2. Agency conflicts between managers and shareholders Remember, an agency relationship can degenerate into an agency conflict when an agent acts in a manner that is not in the best interest of his or her principal. In large corporations, these conflicts most frequently 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 occur when shareholders do not have sufficient information about the decisions and actions being made by the firm's management. Consider the following scenario and determine whether an agency conflict exists: Alexander owns Alexander's Tantalizing Tees, a T-shirt shop in a small college town in Georgia. With a staff of three part-time employees, Alexander operates the business in accordance with his personal goals, dreams, and capabilities. Does Alexander have an agency conflict to deal with? No; as both the owner and operator of Alexander's Tantalizing Tees, Alexander has not created the necessary agency relationship through which an agency conflict can exist. Yes; as both the owner and operator of Alexander's Tantalizing Tees, Alexander has created the necessary agency relationship through which an agency conflict can exist. Yes; there is always an inherent conflict of interest between owners and operators (managers). O No; by having part-time, as opposed to full-time, employees, Alexander is prevented from experiencing an agency conflict. Consider the following scenario and determine whether an agency conflict exists: Five years ago, Tae created a plant-care business that grew, stocked, and maintained fresh plants in office buildings throughout Houston. Over time, The Green Zone Inc. (TGZ) has grown from a proprietorship into a corporation, now reaching far beyond Houston. To finance and support this growth, TGZ issued shares that were sold to TGZ employees, Tae's family members, and selected outsiders. Tae is TGZ's chairman of the board of directors and CEO, but he is no longer the largest shareholder. At the latest annual meeting, two mutually exclusive proposals were placed on the ballot for discussion and vote. The first was put forth by Tae and TGZ's management team, and the second was proposed by a small group of other shareholders. Both groups are adamantly opposed to the other group's proposal, even though both proposals would likely have the same effect on TGZ's value and riskiness. Does an agency conflict exist between TGZ's management and the small group of opposing shareholders? Yes; an agency relationship exists, and an agency relationship always gives rise to agency conflicts, regardless of the actual behavior of the participants. Yes; any conflict or disagreement between the firm's managers and its shareholders constitutes an agency conflict. O No; although an agency relationship exists between TGZ's management-including Tae as TGZ's chairman and CEO and the firm's shareholders-there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred. O No; Tae was the original owner of TGZ, so he would always be sensitive to the concerns of the firm's current owners (shareholders) and would not engage in an agency conflict. Which of the following actions will help ease agency conflicts and better align managers' objectives with the firm's shareholder wealth? Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth. O Pay the manager a large base salary with a huge stock option package that matures on a single date. In addition to well-designed executive compensation packages, two other motivational forces can align the interests of managers with those of their shareholders. Which of the following actions could be used to reduce the potential for these agency conflicts and ensure that the firm's managers will pursue the long-term wealth interests of their shareholders? Let the manager know that he or she will be fired if the company's stock does not reach a certain target by the end of the year. O Let the manager know that a takeover is possible if he or she doesn't perform well. Wight Worldwide's stock price is currently trading at $17.5 per share. The consensus among market analysts is that the stock should trade for $27.5 per share, given the amount, timing, and riskiness of the company's dividends. Is Wight Worldwide more or less likely to receive a hostile takeover bid? O Less likely More likely