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 firms executives or managers (in the form of money and perquisites or power and prestige) at the expense of the companys 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 firms management.

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

William owns Williams 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?

Yes; there is always an inherent conflict of interest between owners and operators (managers).

No; as both the owner and operator of Williams Tantalizing Tees, William has not created the necessary agency relationship through which an agency conflict can exist.

No; by having part-time, as opposed to full-time, employees, William is prevented from experiencing an agency conflict.

Yes; as both the owner and operator of Williams 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, Caesars family members, and selected outsiders. Caesar 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 Caesar 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 Caesar 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; Caesar 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; any conflict or disagreement between the firms managers and its shareholders constitutes 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.

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

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

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.

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.

True

False

Wight Worldwides stock price is currently trading at $30 per share. The consensus among market analysts is that the stock should trade for $25 per share, given the amount, timing, and riskiness of the companys dividends. Is Wight Worldwide more or less likely to receive a hostile takeover bid?

Less likely

More likely