William and Abigail equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. William is responsible for ANB's back-office activities, and Abigail staffs the store and makes deliveries to customers. Both have equal decisionmaking authority and, under the terms of their partnership agreement, both are prohibited from making personal purchases using company funds without prior approval of the other partner. William, without Abigail's knowledge, used the company's bank account recently to purchase a new sports car. William has acknowledged that the car will not be used to support the business. Is this a potential agency conflict between William and Abigail? Yes; William is misappropriating some of Abigail's wealth by unilaterally purchasing a nonbusiness asset using ANB's funds. No; William and Abigail co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflic cannot exist. No; William and Abigail are both authorized to spend ANB's money, so no conflict of interest can occur. Yes; it should have been Abigail who purchased the car. 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. Caesar 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 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. es an agency conflict exist between TGZ's management and the small group of opposing shareholders? 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 firm's managers and its shareholders constitutes an agency conflict. 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. No; Caesar was the original owner of TGZ, so he would always be sensitive to the concerns of the firm's current owners (shareholders) and would not engage in an agency conflict. Consulting 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 packages is most likely to accomplish this task? An annual salary of $800,000 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 $500,000 and a stock option bonus package that provides 100,000 shares after one year An annual salary of $250,000 and a stock option bonus package that provides 250,000 shares after five years 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. False True Suppose a new law made it more difficult to stage a hostile takeover. Which of the following groups would benefit the most? Activist investors Small individual investors Management
