Chapter 1, Problem 7CC

Summary Introduction

Organization:

An organization is a type of entity where in a group of people come together to achieve a common goal. A business organization exists basically in four types of forms namely sole proprietorships, partnerships, limited liability companies, and corporations.

Corporation:

A corporation is a separate legal entity which is separate from its owners. It is an artificial body and continues to exist even after the death of its owners where in such case the ownership is transferred. The owners are separate from the legal body and hence they are not liable for any obligation of the corporation individually. Similarly, the corporation is also not liable for any of the personal obligations of its owners.

Financial Manager:

The financial managers take care of the financial health of an organization. They make the important financial decisions of the company on behalf of the shareholders since it is not feasible for the owners to have direct control over the huge firms.

Agency Problem:

Agency problem happens in a corporation where the ownership of the firm and the control are in two different hands. It is a situation in which there is a conflict of interest between the manager and shareholders of a company. The managers are hired to make decisions on behalf of the shareholders but the managers take decisions that favor their interest instead of the shareholders. This is known as the agency problem that often happens in corporations.

To Identify:

The ethical issues confronted by a financial manager.