7. Agency conflicts between managers and shareholders Aa Aa Remember, an agency relationship can degenerate into an agency confict when an agent acts in a manner that is not in the best interest of his or her principal. In large corporations, these conficts most frequently invoive 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 irm's management Consider the following scenario and determine whether an agency conflict exists: William and Abigail equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. William is responsible for ANB's back-office activities, and Abigail 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. William, without Abigail's knowledge, used the company's bank account recently to purchase a new sports car. William has acknowledged that the car will not be used to support the business. Is this a potential agency conflict between William and Abigail:7 Is this a potential agency conflict between William and Abigail? O No; William and Abigail co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflict cannot exist. O Yes; it should have been Abigail who purchased the car. O Yes; williarm is misappropriating some of Abigail's wealth by unilaterally parchasing a nonbusiness asset using ANB's funds. O No; Wiliam and Abigail are both authorized to spend ANB's money, so no conflict of interest can occur. Consulting firms and human resource departments have spent innumerable 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 most likely to accomplish this task? O An annual salary of $500,000 and a stock option bonus package that provides 100,000 shares after one year O An annual salary of $800,000 O An annual salary of $500,000 and a stock option bonus package for a total of 250,000 shares, with 50,000 shares vesting at the end of each of the next five years O An annual salary of $250,000 and a stock option bonus package that provides 250,000 shares after five years 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? O 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