Final answer:
The management of a firm is overseen by a board of directors, elected by shareholders, to ensure that the firm aligns with shareholder interests. However, because top executives often influence the selection of board members, conflicts of interest can arise, which corporate governance structures aim to minimize.
Step-by-step explanation:
The board of directors plays a critical role in aligned corporate governance and ensuring the company aligns with shareholder interests. Shareholders of a public company elect a board of directors to oversee the firm's operations and make high-level policy decisions. The board hires top executives to handle the day-to-day operations of the business. However, there can be a conflict of interest, as these executives often have significant input in nominating board members. Shareholders usually do not have the incentive or resources to nominate alternative candidates, which would make the board more independent of the executive team.
When a firm is publicly traded, it is called a public company and owned by its shareholders. Each shareholder's voting power in electing the board is proportionate to the number of shares they own. The board's fundamental responsibility is to ensure the company is managed in the shareholders' best interests, but the presence of top executives in the board selection process can influence decisions away from shareholders' preferences.
To address these potential conflicts, corporate governance structures and practices are in place to monitor and guide executive actions, although these mechanisms do not always function effectively. Thus, the efficacy of a firm's governance is often a measure of how well it balances executive influence with the broader objectives of its shareholders.