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ency conficts are a special example of a conflct of interest; specifically, they are created by the relationship between , and result from inconsistencies or disputes between the interests and motivations of the different parties. agnitude of these conflicts may be made larger or smaller by the environment in which they occur and the avalability of techniques or events to revent, reduce, or rectify them. For example, in businesses managed by professional managers, managers frequently have less financial and emotional commitment to the business than the firm's owners (the firm's common shareholders). The of ownership and management and the of decision making by the owners to the professional managers create an environment in which these conficts can take root. Left unaddressed, these conficts can produce significant real and opportunity costs that the firm's sharehoiders and other stakeholders must beare Examples of management behaviors that are not in the best interests of the firm's shareholders include shirking, an excessive consumption of perquisites, an excessive concern with job security, reduced or excessive risk taking; ond/or undertaking activities that are principally intended to expand or enhance a manager's ego, prestige, or power. To prevent, reduce, or correct these conficts between their managers and themseives, ahareholders often have to incur additional real costs called conts. In general, there are four cotegonies of real or opportunity costs incurred by shareholders designed to prevent, mitigate, or correct management- In general, there are four categories of real or opportunity costs incurred by shareholders designed to prevent, mitigate, or correct managementshareholder agency conflicts. They are: 1. Expenditures to minimize management's desire to act contrary to the best interests of shareholders 2. Expenditures to monitor management's activities 3. Expenditures to provide a bond against management dishonesty 4. The opportunity cost of lost profits Consider the following situation and identify both the category of the expenditure and the best device that might be used to prevent, reduce, or correct the agency conflict: A firm's president and management team are alf buddies and run the organization to make the president look good in the Wall street Journal. Expenditure category: 3 2 4 1 Most appropriate form of control device: Enforce a corporate governance program that provides for an independent board of directors that will vigorously oversee and take action against the president and the monagement team if warranted. Increase the pay and bonus of the president and the management team. Identify a competitor to take over the company

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