Assignment:
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 conflict of interest but reported that they were sold the shares at a 75% discount by CSI's chief financial officer. The CFO was concerned that CSI might not be able to meet its annual performance objectives and in turn pay his anticipated multimillion-dollar bonus.
Does an agency conflict exist between CSI's CFO and the company's shareholders?
- Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus.
- Yes; the shares should not have been sold at a 75% discount, which is price discrimination.
- No; professionals, such as doctors and professional money managers, would not participate in unethical activities.
- No; in general, shareholders are satisfied with company officers engaging in any type of legal or illegal activity to ensure the chances of them receiving greater dividend payments.
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 combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.
- Pay the manager a large base salary with a huge stock option package that matures on a single date.
Amalgamated Metals Corporation'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 Amalgamated Metals Corporation's stock, direct shareholder intervention would be more likely to motivate the firm's management.