Consider the following scenario and determine whether an agency conflict exists:

Five years ago, Jamal created a plant-care business that grew, stocked, and maintained fresh plants in office buildings throughout Portland. Over time, The Green Zone Inc. (TGZ) has grown from a proprietorship into a corporation, now reaching far beyond Portland. To finance and support this growth, TGZ issued shares that were sold to TGZ employees, Jamals family members, and selected outsiders. Jamal is TGZs chairman of the board of directors and CEO, but he is no longer the largest shareholder.

At the latest annual meeting, two mutually exclusive proposals were placed on the ballot for discussion and vote. The first was put forth by Jamal and TGZs management team, and the second was proposed by a small group of other shareholders. Both groups are adamantly opposed to the other groups proposal, even though both proposals would likely have the same effect on TGZs value and riskiness.

Does an agency conflict exist between TGZs management and the small group of opposing shareholders?

No; although an agency relationship exists between TGZs managementincluding Jamal as TGZs chairman and CEO and the firms shareholdersthere is no agency conflict, because no expropriation or wasting of the shareholders wealth has occurred.

No; Jamal 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 conflict.

Yes; an agency relationship exists, and an agency relationship always gives rise to agency conflicts, regardless of the actual behavior of the participants.

Yes; any conflict or disagreement between the firms managers and its shareholders constitutes an agency conflict.

Which of the following actions will help ease agency conflicts and better align managers objectives with the firms shareholder wealth?

Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.

Pay the manager a large base salary with a huge stock option package that matures on a single date.

True or False: A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firms management in an effort to reduce potential agency conflicts.

False

True

Katz Investment Groups stock price is currently trading at $45 per share. The consensus among market analysts is that the stock should trade for $35 per share, given the amount, timing, and riskiness of the companys dividends. Is Katz Investment Group more or less likely to receive a hostile takeover bid?

Less likely

More likely