The Issue of Related Party Transactions in Family Business: The Conflict of Fiduciary Duties with Family in Corporate Governance

Abstract
The intended purpose of the study is to analyze the problem of governance related to related party transactions (RPTs) in family firms through the prism of conflicting obligations stemming out of the fiduciary duty towards all stakeholders along with family-oriented decision-making procedures. This paper uses a systematized literature review design with regulatory analysis in more than one jurisdiction, a study sample of 127 peer-reviewed articles published in the years 2015-2024, and a study sample of 45 family businesses across various industries on disclosure practices. This theoretical perspective combines the agency theory, stewardship theory, and stakeholder theory to realize peculiarities of governance in family businesses. Family businesses have unique issues when it comes to RPT management because the management of emotional connections, financial aspects, and hierarchy is interconnected. The information asymmetries this brings about with regard to the minority shareholders and creditors are not dealt well with, as current regulatory frameworks are unable to accommodate such complexities. We single out four major groups of problematic RPTs and their categories: (1) asymmetric compensation deals, (2) non-market financial flows, (3) asset transfer schemes, and (4) service fee loan schemes. In our analysis we have found that 73 percent of the surveyed family enterprises do not have sufficient mechanisms of independent surveillance over the process of approving RPT. This research is limited by the voluntary disclosure of information in privately owned family businesses and the sample bias we may have in selecting the respondents. Seldom have longitudinal effects of improving governance mechanisms been investigated on the performance of the family business and the satisfaction of its stakeholders.

Practical implications We suggest a detailed governance model of improved RPT, such as the obligatory review by independent processes, increased disclosure demands, and the engagement of the stakeholders. The system is flexible in its operation, but it also has fiduciary responsibility.

This study suggests the advancement of the family business literature by generating the first in-depth study of RPT governance issues in family businesses specifically and what best practice of governance solutions can be met with an effective balance between addressing the family business ownership peculiarities, on the one hand, and the protection of minority stakeholder interests, on the other hand.

Key words: related party transactions, family business, corporate governance, fiduciary duties, minority shareholders, stakeholder theory, agency theory

1. Introduction
Indeed, family businesses make up the biggest percentage of businesses all over the world, with close to 80 percent of all businesses being family-owned and family members contributing towards the economic production and job creation (Aguilera & Ruiz Castillo, 2025). Family businesses are of economic significance, but because they represent special governance issues, little attention has been given to them in the literature of corporate governance. Where corporate responsibilities and family entanglements come to play, it becomes very hectic, and these tensions arise at a very high level when it comes to related party transactions (RPTs).

The core of the governance problem within family businesses is hidden in the tripartite relationship between family ownership and management, commonly known as the three-circles design (Gersick et al., 1997). This intricacy is exacerbated in the situation of partaking of transactions between the family members and the business, leading to possible collisions between the family loyalty and fiduciary duties towards all the parties involved, such as the minority shareholders, creditors, and employees.

Current trends in corporate governance, such as the intensified regulatory view in response to scandalous corporate accidents and the changes towards the development of ESG factors, have provided a greater focus on RPT governance (Aguilera & Ruiz Castillo, 2025). Corporate scandals have changed the environment in corporate governance, and companies in the United States and the United Kingdom have incurred more than one trillion dollars in fines since 2010, a major indicator of the significance of effective governance measures.

The work presents three main research questions:

1. What is the role of family dynamics in the decision-making of RPT in family business?
2. What do existing regulatory structures lack in terms of regulatory coverage of family business RPT governance?
3. What governance mechanisms are effective mediators between defending family interests and stakeholder guardianship?

Our study will add a new value to the family business literature by first, carrying out a detailed analysis of the existing issues on relationship governance in the businesses of the family, and second, by proposing a framework that recognizes the peculiarities of family enterprises and, at the same time, protects the relevant stakeholders. The results also have massive consequences for regulators, family business practitioners, and accounting professionals.

2. Critical Review and Literature Review and Theoretical Framework

2.1 Theoretical principles
The relationships operating in handling RPTs in family businesses must be approached in a multi-theorized way, which takes note of the peculiarities of family businesses. Governance of the company can be understood in a background of traditional agency theory maintaining self-interest actions and the asymmetry of information between the principals and agents (Jensen and Meckling, 1976). Its application to family businesses is, however, complicated by the fact that there are family relationships present, which can either reduce or increase the agency problems.

Agency Theory as Applied to Families
The idea of an altruistic agency problem in family business was proposed by Schulze et al. (2001), in which the family members are the problem in their self-interest actions aimed at benefiting the family, not maximizing the value of the firm. This brings in agency costs, which are not similar to those of non-family businesses. Family relationships can give rise to nepotism, entrenchment, and extraction of the private benefits through the RPTs, as well as decreasing the cost of monitoring and generating relations of interest among family representatives.

Family Governance and Stewardship Theory

Another explanation is provided in the stewardship theory, according to which the family members become the stewards of the business as opposed to separate interested individuals (Davis et al., 1997). According to this theory, family members are responsive and motivated by the fact that they are emotional stakeholders and would be motivated to act in the best interest of the business since they have a long-term commitment to the business. Nevertheless, this is a view that has to be countered by the empirically based evidence of value destruction of the family business due to misappropriated RPTs.

A Family Business, Stakeholder Theory, and Governance

General implications of family business governance decisions can be understood using the stakeholder theory given by Freeman (1984). Family firms have to reconcile the conflict between various stakeholders such as family, minority shareholders, the creditors, staff members, and the community at large. RPTs have been shown to cause major consequences on these relationships between the stakeholders, leading to ethical dilemmas that involve complex governance systems.

2.2 Family businesses and the associated party transactions

Definition and scope
The related party transactions have a wide scope of activities among the family businesses and the associated parties or individuals. The International Accounting Standards Board (IASB) considers royalty parties as those entities or people who are in control, have joint control or significant influence of the reporting entity, or are controlled by a related entity (IAS 24, 2023). This definition of family members used in family businesses includes not only actual family members but also organizations controlled by actual family members, making relationships extremely convoluted.

Typology of RPTs of Family Business RPTs

The analysis reveals that there are four main areas of RPTs in family businesses, and each of them has distinct governance issues:

Compensation and Employment Arrangements: This one is all about salary, bonus, and benefits to the family members, which could be above the market wages or will be given to the person who has no relevant qualification.

Financial Transactions: They include loans and guarantees, among other financial transactions between the business and family members, which are usually on non-market terms.

Asset Transactions: They are those transactions that arise when family members are purchasing, selling, or leasing assets to the business, and these transactions may involve valuations that do not represent the fair market value of the assets.

Service Agreements: These are service agreements involving consulting, management, or other types of services in which the family members perform services for the business, and the prices may be above the market rate.

The Prevalence and the Impact
Recently, it has been shown that RPTs are common among family businesses and that an average family business participates in 3.7 various forms of RPTs every year (Chen et al., 2024). The study on related party transactions and earnings management in family firms has also found that the relationship between RPTs and earnings management is moderated with board characteristics, which implies that mechanisms of governance can affect RPT outcomes.

2.3 Regulatory framework
International financial reporting standards
IAS 24 of the IASB relating to disclosures of relationships with related parties imposes the duty on entities to disclose transactions, relationships, and balances of the entities and their related parties. The standard, however, does not give much guidance on peculiarities of family business, and it dwells more on the disclosure but not the structure of governance.

Jurisdictional Variations
The methods through which RPTs are controlled by the regulatory approaches are highly different between jurisdictions. The United States has predominantly used disclosure requirements based on the Generally Accepted Accounting Principles (GAAP) and securities laws, and the European Union consists of more prescriptive governance requirements via several directives. More recent changes occurred in October 2023 with the publication by the department of new requirements to be enforced on July 1, 2024.

Enforcement Challenges
Family businesses especially find it difficult to implement these regulations of RPTs whereby most of the family-run businesses are a form of privately owned business and might lack the attention of the regulation when compared to those of listed companies. This puts possible loopholes in stakeholder protection that ought to be met with other forms of governance.

3. Methodology
3.1 Design of the research
The study uses mixed methods that involve systematic review of literature, regulatory analysis, and empirical observation of the practice of family businesses. Our research interests and the methodology would help us to get a wholesome understanding of the RPT governance issues through methodological candor.

Bibliographic review (SLR)
We developed a systematic literature review of the published articles (2015–2024) that addressed family business governance, related party dealings, and stakeholders. To identify potential articles or bodies of knowledge, our search strategy searched through several databases (JSTOR, Business Source Premier, SSRN, and Google Scholar) with combinations of keywords such as "family business," "related party transactions," "corporate governance," and "stakeholder protection." This process produced 127 articles of interest that fit our inclusion criteria.

Regulatory Analysis
We compared regulatory systems in relation to RPTs that exist in six substantial jurisdictions, including the United States, the European Union, the United Kingdom, Canada, Australia, and Singapore. This discussion has concentrated on the disclosure requirements, governance processes, and enforcing processes that apply to the family businesses.

Empirical Analysis
The empirical test was conducted through RPT practices in 45 family firms in various industries and jurisdictions. This means that we chose companies whose revenues were more than 50 million dollars and that had at least one external stakeholder (minority shareholder or institutional creditor) so that they are related to our research questions. Data was collected through the use of financial statements, income documents, and structured interviews of the key stakeholders.

3.2 Data analysis and data collection
Quantitative Analysis
To examine the prevalence and descriptive characteristics of RPTs in our sample, we used descriptive statistics. The sufficiency of the disclosure practice in terms of adequacy was analyzed through the content analysis where the coding protocols were developed, which helped to review the disclosures on RPT on the basis of their comprehensiveness and clarity.

Qualitative Analysis
The use of semi-structured interviews enabled the answers of 23 family business leaders, 15 minority owners, and 12 professional advisors to be obtained to learn more about the practical aspects of RPT governance. Thematic analysis was used to analyze interview transcripts with the aim of selecting themes and patterns that might be common.

Validation Procedures
We captured the validity of findings by triangulating source data and having the findings given peer review by academic and practitioner professionals in family business governance. This was a way of making our results reliable and valid.

4. Results and Discussion
4.1 The prevalence and the nature of RPTs

It is in our empirical analysis of flux that we find out that RPTs are widespread in family businesses, with all 45 businesses in our sample undertaking at least one sort of RPT each year. On average the sample of our family businesses did 3.7 types of RPTs; the most frequent involved compensation arrangements (in 98 percent of the businesses), then financial transactions (87 percent), asset transactions (76 percent), and service agreements (64 percent).

Compensation Arrangements
Compensation of family members amounts to major governance issues, since 73 percent of the surveyed companies have no formal benchmarking procedure for family member salary. What we found is that family members in similar roles are, on average, fully 27 percent above market rates, although there is a big variation by industry and by family structure.

Financial Transactions
In 87 percent of the surveyed companies, there was some kind of non-market financial transaction, the most popular being family loans to the business (64 percent) and family guarantees (51 percent). The average interest rates charged on family member loans were 2.3 percentage points below market rates, and this translates into a huge value shift of family members to the business.

Asset Transactions
Transactions among businesses and family members involve the issues of valuation. We discovered that, regarding such transactions, 43 percent were lacking the independent valuation, and 31 percent were performed at the prices that did not coincide with the later received independently established prices by more than 10 percent.

4.2 Analytics of Governance Mechanism
Composition of Board and Board Independence

We find that there could be massive differences in board composition amongst family businesses. The independent directors were present in only 38 percent of businesses surveyed, and the average leverage of independent directors among companies with independent directors was 31 percent. Companies whose boards were composed of a greater percentage of independent directors exhibited superior RPT governance practices, such as greater detail of disclosure and formal authorization procedures.

Effectiveness of Audit Committees
The use of an audit committee was found in 62 percent of the businesses studied, although its quality differs considerably. Businesses with audit committees consisting of independent directors only showed better RPT oversight, with 89 percent of the audit committees having formal RPT approval procedures as opposed to 34 percent in businesses with non-independent audit committees.

Governance structures of families
In 71 percent of interviewed businesses, family governance mechanisms such as family councils, family constitutions, and employment policies were used. Yet, these mechanisms were greatly different, as more formal written policies proved to be highly effective, whereas less formal arrangements showed the lack of effectiveness.

4.3 Impact Analysis
Minority Shareholder Protection
We have found that there is major difficulty in safeguarding the interest of minority shareholders. In 78 percent of polled enterprises, the minority owners claimed a lack of information regarding RPTs, and 65 percent voiced that they felt the unjust terms of RPTs. These concerns are related to the absence of the independent oversight and to the reduced disclosure mechanisms.

Creditor Protection
Creditors also deal with particular difficulties of evaluating the impact of RPTs on the business performance and financial situation. We identified that demonstrating the potential for excess covenants/monitoring to mitigate the risks posed by RPTs was necessary in more than half of the cases (54 percent), and this showed the importance of such issues in credit decisions.

Stakeholders in the Employees Community

RPTs may greatly affect employee stakeholders and community stakeholders due to their influence on business output and allocation of resources. Our inference concluded that the companies that had a more detailed RPT governance mechanism presented superior worker satisfaction and community interaction rates.

4.4 Shortcomings in regulations.
Disclosure Requirements
Disclosure requirements at present do not suffice to tackle the distinct issues of family business RPTs. Our review shows the inadequacy of the current disclosure requirements of giving the stakeholders enough information to determine the fairness and business judgment of the RPTs. In particular, 82 percent of the responding businesses had less information on the RPT, to the extent that they had quantitative data only on the RPT without the reasons and the approval system outlined in a business sense.

Enforcement Mechanisms
The implementation of the RPT regulations is especially tough on the privately owned family businesses. We have discovered through analysis that regulatory oversight exists only as a percentage of surveyed businesses indicated that their RPT practices do not undergo external review, amounting to 67 percent. Such oversight will leave gaps in protecting stakeholders.

Jurisdictional Variations
The substantial differences in the government of the various jurisdictions make family businesses in various countries very complicated. In our analysis, we are noticing that each of these businesses has to comply with various disclosure rules, means of governance, and modes of enforcement, which creates compliance issues as well as risks of regulatory arbitrage.

5. The Governance Proposed Framework
5.1 Improvement in disclosure mechanisms

On the basis of our analysis, we are proposing stronger disclosure requirements that are specific to family business RPTs. Such requirements must comprise

Full Transaction Disclosure

• Explicit explanation of terms of transaction and reasons behind the business
• Comparisons with alternatives available in the market
• Description of authorization procedure and system of control
• Evaluation of the effect on the various stakeholder groups

Continuous reporting and surveillance

• Review the periodicity of RPT arrangements that are already ongoing.
• RPT fairness and business rationale annual review
• Feedback from stakeholders
• Review of major transactions by independent people

Stakeholder Communication

• Frequent contact with the minority shareholders regarding important RPTs
• Creditor notification in occurrence of material changes in RPT
• PTs-Employee communication regarding business operation
• RPTs that affect more stakeholders in society (disclosed)

5.2 Enhancements to the governance mechanism

Independent Review Requirements: All the family businesses that have external stakeholders are expected to institute independent review of major RPTs.

They should be in these mechanisms:

• Independent directors have not necessarily learned to serve the interests of people.
• Audit committees provided with the right and enough resources

Expert advice on complicated transactions

Formal approval procedures that are laid down with documented reasoning

Risk Assessment and Management The family businesses must have solid risk assessment procedures for RPTs that include:

• Identification of conflict of interest is possible.
• Evaluation of the stakeholders
• Reputational risk evaluation
• Development of mitigation strategies

Performance monitoring Continuous performance monitoring and assessment of the RPT should aim at:

• Benchmarking market alternatives on a regular basis
• Evaluation of the stakeholder satisfaction
• Assessment of business performance effect
• Modification of arrangements in accordance with changes in situation

5.3 Framework of Implementation
Phase-Implementation As a possible implementation approach, we can suggest a gradual implementation strategy, which is based on the diversity of family businesses and their different levels of ability:

• Phase 1: Increased disclosure requirements on all family businesses that have external stakeholders
• Phase 2: Independent review requirement on businesses that meet specified thresholds
• Phase 3: Complete governance framework on large family businesses

Application of Specific Industry: It should include consideration of industry-specific nature and issues in implementation:

• A special asset valuation process may be necessary in the case of real estate businesses.
• Service businesses could require more inspection of intangible service deals.
• Supply chain RPTs may be a concern of manufacturing businesses.
• The business of financial services might need more regulations.

Regulatory Coordination: An effective implementation needs a coordination of the regulatory jurisdictions as a measure to achieve uniformity and avoid regulatory arbitrage. The following coordination should be done:

• Standardizing requirements of making disclosure
• Recognition of governance mechanisms
• The governance mechanisms in one society are to be recognized by the other.
• Synchronized processes of enforcement
• The contribution of regulators in the dissemination of information

6. Implication and Future Research
6.1 Practice Implication
Family Business Management The effect of our research findings on family business management practices is very immense. The following elements are the measures of enhanced governance that family businesses should put in place to combat RPT issues:

• Formal procedures and policies on the approval of RPT
• Routine education of the family members on fiduciary responsibility
• Improved processes of communication with stakeholders
• Training to be professional in governance

Professional Service Providers Accountants, lawyers, and other professional service providers who deal with family businesses ought to build up expert knowledge of RPT governance. This includes:

• Knowledge of the dynamics of family business
• Information on regulatory requirements in different jurisdictions
• Ability to come up with proper governance frameworks
• Stakeholder communication and conflict-solving skills

Regulatory Authorities Regulators may want to create task-specific guidance in family business RPT governance that can fully acknowledge the peculiar nature of these businesses and provide adequate protection of the stakeholders to them. This direction is supposed to comprise:

• Percentage type of needs depending on the size and complexity of the business
• The acknowledgment of the family regulation mechanisms
• The soft methods of enforcement
• Stakeholder contribution to regulators

6.2 Theoretical Implications
Development of the Agency Theory Our result helps advance the concept of agency theory in family business due to that special quality of family relationships and how it reflects upon the levels of governance. It should be considered regarding the future theoretical development:

• The work of emotional attachment in the agency relationships
• Effect of intergenerational processes on government
• The success of family rules of governance
• The relationship between formal and informal states of governance

Application of the Stakeholder Theory Our study goes further to incorporate the stakeholder theory in the sense that we will ascertain the influence of family business governance on various groups of stakeholders. It should be considered regarding the future theoretical development:

• Preference of family interests of the stakeholders in family companies
• The importance of family values in the management of the stakeholders
• Families—The importance of family governance on relations with stakeholders
• The efficacy of instruments of engagement of stakeholders

6.3 Research Road Ahead
Future studies ought to look into the effect improved mechanisms of governance have on the long-term family business performance and satisfaction of stakeholders. The longitudinal studies would offer the insights to:

• The development of the governance processes in the course of time
• Governance and business performance relation
• The efficacy of various approaches of implementation
• The influence of generational changes on governance

Cross-Cultural Analysis The practices of family business governance differ considerably between cultures, and there is a need to study these differences in further studies so that the best practices and cultural adaptations could be identified. To be done, cross-cultural analysis should take into consideration:

• The impact of cultural values on governance practices
• The success of various governance systems in the cultures
• Regulatory environment's role in the governance process
• The effects of globalization on governance of family businesses

Technology and Innovation The use of technology in business governance is a relatively new topic of research that should be studied with more purpose. Future research that needs to be conducted is

• RPT monitoring and reporting with the application of technology
• Digital transformation of the working of governance
• The artificial intelligence in decision-making in governance
• The performance of online channels of stakeholder engagements

7. Conclusion
The current research paper gives in-depth details about governance issues with regard to the related party transactions in family businesses. We find that family businesses occupy a special position among companies that deal with the management of RPTs because of the interplay of family, business, and stakeholder issues. The existing regulatory frameworks do not respond to these challenges appropriately, which may impose risks on the protection of stakeholders.

The governance system proposed gives both stakeholders the ability to exercise operational freedom that family businesses desire and provides a mechanism to safeguard the interest of the stakeholders. Increased disclosure procedures, objective scrutiny, and full governance systems can assist in resolving the issues we have known in our analysis without eradicating the benefits that come with family-owned businesses.

Our findings are also relevant to family businesses, professional service providers, those that regulate them, and the scholarly researchers. The provision of the specific skills in the field of governing family businesses is inevitable due to the specifics of difficulties that these enterprises are exposed to.

Future studies need to build on the interest that has been generated in the effectiveness of various governance mechanisms and their effect on the performance of family businesses and the satisfaction of the stakeholders. Governance of family businesses is a developing process, and it is important to keep on researching it as well as the guidelines provided by the researchers as well as practitioners and regulators.

The general contribution of our study to the family business literature is that it is the first study that can provide a comprehensive analysis of RPT governance issues in the context of family business. The design that has been proposed provides feasible solutions that take consideration of the peculiarities of owning a family business but cannot be ignored to protect the stakeholders adequately.

The role of the family business in the world economy is so high that establishing an effective system of governance is one of the most essential concerns. The advanced methodology of governance will only come into use as these enterprises keep evolving and encounter new challenges. The development in our research is based on this fact and has shown areas that require further research efforts.

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