Final answer:
Large shareholders monitor firm strategies through the board of directors, auditing firms, and direct oversight to ensure effective management. The board serves as a primary governance mechanism, while auditing firms provide financial accountability. Significant investors can influence corporate decisions through their substantial holdings.
Step-by-step explanation:
The primary entities involved in monitoring firm strategies to ensure effective management are the board of directors, auditing firms, and large shareholders. The board of directors is elected by the shareholders and serves as the first line of corporate governance and oversight for top executives. Their role includes making crucial decisions on the company's strategic direction and overseeing executive performance to protect the interests of the shareholders.
Auditing firms are hired by the company to review the company's financial records and certify that the financial statements are fair and reasonable. This helps in ensuring that the investors receive accurate financial information about the firm's operations.
Large shareholders, such as those who invest in large mutual funds or pension funds, serve as a third institution of corporate governance. These investors often have significant influence and the resources to monitor the company's performance closely. In cases, such as with Lehman Brothers, where corporate governance fails, it can lead to a lack of accurate financial information being provided to the investors, which can negatively impact the firm's reputation and value.
As a firm grows and its information becomes widely available, outside investors like bondholders and shareholders, who may not know the managers personally, become more willing to provide financial capital to the firm. The increased transparency and access to information play a crucial role in investors' decision-making.