Final answer:
Governance mechanisms in corporations, such as the board of directors and auditing firms, are designed to monitor and align the interests of the management with those of the shareholders, reducing agency problems.
"The correct option is approximately option C"
Step-by-step explanation:
The purpose of governance mechanisms in corporations is primarily to reduce the scope and frequency of agency problems. The board of directors, elected by shareholders, is meant to oversee top executives, constituting the first line of defense against misalignment of interests between owners and managers.
Additionally, auditing firms are hired to review financial records and reassure that everything is handled properly while outside investors, especially large shareholders, serve as another layer of governance. An example of governance failure is seen in the case of Lehman Brothers, where corporate governance mechanisms failed to provide accurate financial information, leading to a massive loss for investors.
Despite the presence of these governance mechanisms, there is still a potential conflict of interest since top executives have significant influence over who gets nominated to the board of directors. This influence can potentially undermine the board's effectiveness in monitoring executives and safeguarding shareholders' interests.