes it easier for directors to engage in activities like self-dealing (using company assets for personal benefit) or granting themselves excessive compensation, as there's no organized voice to hold them accountable.
Investor Indifference
Many individual investors, especially in large, publicly traded companies, are often indifferent to corporate governance matters. This is because they own a very small percentage of the company and may not believe their vote has a significant impact. They tend to vote for whatever the board recommends, or they don't vote at all. This apathy gives directors a free pass to make decisions with little scrutiny. The rise of passive investing, such as index funds, has also contributed to this indifference, as these funds are not incentivized to actively monitor the companies they hold.
