What governance practice best mitigates risk from related-party transactions?

• A. Hide related-party transactions from shareholders.
• B. Disclosure, independent review, and fair terms.
• C. Approve all related-party transactions by majority of related parties.
• D. Never allow related-party transactions.

Answer: (B)

The key idea is that governance mechanisms must address conflicts of interest in related‑party transactions by ensuring transparency, objective review, and fair dealing. When someone with a close relationship to the company might benefit, without safeguards they could steer terms that favor themselves over the corporation and its shareholders. Disclosing these transactions puts the information in the hands of investors, regulators, and other stakeholders so they can assess potential biases and the impact on value. An independent review adds an objective check—an outside or independent committee can evaluate whether the terms are truly market-based and appropriate, shielding management from pressure and reducing the risk of biased judgments. Finally, ensuring the terms are fair means pricing, conditions, and protections resemble what independent, unrelated parties would negotiate—often called an arms’-length standard. Together, these steps promote accountability, align actions with fiduciary duties, and lower the risk of self-dealing or mispricing.

Hiding related-party transactions undermines transparency and fiduciary duties; allowing approvals by related parties themselves introduces conflicts of interest and can distort terms; and pursuing a policy that bans related-party transactions entirely ignores legitimate, value-creating collaborations and isn’t practical. The best practice is the combination of disclosure, independence, and fair terms to manage the risk effectively.