Liquidity, Elevated Interest Rates and Principal-Principal Conflict in Brazilian Family Businesses

The recent cycle of Brazilian monetary policy has substantially altered the financial environment in which companies operate. The trajectory of the Selic rate provides an objective benchmark of this shift.

Chess and Business Economics

After reaching 14.25% per year in 2015 and 2016, the Selic rate began a consistent easing cycle starting in October 2016. By December 2017, the rate had fallen to 7.00% per year. In March 2018, it was reduced to 6.50%. In 2019, it closed the year at 4.50%. In the context of the pandemic, further cuts brought the rate down to its historic low of 2.00% per year in August 2020, a level that remained in place until March 2021.

From that point onwards, a new monetary tightening cycle began. The Selic rate closed 2021 at 9.25% per year and reached 13.75% in August 2022, remaining at that level until August 2023. The shift from the 2.00% per year floor to 13.75% represents a structural change in the underlying cost of money.

This shift reshapes corporate decision-making logic. The cost of debt rises, working capital becomes more expensive, the return required by financiers increases, and the margin for operational error narrows. In such contexts, cash retention becomes an instrument of financial preservation.

In Brazilian family businesses, however, this decision produces effects that extend beyond the technical and financial sphere.

The prevailing ownership structure in the country is characterized by concentrated control and closely held capital. Equity interests are typically illiquid. As a rule, there is no secondary market that allows a partner or shareholder to readily convert their stake into financial resources. In many cases, the family’s wealth is largely concentrated in the business itself.

Within this institutional arrangement, dividends assume a function that goes beyond the mere allocation of profits. They constitute a mechanism for the economic realization of the capital invested.

When the macroeconomic environment requires profit retention to preserve the company, a structural tension emerges. The firm needs to strengthen its cash position, while the shareholder may depend on distributions as a source of personal liquidity.

At this point, the issue ceases to be merely financial and becomes institutional.

The corporate governance literature provides an important interpretative framework known as principal–principal conflict. Unlike the classic principal–agent model, which focuses on the relationship between shareholders and managers, principal–principal conflict emerges in structures of concentrated control and concerns the relationship among different shareholders, particularly between the controlling shareholder and minority investors.

In Brazil, this configuration is especially relevant because the controlling shareholder holds decision-making power, influences information flows, and defines the policy of profit retention or distribution. By contrast, minority shareholders possess economic rights but do not exercise equivalent control over the realization of those rights.

In an environment of elevated interest rates, retaining cash may be financially rational for the firm. However, for the shareholder who depends on distributions for personal wealth organization, such retention may represent a significant economic constraint. The tension does not lie in the financial rationality of the decision but in the institutional asymmetry surrounding it.

Empirical studies conducted in economies with concentrated ownership indicate that dividend policy plays a relevant disciplinary role. By reducing the amount of resources under the discretion of the controlling shareholder, dividends tend to mitigate the risk of private benefit extraction. In family-owned and private firms, evidence suggests that predictable payout policies contribute to reducing disputes among shareholders.

When dividend reductions occur without previously defined objective financial criteria, the perception of arbitrariness increases. Retention ceases to be interpreted as a technical decision and begins to be perceived as an exercise of power.

It is important to emphasize, however, that a restrictive monetary environment does not create conflicts; it merely reveals them.

In periods of structurally low interest rates, the relative abundance of liquidity may mask institutional fragilities. When the cost of capital rises and financial discipline intensifies, the absence of formal distribution rules becomes visible.

In this context, dividend policy ceases to be merely an accounting outcome and becomes an instrument of governance. When tied to verifiable metrics, such as interest coverage ratios, minimum cash levels, or leverage parameters, retention can be understood as a technical measure. When devoid of transparent criteria, it tends to intensify principal–principal conflict.

Family businesses that navigate cycles of monetary tightening with greater stability share a common institutional trait: they have previously formalized the criteria governing the relationship between liquidity and control. The distinction between compensation for labor and return on capital is clearly defined. Distribution rules are linked to objective indicators. Contractual mechanisms for internal liquidity or exit reduce exclusive reliance on dividends as the sole means of wealth realization.

The cycle of elevated interest rates imposes financial constraints. It is family governance, however, that determines whether those constraints will be managed internally or converted into litigation.

The prior formalization of distribution criteria, objective financial metrics, and internal liquidity mechanisms reduces the likelihood of judicialization and preserves corporate stability during periods of monetary tightening.

In family businesses, governance is not an accessory; it is the structure that preserves wealth.