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: Michael and Primalia equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. Michael is responsible for ANB’s back-office activities, and Primalia staffs the store and makes deliveries to customers. Both have equal decision-making 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. Michael, without Primalia’s knowledge, used the company’s bank account recently to purchase a new sports car. Michael has acknowledged that the car will not be used to support the business. Is this a potential agency conflict between Michael and Primalia? No; Since Michael acknowledged that the car would not be used to support the business, no agency conflict can arise. Yes; Michael is misappropriating some of Primalia’s wealth by unilaterally purchasing a nonbusiness asset using ANB’s funds. No; Michael and Primalia are both authorized to spend ANB’s money, so no conflict of interest can occur. No; Michael and Primalia co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflict cannot exist. 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. 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. Great Fortunes Baking Company’s stockholders are mostly individual investors, and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Great Fortunes Baking Company’s stock, direct shareholder intervention would be more or less? likely to motivate the firm’s management. (Please choose more or less for the drop down.)

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: Michael and Primalia equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. Michael is responsible for ANB’s back-office activities, and Primalia staffs the store and makes deliveries to customers. Both have equal decision-making 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. Michael, without Primalia’s knowledge, used the company’s bank account recently to purchase a new sports car. Michael has acknowledged that the car will not be used to support the business. Is this a potential agency conflict between Michael and Primalia? No; Since Michael acknowledged that the car would not be used to support the business, no agency conflict can arise. Yes; Michael is misappropriating some of Primalia’s wealth by unilaterally purchasing a nonbusiness asset using ANB’s funds. No; Michael and Primalia are both authorized to spend ANB’s money, so no conflict of interest can occur. No; Michael and Primalia co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflict cannot exist. 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. 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. Great Fortunes Baking Company’s stockholders are mostly individual investors, and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Great Fortunes Baking Company’s stock, direct shareholder intervention would be more or less? likely to motivate the firm’s management. (Please choose more or less for the drop down.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Agency conflicts between managers and shareholders

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:

Michael and Primalia equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. Michael is responsible for ANB’s back-office activities, and Primalia staffs the store and makes deliveries to customers. Both have equal decision-making 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. Michael, without Primalia’s knowledge, used the company’s bank account recently to purchase a new sports car. Michael has acknowledged that the car will not be used to support the business.

Is this a potential agency conflict between Michael and Primalia?

No; Since Michael acknowledged that the car would not be used to support the business, no agency conflict can arise.

Yes; Michael is misappropriating some of Primalia’s wealth by unilaterally purchasing a nonbusiness asset using ANB’s funds.

No; Michael and Primalia are both authorized to spend ANB’s money, so no conflict of interest can occur.

No; Michael and Primalia co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflict cannot exist.

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.

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.

Great Fortunes Baking Company’s stockholders are mostly individual investors, and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Great Fortunes Baking Company’s stock, direct shareholder intervention would be more or less? likely to motivate the firm’s management. (Please choose more or less for the drop down.)

Definition Definition Arrangement between two or more people whereby they agree to manage business operations and share its profits and losses in an agreed ratio. The agreement drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, and drawings of a partner.

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