Corporate Governance: Protecting Stakeholders' Interests
What is the system of company oversight designed to ensure that the interests of owners and other stakeholders are protected?
a) Administration
b) Supervision
c) Governance
d) Regulation
Final answer:
Corporate Governance is the correct answer to the student's question, ensuring the protection of stakeholders' interests through mechanisms like board oversight, auditing, and shareholder influence. The system includes various institutions meant to oversee management. The correct answer is option C.
Answer:
Corporate governance is the system of company oversight designed to ensure that the interests of owners and other stakeholders are protected. The correct answer to the student's question is c) Governance. This system includes various institutions such as the board of directors, auditing firms, and outside investors.
Explanation:
Corporate governance is the system of company oversight designed to ensure that the interests of owners and other stakeholders are protected. The correct answer to the student's question is c) Governance. This system includes various institutions such as the board of directors, auditing firms, and outside investors.
These entities play pivotal roles in overseeing the management and operations of a company. For example, the board of directors, elected by the shareholders, is responsible for making decisions at the highest level and overseeing the company's executives.
Auditing firms are hired to review the company's financial records, providing a level of assurance that the statements are free from material misstatements. Outside investors, particularly those who hold large stakes in the company like mutual funds or pension funds, also have influence and interests in the corporate governance process.
However, as evidenced in the case of Lehman Brothers, failures in corporate governance can have significant consequences, leading to misinformation about a firm's operations being disseminated to investors. A private company transitions to a public company when it decides to sell stock that financial investors can buy and sell.
This shift enlarges the circle of stakeholders and introduces more formal mechanisms of corporate governance aimed at protecting the interests of shareholders and other stakeholders. Despite the establishment of these institutions, corporate governance does not always function as intended.