Final answer:
Corporate governance is a framework designed to handle issues from the separation of ownership and control in companies, with the board of directors, auditing firms, and large investors playing key roles. The example of Lehman Brothers illustrates the risks when this governance is ineffective, leading to investor misinformation.
Step-by-step explanation:
Corporate governance refers to the framework of laws, policies, incentives, and monitors designed to handle issues arising from the separation of ownership and control in an organization, particularly a public company. The board of directors, elected by shareholders, act as the primary level of this governance, aiming to oversee and regulate the activities of top executives to ensure they are aligned with the interests of shareholders.
Furthermore, auditing firms are employed to review financial records and validate their accuracy, providing a layer of accountability and transparency. Outside investors, especially those with significant stakes like large mutual funds or pension funds, play a role in governance through their influence and expectations of performance and disclosure.
The failure of corporate governance in the case of Lehman Brothers highlights the potential consequences when these mechanisms do not function properly, leading to a lack of investor confidence due to the misinformation about the firm's operations.