Question

1. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

a.   Decrease the proportion of executive compensation that comes from stock options and increase the proportion that is paid as cash salaries.

b.   Change the corporation's formal documents to make it more difficult for outside investors to acquire a controlling interest in the firm through a hostile takeover.

c.   The percentage of the firm’s stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.

d.   For a firm that compensates managers with stock options, decrease the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

e.   All of the above.

Answer 1

Option C is correct!!.

A. Incorrect, as decreasing the proportion of executive compensation from stock options takes away the incentive for managers to work in company's shareholder's interest.

B. Incorrect, if a company restricts itself from others to take controlling stake in it then it will be immune to getting ousted from company's management else some activist firms would have taken controlling stake in firm and take necessary actions to align managers and shareholders interest. This will have an effect of increasing potential conflicts of interest.

C. Correct, increase in stakes from institutional investors increases oversight on management that it is working best in the interest of company thereby reducing the conflict of interest.

D. Incorrect, If the time of stock options exercise and subsequent sale is reduced then management's incentive to work in the interest of shareholders goes away thereby increasing potentail conflict of interest.

E. Incorrect

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