Trust and family firms: what do we know?

Recognized by UNESCO as Intangible Cultural Heritage of Humanity, castells are human towers whose origins date back to the early 18th century in Catalunya.

At a recent teambuilding event with other IESE faculty, I had the chance to discover their history – and experience first hand! – what it takes to build a castell. They can reach heights up to 8 to 10 levels high, although I admit that ours was a bit more modest…

When asked in the debrief on the most critical values behind successful teams, there was a clear, hands-down winner: trust.

The notion of trust plays a critical role in corporate governance and reputation, but what does it actually mean?

In governance research, scholars often quote the seminal article by Mayer, Davis and Schoorman (1995). Based on their definition,  trust is “the willingness of a party to be vulnerable to another party, and the expectation that the exchange partner will not behave opportunistically even when such behavior cannot be detected.”

In other words, trust is the capacity to rely on others to take actions – some of which can have far-reaching effects – without the ability to control or monitor them. In principle, this definition of trust holds true for both personal and organizational relationships.

Drawing the line between trust and business

In the economic arena, most activities require an undergirding of trust that contracts alone cannot provide, which is why it is so essential to cultivate solid stakeholder relationships. In fact, trust can proffer the same benefits as formal governance mechanisms in terms of ensuring alignment of interests and controlling opportunism, and in turn, minimizing governance costs and facilitating adaptation.

In the specific realm of family business, many scholars have underlined the outsized influence of trust, including Eddleston et al. (2010), who cite it as a bridging concept that can help reconcile and enhance our understanding of family firms as a unique organizational form.

When viewed through the lens of trust, both the inherent strengths – and weaknesses – of family firms also rise to the fore.

The upside of trust in family-owned firms

According to more than 50 academic and practitioner-oriented studies, family firms enjoy a comparative advantage when it comes to building trust with stakeholders.

The Edelman Trust Barometer, unveiled yearly at the World Economic Forum in Davos, further supports these findings. In their 2022 report, family-owned businesses topped the “most trustworthy list,” achieving a score of 67% in the court of public opinion, 9 points ahead of privately held companies and 15 in front of state-owned firms.

Studies on family firms also indicate a trust advantage among consumers, who generally trust the brands, management policies and practices of family-owned companies over their non-family-firm counterparts.

This trust premium is shaped by several factors, among them, families’ enduring nature, the tightly woven link between family and corporate identity, and the view that family firms act more benevolently toward stakeholders, beyond the bottom line.

Family firms aspire to maintain a solid corporate reputation since it directly reflects on the family, while forging sustainable long-term relationships and social capital. In their pursuit of these non-economic goals, family business lay the foundations of trust with their key stakeholders and society as a whole.

So is the trust-family firm relationship all wine and roses?

Well, not exactly….

The dark side of trust in family firms

As both history annals and current news headlines attest, trust can also lead to the unraveling of family firms, made manifest by blind faith, amoral familism and complacency. This is especially true when the family considers its future control and dynastic succession at risk. In these cases, the positive balance between family control and stakeholder trust can vanish in an instant.

Some scholars also point to the critical link between trust and competence. Specifically, they underscore the need for family firms to consider the potential tradeoffs between trust and competence in their governance choices, especially crucial in generational handovers.

While families can offer a stable and steadfast leadership pipeline, they must stay attuned if their familial talent pool falls short, both in quantity and quality.

Beyond objective truths, they also need to weigh potential negative biases, since research suggests stakeholders sometimes consider next-generation members less talented and committed than their predecessors, even when they are perfectly qualified.

On a positive note, these negatives can be countered. Solid structures, systems, contracts, incentives, professional development, and succession plans will all bolster the reliability of future behavior, ensuring that trust continues to serve as an engine of competitive advantage.

 

 

 

 

 

One thought on “Trust and family firms: what do we know?

  1. Talking about family, it’s one thing to note that the family makes up the society… Whatever can’t be well handled in the family brings chaos in the society, because the home must be in order to be able to put the society in order. Healthy Home, Healthy Society.

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