Remember, an agency relationship can degenerate into an agency confict when an agent acts in a manner that is not in the best interest of his or her principal. In large corporations, these conficts 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 sufficlent information about the decislons 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 attenapting to market the drug. Upon being interviewed by federal authorities, the doctors acknowledged their confict of Interest but reported that they were sold the shares at a 75% discount by CSI's chlef financial officer. The CFO was concerned that CSI might not be able to meet its annual performance objectives and in turn pay his anticipated muitimillion-dollar bonus. Does an agency conflict exist between. CSI's CFO and the compeny's shareholders? No; in general, shareholders are satisfied with company officers engaging in any type of legial or illegal activity to ensure the chances of them recelving greater dividend payments. Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus. 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. Consuiting 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 pockages is most likely to accomplish this task? Consulting firms and human resource departments have spent innumerable hours attempting to develop executlive compensation programs that will align the gosis of a firm's managers with those of the firm's shareholders. Which of the following compensation packages is most ilkely to accomplish this task? 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 An annual salary of $250,000 and a stock option bonus packoge that provides 250,000 shares after five years. An annual salery of 5500,000 and a stock option bonus package that provides 100,000 shares after one year Smith as. Jones incis stockholders are mostly individual investors, and there is relatively ittle institutional ownership. If soveral pension and mutual funds were to take large positions in Smith \& Jones Inci's stock, direct shareholder intervention would be management
