Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?
A. Congress passes a law that severely restricts hostile takeovers.
B. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.
C. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.
D. The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company.
E. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.
Answer: E
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