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 o 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 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% discount by CSI's chief financial officer. The CFO was concerned that CSI might not be able to meet its annual performance obfectives and in turn pay his anticipated multimillion-dollar bonus. Does an agency conflict exist between CsI's CFO and the company's shareholders? O Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood af receiving his annual banus O No; professionals, such as doctors and professional money managers, would nat participate in unethical O No; in general, 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. Yes; the shares should not have been sold at a 75% discount, which is price discrimination. 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, Jamal's family members, and selected outsiders. Jamal 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 mutually exdusive proposals were placed on the ballat for discussion and vote. The first was put forth by Jamal 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 conflict exist between TGZ's management and the small group of opposing shareholders? No; lama1mas the onginal awner of TGZ, so he ould always be sensitive to the concerns of the firm's current owners (shareholders) and would not engage in an agency conflict. O Yes; an agency relationship exists, and an agency relationship always gives rise to agency conflicts, regardless O Yes; any conflict or disagreement between the firm's managers and its shareholders constitutes an agency O No; although an agency relationship exists between TGZ's management-including Jal as TGZ's chairman of the actual behavior of the participants. conflict. and CEO and the firm's shareholders-there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred. 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 incenve to maximize the value of the company's common stock price. short-term long-term True or False: A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts. O True O False Suppase a new law made it more difficult to stage a hostile takeover Which of the fallawing graups would benefit the most? Institutional investors O Management Activist investors 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 o 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 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% discount by CSI's chief financial officer. The CFO was concerned that CSI might not be able to meet its annual performance obfectives and in turn pay his anticipated multimillion-dollar bonus. Does an agency conflict exist between CsI's CFO and the company's shareholders? O Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood af receiving his annual banus O No; professionals, such as doctors and professional money managers, would nat participate in unethical O No; in general, 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. Yes; the shares should not have been sold at a 75% discount, which is price discrimination. 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, Jamal's family members, and selected outsiders. Jamal 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 mutually exdusive proposals were placed on the ballat for discussion and vote. The first was put forth by Jamal 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 conflict exist between TGZ's management and the small group of opposing shareholders? No; lama1mas the onginal awner of TGZ, so he ould always be sensitive to the concerns of the firm's current owners (shareholders) and would not engage in an agency conflict. O Yes; an agency relationship exists, and an agency relationship always gives rise to agency conflicts, regardless O Yes; any conflict or disagreement between the firm's managers and its shareholders constitutes an agency O No; although an agency relationship exists between TGZ's management-including Jal as TGZ's chairman of the actual behavior of the participants. conflict. and CEO and the firm's shareholders-there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred. 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 incenve to maximize the value of the company's common stock price. short-term long-term True or False: A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts. O True O False Suppase a new law made it more difficult to stage a hostile takeover Which of the fallawing graups would benefit the most? Institutional investors O Management Activist investors