What does corporate governance involve?

Corporate governance encompasses the structures and processes for the direction and control of companies. It primarily involves the mechanisms and relations through which corporations are controlled and operated, with a significant focus on the role of the board of directors and the relationship between shareholders and management.

The correct choice points to the fundamental process in governance where stockholders, as owners of the corporation, elect a board of directors. This board holds the responsibility to make key decisions on behalf of shareholders, such as setting strategic direction, overseeing management, and ensuring that the company adheres to legal and ethical standards. This electoral process is critical because it serves as a check on management, ensuring accountability and alignment with shareholder interests.

In contrast, the other options do not correctly reflect the principles of corporate governance. Management having no authority would undermine the operational aspect of a corporation, as management is needed to run daily operations effectively. Direct control by stockholders over daily operations is impractical since it disrupts the separation of ownership and control, a core aspect of corporate structure that allows for efficiency and specialization in management. Lastly, shareholders being liable for corporate actions contradicts the foundational principle of limited liability that protects shareholders from personal liability for a corporation’s debts and obligations, a key feature that encourages investment in corporations.