The Importance of Trust in Family Business

trust_fallA majority of family business consultants, experts, leaders and members believe that the most prevalent reason for failure of family businesses is seated within the family dynamics. The critical issues facing these businesses are more family-based than business-based: issues of values, relationships, and personalities that change over time and require both psychological attention and adjustment. This perception is held regardless of the marketplace or economic climate.

Distrust and miscommunication are a psychological tax on family businesses.

Important business conversations among family members require greater confidence and awareness than those among non-family associates. This is due to the maturity levels, evolving life stages, ingrained reactions, and interpersonal rivalries that flow from the family into the business. When trust and communication break down in the family, on the leadership team or in the organization, the expense of doing business goes up. The extra steps needed to compensate for broken trust and poor communication cut into the profitability of the enterprise. Lack of trust creates emotional distress and creates costly detours.

A study of 3,250 affluent families found a 70% failure rate in wealth estate transfer, where failure was defined as involuntary loss of control of the assets. Researchers faced the “shirtsleeves to shirtsleeves” phenomena, where wealth disappears in three generations, by asking the question of how the failed transitions in an affluent family differed from the successful ones. They concluded that the major causes were within the family itself, having more to do with psychological patterns than financial or business planning.

This investigation showed that the wealth breakdown was caused primarily by a collapse in trust and communication in the family (42%). Next on the scale was the failure of parents to adequately prepare their heirs for creating and managing the wealth (17%).

Relationships in a family business are like the wheels on a chariot. When the wheels are in balance, there is energy and productivity, but once broken, everything slows or shuts down. If one person in a relationship discounts another, it breaks the success momentum with differing levels of cost. The breakage can come from anywhere or anyone, from the oldest to the youngest, even from family members outside of the business environment.

A strong relationship builds trust and communication and is based on equality and respect, not power and control. While it takes only one broken dowel to hurt a relationship, it takes many branches to create and maintain it. The Germans have a term for this psychological dynamic, ein Haar in der Suppe, or “a hair in the soup.” It takes several ingredients to make a good stew and only one fly to spoil it.

Trust can be built, measured, tested and repaired. It is a way of reducing uncertainty in interpersonal and organizational settings and is necessary for cohesive and productive professional relationships. As trust declines, people engage in self-protection behaviors, are more cautious and demand greater regulation.

Trust always involves two tangible functions: character and competence. Character relates to a person’s values, behaviors, attitudes and priorities. Character incorporates integrity and resolve. Competency has to do with education, skills, responsibilities, accountabilities and achievements in the family, business and/or the community. Competence is about capabilities and track records. We may consider a person honest, charming, and sincere, but we will not trust that person if he or she does not deliver results. The opposite is also true. Even when a person has great ability and a perfect track record, if he or she is not honest we will not trust that person.

Communication is made up of transactions within a system, whether it is two people planning dinner or a board of directors deciding on an acquisition. There are always two transactional units taking place at the same time, the pragmatic information and the psychological feelings about the situation. When these are sequential and complementary, the results are clear and productive. When these areas are in conflict, it is a psychological levy on the family business, everything slows or shuts down, often resulting in confusion, criticism and disagreements.

The performance of a family business looks different than that of a non-family-owned company. Research at the Center for Management and Economic Research at Ecole Polytechnique compiled a list of 149 publicly-traded, family-controlled businesses based in several countries. In each business the family owned a significant percentage of the stock but not necessarily the majority. In each case, family members were actively involved on the board and/or in management. They compared these businesses with a similar group of non-family-owned companies.

The results of this study illustrate that family business leaders focus on resilience more than performance. During good economic times, family-run firms do not earn as much money as public companies. But when the economy slumps, family businesses far outshine their peers. In a 12-year study that included the 2008/2009 business cycle, the average, long-term financial performance of family businesses was higher than non-family businesses. The conclusion reached was that a CEO of a family-controlled firm may have financial incentives similar to those of executives in non-family companies, but he or she will lead with a very different management strategy. Because of the familial commitments and obligations, the economic side of a family business is run for the long term. The same attitudes need to be applied to the relationship issues in the family business.

How do you and your family stack up when it comes to trust?

*This post is based on an article written with my associate, PhD psychologist Dr. Edgell Pyles.

Does Your Family Business Need Help?

Family Business Matters has extensive experience assisting family businesses. With many decades of experience, we understand the wide variety of challenges that families face as they work together to build, grow and sustain a thriving family business generation after generation. Through conferences, continuing education programs, family business retreats, speaking engagements and private family business consulting services, Family Business Matters has assisted more than 450 family-owned businesses around the world chart their way through family business issues of all shapes and sizes.

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For more information on how Family Business Matters can help your family business survive and thrive, please contact us today at (970) 948-5077.

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