7. 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: William owns William's Tantalizing Tees, a T-shirt shop in a small college town in Washington. With a staff of three part-time employees, William operates the business in accordance with his personal goals, dreams, and capabilities. Does William have an agency conflict to deal with? Does William have an agency conflict to deal with? Yes; as both the owner and operator of William's Tantalizing Tees, William 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), No; by having part-time, as opposed to full-time employees, William is prevented from experiencing an agency conflict - No; as both the owner and operator of William's Tantalizing tees, William has not created the necessary agency relationship through which an agency conflict can exist For the past 40 years, companies have attempted to attractritain, and encourage managers by developing attractive compensation packages. These compensation packages have also been intended to reduce potential agency conflicts between these managers and the firm's shareholders. 13 In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the value of the company's common stock price Ch 01: Assignment - An Overview of Financial Management compensation packages have also been intended to reduce potential agency conflicts between these managers and the firm's shareholders. In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the value of the company's common stock price. 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. Let the manager know that a takeover is possible if he or she doesn't perform well