Related Party Transactions in Corporate Governance

Abstract

Related party transactions have been neglected for a long time. In the literature two theories prevail: a) conflict of interests. These dealings are considered as potentially harmful and carried out in the interest of directors; b) efficient transaction hypothesis, considering them as sound economic exchanges. The paper examines both theories critically through a deductive approach, and also on the basis of their economic rationale. Solutions consistent with social factors and governance models as well as being aligned with expected benefits are suggested. The European state-of-the-art is examined and its loopholes and inconsistencies highlighted. Emphasis is placed upon truly independent directors, considered as an unavoidable condition for effective monitoring and for avoiding only a formal compliance to stricter disclosure and monitoring procedures.

Keywords: related party transactions, corporate governance

JEL Classification: M