Final answer:
Investors should consider the independence of the board of directors and its capacity for oversight when reviewing firm policies, alongside the firm's governance structures. This includes assessing the role of auditing firms and the influence of large shareholders in upholding corporate governance, which is vital for maintaining shareholder interests.
Step-by-step explanation:
When reviewing firm policy regarding the election of the board of directors, investors should consider various factors. The board serves as a crucial part of corporate governance, intended to act in the shareholders' interests. However, the reality is that the top executives often have significant influence over the selection of board candidates, potentially skewing this representation. Since many shareholders do not have the knowledge or incentive to nominate alternative board members, it's important for investors to consider the mechanisms in place to ensure the board's independence and its ability to provide oversight over executives.
Firms often face issues of imperfect information when raising financial capital, where insiders have more knowledge than outside investors. The board, alongside institutions like the auditing firm and large shareholders (such as mutual or pension funds), forms a triad of governance to protect the interests of all shareholders. In cases like Lehman Brothers, the failure of these mechanisms to provide accurate information about a firm's operations highlights the importance of a strong, independent board.