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; 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). 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. Consider the following scenario and determine whether an agency conflict exists: Five years ago, Caesar created a plant-care business that grew, stocked, and maintained fresh plants in office buildings throughout Raleigh. Over time. The Green Zone Inc. (TGZ) has grown from a proprietorship into a corporation, now reaching far beyond Raleigh. To finance and support this growth, TGZ issued shares that were sold to TGZ employees, Caesar's family members, and selected outsiders. Caesaris 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 exclusive proposals were placed on the ballot for discussion and vote. The first was put forth by Caesar 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? Yes; any conflict or disagreement between the firm's managers and its shareholders constitutes an agency conflict. No; Caesar was the original owner of TGZ, so he would always be sensitive to the concems of the firm's 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 No; although an agency relationship exists between TGZ's management - including Caesar as TGZ's chairman and CEO and the firm's shareholders- there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred, Which of the following actions will help ease agency conflicts and better align managers' objectives with the firm's shareholder wealth? Pay the manager a large base salary with a huge stock option package that matures on a single date. O 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. 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 he or she will be fired if the company's stock does not reach a certain target by the end of the year. Let the manager know that a takeover is possible if he or she doesn't perform well. Suppose a new law made it more difficult to stage a hostile takeover. Which of the following groups would benefit the most? Management Small individual investors O Institutional investors