Trust and Family Business

Distrust and miscommunication is a psychological tax on a family business.

Important business conversations among family members require greater confidence and awareness than with 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. Everything takes more time and creates costly detours, in addition to the emotional distress.

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 in major respects 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 and alignment 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 different 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, 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 relationship. As trust declines, people feel compelled to 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. Competency has to do with education, skills, responsibilities, accountabilities, and achievements in the family, business, and/or the community. Character incorporates integrity and resolve, and 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 if a person has great ability and a perfect track record, if he or she is not honest, in things big and small, we will not trust that person.

Communication, from the neutral to the crucial, is made up of transactions within a system, whether it is two persons 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 complimentary, the results are clear and productive. When these areas conflict it is a psychological levy on the family business, everything slows or shuts down, often resulting in confusion, criticism, and conflict.

The performance of a family business looks different than a traditional public 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 public 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.

Regardless of the market place or the economic climate, the perception of a majority of family business leaders and members is that the primary dilemma and most prevalent reason for failure 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.

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

* Dr. Edgell Pyles is an associate of David Bork and is a PhD psychologist

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