Corporate governance structures and relationships are shaped by internal and external mechanisms. Which of the following is an external mechanism?

• A. State and federal statues require a baseline corporate governance system
• B. Audit committees must consist of at least three members all of whom are independent of management and the entity
• C. All directors must be independent of management
• D. Each listed company must have an internal audit function

Answer: (A)

External mechanisms are rules and pressures that come from outside the firm and shape governance. Government statutes at state and federal levels create a baseline corporate governance framework, and because they originate externally, they impose mandatory requirements the company must follow.

The other items describe governance practices the firm implements internally—how it structures its own board independence, audit committee composition, and internal audit function. While these can be influenced by external codes, they are governance arrangements established inside the organization.