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Remember, an agency relationship can degenerate into an agency confict 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 arid 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: Last week, an investigative reporter for a major metropolitan newspaper discovered that the doctors conducting clinical trials of a new cancer treatment drug are also the principal shareholders in Cancer Solutions inc. (CSI). CSI is the company developing and attempting to market the drug. Upon being interviewed by federal authorities, the doctors acknowledged their confict of interest but reported that they were sold the shares at a 75% difcount by CSI's chief financial officen The Cro was concerned that CSt might not be able to meet its annual performance objectives and in turn pay his anticipated mulimillion dolltor bonus. Does an agency confict exit between cSits cFo and the company's shareholders? Yes; the shares shoula not have been sold at a 75% discount, which is price discrimination: No: professionais, such as doctors and professional money managers, would not participate in unethical activalies. No; in general, tharehoiders are satistied with company officers engaging in any type of legal or illegal activity to ensure the chances of them receiving greater oividend payments: Yes; cSt's CFO engaged in unethical conduct to manipulate the firms short-term eamings and improve the likeinood of receiving his annual sonus. For the past 40 years, companies have attempted to attract, retain, and encourage managers by developing attractive compensation packages. These compensation packages have also been intended to reduce potential agency conflicts between these managers and the firm's shareholders. In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the value of the company's common stock price. True or False; A small number of institutional investors are often able and mothated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conficts. False True

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