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? 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. 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. No, by having part-time, as opposed to full-time, employees, William is prevented from experiencing an agency conflict. Yes; there is always an inherent conflict of interest between owners and operators (managers). Yes; there is always an inherent conflict of interest between owners and operators (managers). 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? An annual salary of $250,000 and a stock option 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 $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 An annual salary of $800,000 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 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