Final answer:
The governance problem in modern corporations arises from the separation of ownership and control, creating agency problems. Shareholders own public companies, but managers run them, which can lead to conflicts of interest and misalignments between management actions and shareholder interests.
Step-by-step explanation:
The governance problem in modern corporations revolves around the separation between ownership and control, leading to potential agency problems. In a private company, ownership often aligns with management, as seen in sole proprietorships or partnerships. However, public companies are owned by shareholders who elect a board of directors, and these directors hire the company’s top management. This separation can cause agency problems as the management may not always act in the best interests of the shareholders, prioritizing personal gain over shareholder value.
The board of directors is responsible for corporate governance, providing oversight for executive actions. Other integral parts of corporate governance include auditing firms and outside investors, such as mutual funds or pension funds. Unfortunately, there are cases, like Lehman Brothers, where corporate governance fails, resulting in misinformation and financial inaccuracies being presented to the investors.