Jackylyn B.

Garde BSA-3 09/05/20

AEC 127

1-8

What are the conflicts between stockholders and managers? How can these
conflicts be alleviated?

Managers play a major role in assuring the company’s intrinsic value. To give
managers an incentive to focus on stock prices, stockholders acting through boards of
directors may award executive stock options that could be exercised on a specified
future date. Indeed the purpose is for the greater good however conflicts may arise if
managers would place their personal greed before the betterment of the company.
Stock options can be exercised on a specified future date and managers may
manipulate the stock prices during that date in order to maximize their wealth. This
would lead to managers aiming for short term goal which is to boost the stock price in a
specified date than aiming for the long term goals of the business. Instances where
managers would overstate their profits may occur in order to boost the stock price then
they would exercise stock options leaving stockholders in despair when the true
situation unraveled. These conflicts can be alleviated by effective executive
compensation plans that would motivate managers to act in their stockholder’s interest.
The compensation plan must lead the managers to aim for the company’s performance
on the long run not just on an exercised date. Stockholders nowadays have the
influence over firm’s operation. They can talk with the managers about how the
business should operate.

1-9

a.) The receiving end of the contribution does not relate to the structure of the business.
It may create a positive feedback since it is located in their headquarters city but it may
be taken negatively by stockholders not living in the city. This action does not contribute
to the maximization of share price and if it does its effect will be minimal.

b.) Business aiming for international expansion can increase the stock price. This
proves that their business is doing well and their investments are properly used. It is a
smart move to invest now for it will generate profits in the future.

c.) Treasury bonds are considered as safer investment than common stocks. If the
company plans to shift its emergency fund from Treasury bonds to common stocks it
would be riskier for the shareholders because stock returns are not certain. This would
lead to decrease of their stock price.
1-12

The board of directors should set the compensation plan based on CEO’s
performance over the long run. This would inspire the CEO to work for the betterment of
the company and its future endeavors. Direct stock awards should be phased in over a
number of years in order for the CEO to not just focus on one specific date but the
performance of the company over time. CEO compensation should be the mix of the
two in order for her or him to have motivation rather than personal goals because
instances may occur that the CEO would not do his job at his best since he has a fixed
salary. The actions of the vice president of Company X would be different if he or she is
the CEO of some other company