Related-party transactions rarely make headlines. They live in the footnotes, couched in tidy legal phrasing and numbers small enough to look harmless. Yet for governance watchers, they’re often the purest signal of whether a company is run for all shareholders—or for a well-connected few.

At its simplest, a related-party transaction is business between the company and someone who sits close to the controls: a director, an executive, a major shareholder, or an entity they influence. These deals are not inherently sinister. A founder might lease warehouses to the company at market rates, or a joint venture may buy components from its parent because it is the most efficient source. The problem is that the same pathway that enables legitimate efficiency can also enable what governance scholars call “tunneling”—the transfer of value from the listed company to insiders through pricing, terms, or timing that wouldn’t survive an arm’s-length negotiation.

The risk grows in proportion to two things: opacity and dependency. Opacity is structural. Even in markets with robust disclosure rules, the relevant information tends to be scattered. A footnote in the financials may summarize the scale of related-party sales or payables. Somewhere else, the segment note reveals margin movements. The management discussion hints at “commercial reasons” for revised terms. Individually, none of it is damning. Together, it can tell a very different story.

Dependency is behavioral. The first transaction is easy to defend—a one-off lease, a bridge loan during a tight quarter, a pilot contract for a new product. But when a line of business becomes anchored to a cousin’s distributor, or when financing repeatedly arrives from the chair’s private vehicle just before covenant tests, the company’s optionality narrows. What began as a convenience becomes a lever of control.

The classic warning signs tend to rhyme across markets and decades. Watch for non-ordinary-course arrangements—unsecured loans to executives; guarantees for affiliates that do not sit on the consolidated balance sheet; sudden sale-and-leaseback deals with insiders near year-end; or asset transfers to entities controlled by the same family at prices that later look charitable. Round-tripping—selling to a related distributor on extended terms and booking revenue that quietly returns as bad debt—still appears in modern packaging. The gloss is different, the economics are not.

Accounting standards try to corral the risk. Under IFRS, IAS 24 requires disclosure of related-party relationships and transactions; under U.S. GAAP, companies make similar disclosures and audit committees are generally expected to pre-approve such dealings. Securities regulators demand detail sufficient for investors to judge materiality and fairness. But rules can only do so much when power is concentrated. In controlled companies, the decisive question is whether the independent directors are genuinely independent and empowered, not just present in the room.

A healthy board treats related-party dealings as a governance event, not a procurement task. That means formal approval processes, documented recusal by conflicted directors, third-party valuations where appropriate, and a sober bias toward simplicity. The board should be able to answer, in plain language, why the company must transact with an insider instead of the open market and how it verified the price and terms. If the explanation leans on speed, secrecy, or “relationship value,” skepticism is warranted.

Family-controlled businesses, founder-led tech firms, and state-influenced enterprises face different flavors of the same temptation. In family groups, the boundary between public and private assets can blur, particularly where real estate or logistics sit outside the listed company. In tech, founders sometimes keep crucial intellectual property in separate vehicles and license it back to the operating company. In state-linked entities, policy goals can creep into transfer prices or procurement. None of this guarantees abuse; it simply raises the premium on clarity.

Valuation is where governance becomes dollars and cents. Markets are fond of founder control when the founder behaves like a steward and the company’s related-party footprint is small, transparent, and shrinking. They penalize repeated exceptions, vague rationales, and creeping exposure. You can see it in the multiple: two companies with identical growth and margins will not trade alike if one’s profits hinge on sweetheart terms with an affiliate. The discount is the market’s way of pricing in the risk that the terms change, the disclosures worsen, or the insiders decide to get paid in a hurry.

There is a practical way to read the tea leaves. Start with the related-party footnote and build a simple ledger: who the parties are, what the company buys or sells, and the balances outstanding. Read across to the segment disclosures and ask whether margins move in ways consistent with those relationships. Scan the cash-flow statement for non-core items that reverse odd receivables or prepayments. Then step outside the financials. How many truly independent directors sit on the audit committee? Do they have the clout to say no? Has the company adopted a clear policy on related-party approvals and published it? When a sensitive deal is proposed, is the tone one of reluctant necessity or eager convenience?

The real-world evidence

In U.S. data, firms that disclose related-party dealings trade at lower valuations and deliver weaker subsequent returns, a pattern documented in Mark Kohlbeck and Brian Mayhew’s study in The Accounting Review. Later work by Kohlbeck finds that certain related-party patterns function as “red flags” for misstatement risk. Move to markets with concentrated ownership and the mechanism becomes more visible. Johnson, La Porta, Lopez-de-Silanes and Shleifer’s classic “tunneling” paper laid out how insiders can legally or quasi-legally extract value from listed firms.

Regulators haven’t ignored the problem. The OECD’s cross-jurisdiction review maps how disclosure, independent board approval and shareholder votes mitigate abuse, and the updated G20/OECD Principles underscore that bans are blunt instruments—well-designed guardrails are better. The upshot for investors is consistent across settings: when insider deals grow opaque or essential, the multiple compresses; when firms unwind them and over-disclose, it expands.

The cautionary tales are familiar because they were avoidable. Enron’s collapse wasn’t just about aggressive accounting; it was about special-purpose entities run by its own finance chief, vehicles that let the company sell assets to itself at friendly prices and bury obligations behind friendly curtains. The structures were disclosed, but the conflicts were structural. When the scheme met reality, equity holders discovered that “off-balance sheet” was a euphemism for “not really yours.”

Even when there is no fraud, the economics can corrode trust. WeWork’s pre-IPO disclosures included leases from properties owned by its chief executive and the sale of the “We” trademark from an entity he controlled. None of that was illegal; much of it was disclosed. But it told prospective owners that the most creative profits might accrue outside the company they were being asked to fund. The valuation deflated as investors priced in the risk that “market terms” were being set by the market participants who benefited from them most.

Conclusion

If there is a single sentence that belongs on a Post-it in every portfolio manager’s notebook, it is this: related-party transactions are not a footnote problem, they are a control problem. They reveal whom the company ultimately exists to serve. When the answer is “every shareholder at the table,” the footnotes read like routine housekeeping. When the answer is “friends and family,” the footnotes read like a roadmap. The difference shows up in the multiple—if you catch it early enough.