Question

In which of the following examples do you expect conflicts of interest between management and owners to be highest? Group of answer choices

A. A corporation in which the compensation package of the management is linked to the corporation ’s performance

B. A corporation with many shareholders

C. A partnership owned and managed by 2 partners

D. A corporation in which superfunds and investment companies hold a majority of its shareholding

Answer 1

Let us analyse each of the four options:

A. If the compensation package of the management is dependent on the performance of the company, the management will take extra care to ensure the company does well. This is in the best interest for the owners of the company as well. Thus, Low conflict of interest.

B. A corporation with many shareholders may have difference of opinions with the management, but both parties still have the best interest of the company in mind. The shareholders and the management want to increase sales and are looking out for the company for a long term. Thus, Manageable conflict of interest.

C. When the company is owned and managed by the same two people, the situation for an agency problem does not arise. Thus, Low conflict of interest.

D. When superfunds and investment companies invest in a company, they are not looking out for the growth or long term sustanance of the company, they are only looking to make back a profit on the money they have invested. Thus, opinions are highly likely to clash between the management and the major shareholders. Thus, Highest conflict of interest.

Thus, answer - D.

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