Ch 01: Assignment - An Overview of Financial Management 7. Agency conflicts between managers and shareholders ols 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 reallacation 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: Willam 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? ves; as both the owner and operator of William's Tantalizing Toes, Willam has created the necessary agency relationship through which an agency conflict can exist. No; as both the owner and operator of William's Tantalizing Tees, Willams not created the necessary agency relationship through which an agency conflict can exist Yes; there is always an inherent confia 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 For the past 40 years, companies have attempted to attract, retain, 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. 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. 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, Willam operates the business in accordance with his personal goals, dreams, and capabilities. Does William have an agency conflict to deal with? Yes; as both the owner and operator of William's Tantalizing Tees, Willam has created the necessary agency relationship through which an agency conflict can exist. 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; there is always an inherent conflict of interest between owners and operators (managers) No; by having part-time, as opposed to full-time, employees, Willam is prevented from experiencing an agency conflict. For the past 40 years, companies have attempted to attract, retain, 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 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. Great Fortunes Baking Company's stockholders are mostly individual investors, and there is relatively little institutional ownership. If several pension and mutual funds were to take targe positions in Great Fortunes Baking Company's stock, direct shareholder intervention would be likely to motivate the firm's management