Final answer:
Corporate governance is the term used for the oversight of corporate management by the board of directors. The board is elected by shareholders and is supported by auditors and large investors, but their effectiveness can be compromised by executive influence over board member selection.
Step-by-step explanation:
The oversight of corporate management by the board of directors is called corporate governance. The board, elected by shareholders, serves as the primary head of oversight for a company's executives.
In addition to the board of directors, corporate governance includes the auditing firm hired to inspect financial records and certify them, as well as outside investors, especially sizeable stakeholders such as mutual funds or pension fund investors.
The Lehman Brothers case is a notable example where corporate governance did not succeed in providing truthful financial information to the investors.
In theory, the board of directors helps ensure that a firm operates in the best interests of its shareholders. However, the firm's top executives often heavily influence the nomination of board members. This may undermine the governance process, considering that few shareholders have the knowledge or incentive to nominate alternative candidates for the board.