Why are related-party transactions a governance and ethics concern, and what controls should be in place?

• A. They can disguise conflicts or self-dealing; require board approval, disclosure, competitive bidding, and independent review to ensure fair terms.
• B. They can be managed through proper disclosure alone, without board involvement or independent review.
• C. They are harmless if transactions are priced at market rates.
• D. They require only internal reviews without board involvement.

Answer: (B)

Related-party transactions raise the risk of conflicts of interest and self-dealing, because a party with influence over management could benefit personally from the terms of the deal. To guard against that, governance needs multiple, independent controls that ensure fairness and transparency.

The strongest approach combines board or independent-committee approval before a related-party deal is signed, thorough disclosure of the relationship and terms to the board and stakeholders, competitive bidding or an arm’s‑length process to verify fair terms, and independent review (often by the audit committee or an external reviewer) to assess fairness. Ongoing monitoring and clear policies on what constitutes a related party help prevent creeping favoritism and enable swift corrective action if issues arise.

Relying on disclosure alone does not stop biased decisions or the appearance of impropriety, and even market-rate pricing can be a cover for improper influence. Internal reviews without board involvement lack the external check needed to ensure impartiality.