Agency conflicts between managers and shareholders emembet, 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 rincipal. In large corporations, these conflicts most frequently involve the enrichment of the firm's executives or managers (in the form of money and erquisites 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 sharehoiders 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: Last week, an investigative reporter for a major metropolitan newspaper discovered that the doctors conducting clinical trials of a new cancer treatment drug are also the principal shareholders in Cancer Solutions inc. (CSI). CSI is 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% discounthy CSI's chief financial officer. The CFO was concerned that CSI might not be able to meet is annual performance objectives and in turn pay his anticipated multimullion- dollar bonus. Does an agency confict exist between CS1' CFO and the company's shareholders? Yes, the shares should not have been sold at a 75% discount, which is price discrimination. No; professionals, such as doctors and professional money managers, would not participate in unethical activities. No: in genera, shareholders are satisfied with company officers engaging in any type of legal or illegal activity to ensure the chances of them receiving greater dividend payments: Ye6; CS1s CFO engaged in unethical conduct to manipulate the firms's short-teem earnings and improve the ikelinood of receiving his annual bonssFive 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 mutualiy 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 confict exist between TGZ's managentint and the smill group of opposing sharehoiders? No; although an agency relatianship exists betwe.

1. Agency conflicts between managers and shareholders emembet, 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 rincipal. In large corporations, these conflicts most frequently involve the enrichment
of the firm's executives or managers (in the form of money and erquisites 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 sharehoiders 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: Last week, an investigative reporter for a major
metropolitan newspaper discovered that the doctors conducting clinical trials of a new cancer
treatment drug are also the principal shareholders in Cancer Solutions inc. (CSI). CSI is 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% discounthy CSI's chief financial officer. The CFO was concerned that CSI might
not be able to meet is annual performance objectives and in turn pay his anticipated multimullion-
dollar bonus. Does an agency confict exist between CS1' CFO and the company's shareholders?
Yes, the shares should not have been sold at a 75% discount, which is price discrimination. No;
professionals, such as doctors and professional money managers, would not participate in
unethical activities. No: in genera, shareholders are satisfied with company officers engaging in
any type of legal or illegal activity to ensure the chances of them receiving greater dividend
payments: Ye6; CS1s CFO engaged in unethical conduct to manipulate the firms's short-teem
earnings and improve the ikelinood of receiving his annual bonssFive 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 mutualiy 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 confict exist between TGZ's managentint and the smill group
of opposing sharehoiders? No; although an agency relatianship exists between TGZ's
management-including The 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.
Yes; an agency relationship exists, and an agency relationship always gives rise to agency
connicts, regardiess of the actual behavior of the participants. No; Tae was the original owner of
TGz, so he would always be sensitive to the concerns of the firms current owners (shareholders)
and would not engage in an agency confict. Yes; any cenfic of disagreement between the firm's
managers and its shareholders consttutes an agency conflict. For the past 40 veors, companies
heve attempted to atract, retain, and encourage managens by deveioping attrictive compensation
packages. These compensatien packages have also been intended to reduce potential agency
contlicts between these managers and the firmi shareholders. In the best intereit of shareholders,

2. compensation packoges should be structured in a way sich that manager have an incentive to
mavimice the value of the company s commen utock pnce. In ago tion to nell-oesigned executive
compenstion nacksges, other motivational forces can align the interests of mansgers wath those
af theirthe past 40 years, companies have attempted to attract, retain, and encourage managers
by developing attractive compensation packages. mpensation packages have also been intended
to reduce potential agency conflicts between these managers and the firm's sharehoiders. the best
interest of shareholders, compensation packages should be structured in a way such that
managers have an incentive to maximize value of the company's common stock price. In addition
to well-designed executive compensation packages, 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 pursue
the long-term wealth interests of their shareholders? Let the manager know that a takeover is
possible if he or she doesn't perform well. 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. Katz Investment Group's
stock price is currently trading at $42.5 per share. The consensus among market analysts is that
the stock should trade fic $32.5 per share, given the amount, timing, and riskiness of the
company's dividends. Is Katz Investment Group more or less likely to receive a hos takeover bid?
Less likely More likely