Question

6. Agency conflicts between managers and shareholders Consider the following scenario and determine whether an agency conflict exists: Alexander and Akiko equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. Alexander is responsible for ANB's back-office activities, and Akiko staffs the store and makes deliveries to customers. Both have equal decision- making authority and, under the terms of their partnership agreement, both are prohibited from making personal purchases using company funds without prior approval of the other partner. Alexander, without Akiko's knowledge, used the company's bank account recently to purchase a new sports car. Alexander has acknowledged that the car will not be used to support the business. Is this a potential agency conflict between Alexander and Akiko? Yes; Alexander is misappropriating some of Akiko's wealth by unilaterally purchasing a nonbusiness asset using ANB's funds. O No; Alexander and Akiko are both authorized to spend ANB's money, so no conflict of interest can occur. O No; Alexander and Akiko co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflict cannot exist.

Answer 1

1) Yes, there is a potential agency conflict between Alexander and Akiro as Alexander is misappropriating some of Akiro's wealth by unilaterally purchasing a non business asset using ANB's funds. Hence the correct answer is (a).

2) The correct answer is (b). No, although an agency relationship exists between TGZ's management; including Tae as TGZ's chairman and CEO and TGZ's chairman there is no agency conflict because there is no expropriation or wasting of shareholder's wealth has occurred.

3) In the best interest of shareholders, compensation packages should be structured in such a way that managers have incentive to maximize the short term value of the company's common stock price. Hence the answer is "short term".

4) If a manager knows that he or she will be fired if the company's stock does not reach a certain target at the end of the year, then this action will reduce the potential for agency conflicts and will ensure that firms managers will pursue long term wealth interest of shareholders.Hence the correct answer is (b).

5) The legislation making difficult for outside investors to stage hostile takeovers likely reduced conflicts between managers and stockholders. Hence correct answer is (a).