Final answer:
Corporate governance is the mechanism by which a company's management is overseen to ensure it operates in the shareholders' best interests.
Step-by-step explanation:
Overseeing a company's affairs to ensure that it is managed with the best interest of shareholders in mind is called corporate governance. This includes a system of practices, policies, procedures, and guidelines that a company follows to ensure accountability, fairness, and transparency in its relationship with all stakeholders (shareholders, customers, employees, government, and the community). The board of directors, auditing firms, and outside investors, especially large shareholders, are key players in maintaining effective corporate governance. Lehman Brothers is an example where corporate governance failed, leading to misinformation amongst investors regarding the company's financial state.
Roles in Corporate Governance
- The board of directors, elected by the shareholders, is the central authority in ensuring that the company is managed appropriately.
- Auditing firms review the company's financial records and verify their accuracy.
- Large shareholders and institutional investors also play a pivotal role in overseeing the company's management.