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Principles of Finance

Summary

Principles of FinanceSummary

Summary

2.1 Business Structures

The most common forms of business organizations are sole proprietorships, partnerships, corporations, and hybrids. There are advantages and disadvantages to each type of organization involving ease of formation, tax requirements, and personal liabilities. The most common type of organization for larger businesses is the corporation, the establishment of which involves filing articles of incorporation.

2.2 Relationship between Shareholders and Company Management

A stakeholder is any individual or group that has an interest in the outcomes of an organization’s actions. Shareholders are relevant to a corporation form of business because they own stock in the corporation. The board of directors of a company is ultimately responsible to shareholders for effectively running the business.

2.3 Role of the Board of Directors

The board of directors acts as a fiduciary for shareholders. The board is also tasked with a number of other responsibilities, including setting company goals, creating dividend and stock option policies, hiring and firing CEOs, and ensuring that the company has the resources it needs to perform well. Diversity and experience play important roles in corporate governance and in the strength and effectiveness of a board of directors.

2.4 Agency Issues: Shareholders and Corporate Boards

Issues and conflicts of interest might arise between shareholders (public ownership) and senior management, including C-level executives and the board of directors. Although there is no definite way to resolve all conflicts of interest, some measures that can help mitigate problems include offering incentives for strong performance and ethical behavior and awarding decision makers with stock packages to encourage long-term thinking.

2.5 Interacting with Investors, Intermediaries, and Other Market Participants

Investor relations are important to a company’s overall corporate governance strategy. Effective communication that is straightforward, open, and free of potentially confusing corporate jargon has become a critical component of a company’s image, overall message, and long-term success.

2.6 Companies in Domestic and Global Markets

Companies sometimes expand internationally, and there are advantages and disadvantages of such growth. International or global expansion efforts require careful and efficient communication, planning, and financing.

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