2. Ownership and Corporate Governance

• An agency relationship occurs when a business has managers rather than owners running certain operations.
• A sole proprietorship is an unincorporated business owned by a single person.

  
• A partnership is a business owned by two or more persons.

  
• A corporation is a business able to act as a legal entity and is able to carry out many similar functions to a person.

  
• Going public implies that the equity in a firm is to be sold to the public in the form of stock.
• An initial public offering (IPO) is the very first time that a firm’s equity is sold to the public, usually in the form of stock.
• The express authority takes place between the agent and the company and is specifically granted to an agent.

  The implied authority falls under the heading of the “doctrine of ostensible authority” and also exists between the agent and the corporation. It provides that the agent has the capacity to act in a manner the public may reasonably believe is within his or her normal duties.

  The apparent authority takes place between the agent and a company but deals with what a third party is led to believe. This doctrine holds a company liable for the agent’s actions.
• One of the financial managers’ main functions is to maximize shareholder wealth. It is indeed the function of any manager within a business to act on behalf of the owners and other principals in every possible way.
• A fiduciary relationship implies that the agent will always place the interest of the principal before his or her own interests.
• An incentive plan is when a firm decides to provide rewards above a normal salary for an agent to perform his/her duties, and performance plans are reward plans for attaining certain company objectives.
• Incentive stock options (ISO) contain the right to buy stock at a fixed price if prices have risen since the options were awarded.
• Performance shares are awarded to a manager if certain company objectives are met.
• Corporate boards sought to achieve a parity regarding pay for performance using performance-vested restricted stock for top managers and executives. Market mechanisms appeared to be effective in achieving corporate objectives. The financial crisis starting in 2008 created many challenges to the long-term incentive compensation models that were in use at the time: those firms that relied heavily on qualified stock options for long-term incentive compensation found the enhancement of management retention and motivation sought by the granting of these qualified options was significantly reduced.
• Underwater options occur when the market price of a stock has dropped below the exercise price of an awarded stock option.
• A limited liability company is an unincorporated business structured to limit the liability of its members.