Related Party Transactions

Edited by Demetris Nicolaou, CFA

Member of the Board

The CFA Society of Cyprus

 

Investors should investigate whether the company engages in outside business relationships with management or board members, or individuals associated with them, for goods and services on behalf of the company.

Reasons for reviewing the company’s policies on Related-Party Transactions.  As they relate to board members, policies that cover related-party transactions attempt to ensure the independence of board members by discouraging them from engaging in the following practices, among others:

• receiving consultancy fees for work performed on behalf of the company;

• receiving finders’ fees for bringing merger, acquisition or sale partners to the company’s attention;

 

Implications for investors. Receiving personal benefits from the company for which board members are supposed to make independent decisions can create an inherent conflict of interest, when these benefits fall outside the role of a board member. Limitations on such transactions, either through the company’s ethical code or board policies, reduce the likelihood that management can use company resources to sway board members’ allegiance away from shareowners.

 

Other things to consider. When reviewing a company’s policies regarding related-party transactions, investors should determine whether:

• the company’s ethical code or the board’s policies and procedures limit the circumstances in which insiders, including board members and their associates, can accept remuneration from the company for consulting or other services outside of the scope of their positions as board members. The intent of such provisions is not only to discourage actions that could compromise board members’ independence, but also to discourage the company from entering into contracts that may not provide the best value to the company and its shareowners.

• the company has disclosed any material related-party transactions or commercial relationships with existing board members or board nominees. (See a discussion of this issue under ‘Board Independence’).

• board members or executive officers have lent, leased or otherwise provided property or equipment to the company.

• the company has paid board members finders’ fees for their roles in acquisitions or other significant company transactions.

 

Where to find information about business transactions between the company and its board members, management, or controlling shareowners:

• The annual reports of companies in many countries include a discussion of insider transactions and fees paid to board members and controlling shareowners, often under the heading of “Related Party Transactions.”

• In the United States, listed companies are required to provide information relating to dealings with insiders in the annual proxy statement, often under the heading of “Related-Party Transactions.”

• Investors also should review the prospectus of a company preceding a public offering of securities for any related-party transactions disclosures. This document should inform investors about transactions that permit insiders to purchase shares at a discount prior to an offering at a higher price.

 

The CFA Society of Cyprus is a member society of CFA Institute, an international, nonprofit member organization of more than 82,000 investment practitioners and educators in 124 countries. The CFA Institute awards the Chartered Financial Analyst (CFA) professional qualification, the designation of professional excellence within the global investment community. For more information on the CFA designation, visit www.cfainstitute.org or the CFA Society of Cyprus web page on www.cfacyprus.com , e-mail: [email protected] .