Which of the following best identifies the reason that effective
corporate governance is important?

(a) The requirement is to identify the reason that
effective corporate governance is important. Answer (a) is
correct because the separation of ownership and management
creates an agency problem in that management may not act in
the best interest of the shareholders. Answer (b) is incorrect
because profit maximization is an appropriate goal of management.
Answer (c) is incorrect because while corporate governance
is designed to prevent excess management compensation,
that is not the only reason it is important. Answer (d) is incorrect
because oversight by boards of directors is a part of corporate
governance.