That would go in the u-joint bellows. Before installing the drive, it seals against the drive cone to keep water out of the bellows and boat. Have you pulled the drive? It will be there unless someone didn't put it in. If not you may have some very rusty parts in there.
It MUST be glued into place...
You dont, you get a can of "power tune" from a merc dealer , spray the bellow and ring and just push it into place this is assuming to installed the bellow correctly over the ridge
Thats why it pays to download the manual first