Question

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers? a. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. b. Pay managers large cash salaries and give them no stock options. c. Beef up the restrictive covenants in the firm's debt agreements. d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock. e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

Answer 1

Answer: Option D

Explanation:

A. If the hostile takeover by outside investors is made easier it might result in  

depletion of shareholders interest in the company.

B.  Large cash salaries and low stock options will result in mangers being carefree about the position of company in the market,thus, resulting in depletion of shareholders interest in the company.

C. Covenants protect the shareholders from unethical or illegal decisions of the management. Thus covenants are necessary for healthy manager and shareholder relationship.

D. Eliminating minimum requirement by shareholders will result in more shares to the general shareholders and high voting rights on company decisions also.

E. Doing such act will get the managers more hold on the stock of the company resulting in conflict.