The ripple effect of trust and the family firm

When searching for a new supplier, investor or manager, what’s your number one criterion? Industry reputation? A core metric? Economic cost or benefit? While all relevant criteria, there is another that trumps them all: trust.

Defined in academic literature as the willingness of one party to be vulnerable to the actions of another, trust has been a kingpin in society since the beginning of time: before legitimate currency, loans, barters and other commercial transactions relied fully on personal credibility and community relationships.

Several studies point to the role of trust in boosting performance in dyadic transactions, e.g. bilateral firm-supplier relationships, as well as its divergent impact across countries and national regions. Yet far less is known about another key mechanism: the development of trust on a broader social level and its impact on a specific region’s business performance.

In today’s world – shaped by the war in Ukraine, pandemic aftershocks, extreme weather events and cryptocurrency mayhem – the need for trust is more palpable than ever. What conditions are conducive to climates of trust on a broader social level, beyond specific dyadic relationships? What are its wider repercussions on a local region’s business fabric?

These were the questions my research sought to address.

Family firms and long-term horizons

In the public realm, the perception of trust varies depending on the organization, but family firms in particular seem to garner a “trust advantage.” As captured by the Edelman Trust Barometer, family firms are the most trusted form of business globally, with 69% of people trusting family business versus 56% for business in general.

One differential aspect of family firms is their relatively longer-term outlook compared to their non-family counterparts. This expansive perspective, inspired by the ambition to transfer ownership from one generation to the next, makes them more likely to seek long-lasting business relationships.

Through repeated, enduring interactions with suppliers, investors and other stakeholders, family-controlled firms are able to build a reputation as trustworthy business partners, with myriad benefits for all parties.

Family firms also aim to nurture strong ties in their local communities. Grounded on deeply entrenched local roots and historical connections, they often play influential roles in their local environs, and take proactive steps to gain and sustain a positive corporate reputation since it directly reflects on them as a family.

But do extensive time horizons and local ties give them an edge when forming trust-based collaborations? If so, what about other firms and stakeholders operating adjacent to family firms: do they reap any indirect upsides?

According to my research findings, the answers to both questions are a resounding “yes” and “yes”.

Family firms’ impact on the overall business community

As the literary legend Ernest Hemingway succinctly noted, “The best way to find out if you can trust somebody is to trust them.” Based on my research, family firms seem to set the tone, playing a pivotal role in generating trustworthy and positive business climates, in benefit for all.

In one study, I focused on the Belgium business landscape, discovering a positive relationship between family firm density – defined as the relative prevalence of family businesses in a local region – and the development of trust among regional stakeholders.

What’s more, greater family firm density not only benefited family businesses, it positively correlated with higher performance for all firms in the region – both family firms and non-family firms alike. And the effect was significant: a 10% increase in a region’s family firm density translated into a 4% to 8% increase in overall performance.

In the words of the late scholar and philosopher Robert C. Solomon, “Trust opens up new and unimagined possibilities.” As you reflect on your business connections, pay attention to the economic value of trust and how it can help your organization reach its long-term aims. As history can attest, trust-based alliances are strategic investments whose dividends grow exponentially over time.