Related party transactions disclosure and procedures: a critical analysis in business groups

• Pages: 1253-1273
• DOI: https://doi.org/10.1108/CG-08-2018-0281
• Date: 11 September 2019
• Published date: 11 September 2019
• Author: Pier Luigi Marchini,Paolo Andrei,Alice Medioli
• Subject Matter: Strategy

Related party transactions disclosure

and procedures: a critical analysis in

business groups

Pier Luigi Marchini, Paolo Andrei and Alice Medioli

Abstract

Purpose –In the light of the risks involved in related party transactions, transparent disclosure is

particularly important.The impact of related party transactions is relevantfor all types of company, but

there is greater complexityin business groups where they can be easier to hide.Focusing on business

groups, this study aims to analyze the accuracy and transparency of related party transaction

information, its understandability, compliance with legislation and comparability. It also examines

whether shareholders can be fully informed of all related party transactions by reading only the

consolidatedfinancial statement.

Design/methodology/approach –Three case studies are used. The units of analysis are three

corporate groups inwhich the parent company is listed on the Milan StockExchange as of 1 July 2015.

The authors use two differentsets of information. The first is secondarydata from company procedures,

annual reportsand other official documents. Theyanalyzed the separate financial statementof each firm,

including the separatefinancial statement of the parent company and compared all relevant information

from the consolidatedfinancial statement andthe separate financial statement.The second set is primary

data from face-to-facesemi-structured interviewsand observation.

Findings –This study underlinesthat there is no requirement for a specific classificationof related party

transactions disclosure, and as a consequence, it is not possible to compare information. An

unambiguous framework for disclosure, established by regulation or legislation, for use by companies

supplyingrelated party transactions informationwould be useful.

Originality/value –The resultsoffer possible recommendations forregulators to improve presentation of

relatedparty transaction information without increasingthe amount of information required.

Keywords Corporate governance, Business group, Related party transactions, Disclosure

Paper type Case study

Introduction

In recent decades, regulatory authorities and stakeholders in countries around the world have

started to consider good corporate governance (CG) and fair disclosure as key tools for the

protection and correct functioning of the capital market (Blue Ribbon Commi ttee, 1999;

Cadbury Committee, 1992;OECD, 1999). All over the world, attention has increasingly

focused on shareholder protection and company groups, often as a result of high profile

scandals, many of which have also involved related party transactions (RPT). RPT are defined

by the International Accounting Standards Board as a transfer of resources, services or

obligations between related parties, regardless of whether a price is charged.

The problem of RPT has, therefore, gained a higher profile over the past 20 years. In the

academic literature, Pizzo (2013) for example notes various scandals involving RPT. They

have occurred worldwide, in Europe and specifically in Italy, and widespread outrage in

response has thrown up critical issues for RTP (OECD, 2012).

Pier Luigi Marchini,

Paolo Andrei and

Alice Medioli are all based

at the Department of

Economic and

Management Sciences,

University of Parma, Parma,

Italy.

Received 31 August 2018

Revised 4 February 2019

15 May 2019

Accepted 16 June 2019

DOI 10.1108/CG-08-2018-0281 VOL. 19 NO. 6 2019,pp. 1253-1273, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1253

In Italy, high profile scandals include the cases of Parmalat, Fondiaria Sai and Cirio. In the

last two cases, the institution which was expected to protect minority shareholders failed to

detect damaging fraud and associated illegal RTP. The Parmalat case referred to is not the

collapse of the company 2000; the most recent scandal related to a conflict of interest in

RPT, in which the company did not properly disclosethis transaction.

Given the complex corporate structure typical of Italy, policy was required to balance the

potential efficiency raising effects of RPT with the strong possibility that they can also be

used to the detriment of minority shareholders and creditors (OECD, 2012).

The scandals severely shook investor confidence, so although the interest of academics

and regulators in RPT had been limited, they are now increasingly recognized as a

potentially powerful instrument of fraud, and appropriate regulation is perceived as a

necessity. It is not surprising that RPT today are explicitly treated and regulated in most

existing codes and regulations (Pizzo, 2013). Widespread opinion today is that transparent

and fair RPT disclosure, closely associated with good internal procedures, is thefirst step in

protecting and properly informingminorities.

RPT are associated with a negative perspective and are often discussed from an agency

theory point of view in the literature (Berle and Means, 1932;Jensen and Meckling, 1976;

Shleifer and Vishny, 1997;Smith, 1776). Agency theory supports the idea that that RPT are

made by an agent to obtain private benefits to the detriment of the principal, and defines

them as opportunistic instruments (Bertrand et al., 2002;Claessens et al.,2000;Faccio

et al., 2001;Lemmon and Lins, 2003;Leuzet al.,2009;Marchini et al., 2018a;Sherman and

Young, 2001).

RPT can also be studied from an efficiency perspective, which supports the idea that that

they are made for genuine business purposes and, in some cases, to reduce transaction

costs (Coase, 1937;Fan and Goyal, 2006;Khanna and Palepu, 2000;Kim, 2004;Shin and

Park, 1999). Such authors find that RPT are efficient exchanges used to better meet

business needs (Coase, 1937;Williamson, 1985).

A third idea, supported by Pizzo (2013), is a contingency approach which lies between

agency theory and the efficiency perspective. This approach considers aspects such as

organizational contexts and institutional environments as contingency factors in the

evaluation of RTP. As noted by Otley (2016), among other researchers, it is important to

comment and evaluate factors in contextand not isolate them from their background.

Although these three academic approaches may lend them an air of respectability,RPT are

often viewed under a cloud of suspicion.

Regulations on RPT promulgated by governments and market regulators often attempt to

avoid potential conflicts. Although national and international regulations specify that

investors should be fully informed about RPT, the fact that different sources regulate these

transactions means that there canbe overlap which may cause inconsistency. Each country

has to implement international rules into domestic regulation. At the same time, inside

national law, there may be various rules and standards and it is useful to understand how

these interact and conflictwith each other.

In the Italian context, there is in fact overlap between national and international regulation.

Moreover, some rules conflict inside domestic regulation, and require redundant disclosure

which may be misleading. This makes Italyan interesting scenario to study (Di Carlo, 2014).

Another important reason for studying the context of Italy is that Italian companies have

particular features. The characteristics of the Italian economic system are widely known

(Bianchi and Bianco, 2006;Mengoli et al.,2007). In Italy usually there is no separation

between ownership and control, and very few truly public companies exist (Crisci and

Tarizzo, 1995). As noted by Barca (1994), particular features of Italian companies are a

pyramid ownership structure anda dominant shareholder, generally a family. Zattoni (1999)

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