Question

7. Agency conflicts between managers and shareholders Aa Aa Remember, an agency relationship can degenerate into an agency conflict when an agentacts in a manner that is not in the best interest of his or her principal. In large corporations, these conflicts most frequenty involve the enrichment of the firm's executives or managers (in the form of money and perquisites or power and prestige) at the expense of the company's shareholders. This usurping and reallocation of shareholder wealth is most likely to cccur when shareholders do nat have sufficient information about the decisions and actions being made by the firm's Consider the following scenario and determine whether an agency conflict exists Last week, an investigative reporter for a major metropolitan newspaper discovered that the dactors conducting dinical trials of a new cancer treatment drug are also the principal shareholders in Cancer Solutions Inc. (CSI). CSI İS the company developing and attempting to market the drug. Upon being interviewed by federal authorities, the doctors acknowledged their conflict of interest but reported that they were sold the shares at a 75% discount by CSI's chief financial officer. The CFO was concerned that CSI might nat be able to meet its annual performance objectives and in turn pay his anticipated multimillion-dollar bonus. Does an agency conflict exist between CsI's CFO and the company's shareholders? O No; professionals, such as dactors and professional money managers, would nat participate in unethical activities. O No; in general, shareholders are satisfied with company officers engaging in any type of legal or illegal activity O Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term eamings and improve the O Yes; the shares should not have been sold at a 75% discount, which is price discrimination. to ensure the chances of them receiving greater dividend payments. likelihood of receiving his annual bonus. Consulting firms and human resource departments have spentinnumerable hours attempting to develop executive compensation programs that will align the goals of a firm's managers with those of the firm's shareholders. which of the following compensation packages is mostlikely to accomplish this task? O O O O An annual salary of $25D,0DD and a stock aption bonus package that provides 250,000 shares after five years An annual salary of $500,000 and a stock option bonus package that provides 100,000 shares after one year An annual salary of $8DD,0DD An annual salary of $5DD,000 and a stock aption bonus package for a tatal of 250,000 shares, with 50,ODD shares vesting at the end of each of the next five years True or False: A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce pabential agency conflicts. True False

Answer 1

1: Option 3 holds true

The CFO acted against the interests of the shareholders and secured the chances of his own bonus rather than aiming at wealth maximization of the business.

Other options do not indicate breach of agency relationship.

2: Option 4 holds true

This ensures that the management receives the shares every year thus inducing them to work towards the maximization of wealth objective. Other options do not ensure a yearly target of working towards the maximization of wealth.

3: True

A small number of investors are often united and motivated to drive the change and reduce the conflicts.