Final answer:
Ultimately, the board of directors, elected by shareholders, controls a corporation, serving as the key entity in corporate governance. However, the efficacy of governance can be compromised if top executives influence board member selection and if shareholders are not proactive in governance.
Step-by-step explanation:
Ultimately, the board of directors controls the corporation. The board is elected by the shareholders and serves as the first line of corporate governance and oversight for top executives. The auditing firm is another institution of corporate governance, hired to review the financial records and ensure that they are reasonable.
Furthermore, outside investors, especially large shareholders such as those who invest in mutual funds or pension funds, also play a significant role in corporate governance. However, in the case of companies like Lehman Brothers, corporate governance mechanisms have failed in the past to provide investors with accurate financial information about the company's operations.
In theory, the board of directors ensures that the company operates in the shareholders' interests. Yet, top executives have a strong influence in nominating board candidates. This can lead to a lack of rigorous oversight if shareholders do not have the knowledge or incentive to nominate alternative candidates to the board.