Why do people in a family business often risk destroying the bonds on which their collaboration depends?

For all the lip service given to the importance of trust, it is still a relatively scarce commodity in family businesses. By trust, I mean the certainty, confidence, or faith that someone we depend upon will act in ways that benefit us and will refrain from acting in ways that bring us harm. Trust is not created by talking about it. It depends on behavior; it’s what we do, not what we say, that makes a difference.

We all recognize the kinds of behavior that sow distrust in a family business:

• The chief executive of a large fourth-generation sportswear manufacturing firm tries to convince his shareholder cousins, who don’t work in the company, that there is too little cash to distribute as dividends. Meanwhile, he has quietly raised his own salary and increased his perks. “After all,” he rationalizes, “who is responsible for last year’s increase in sales and profits?”
• A sister who has agreed to run the family business in a 50-50 partnership with her brother worries about their ability to work together in the future. She is thinking seriously about trying to persuade her father to revise his succession plan to give her control of the voting stock after his death.
• The founder of a lighting company fosters intrigue and infighting among his grown children in order to tighten his absolute control of major decisions. While he complains constantly about the rivalries among them, he is blind to how their inability to cooperate serves his own need to remain in control. 

What do these three examples have in common? While the people in each case may be well intentioned, they do not fully appreciate the extent to which the success of their enterprise depends upon collaboration with others. By pursuing their self-interest regardless of its possible adverse effect on others, they undermine their long-run interest in the success of the enterprise. They risk winning the battle but losing the war.

Each of the three examples speaks to what is known in the behavioral sciences as “the prisoner’s dilemma”—a paradoxical situation in which an individual’s pursuit of self- interest in the short term is pitted against his or her more enlightened long-term interest in collaboration with others. Developed by two mathematicians, Luce and Raifa, in their now classic “Games and Decisions,” the prisoner’s dilemma is helpful in understanding how people’s perceptions of how others will behave influences how they act. In this scenario, two suspected bank robbers arrested by police are taken to separate rooms for questioning. Although the police are sure that the two are guilty, their case is weak unless they can get a confession from one or both of them. Each is offered the following terms: If one confesses and the other does not, the one who confesses will go free while the other will face 10 years in prison. If both men confess, each will get five years instead of 10. Finally, if neither man confesses, both will be tried on a minor charge that carries a minimal sentence of one year.

Each prisoner knows that by confessing he will end up with either no sentence (if the other doesn’t confess) or an intermediate sentence (if both do). If one remains silent while the other confesses, the first would get 10 years. But if both keep their mouths shut—despite the temptation not to do so—they will get the minimal sentence.

The trouble, of course, is that since the prisoners are questioned separately, each can only speculate on what terms his partner will accept. Whether or not each is willing to risk remaining silent depends on his perception of the other’s trustworthiness.

Now let’s look at the reasoning that goes into that perception and how it applies to a family business. Trust, in my experience, is based on four ingredients—what I call the “four C’s.” They are: competence, congruence, consistency, and communication.

In the prisoner’s dilemma, the decision of one man to remain silent is based, in part, on an assessment of the other’s competence. If one knows that the other is savvy about the tactics police use to wheedle confessions, he will trust the other to remain silent, and he will do likewise. In family companies, competence is essential for building trust. Trust has to be earned. It requires a track record of excellence under fire. This is especially true at the time of succession. Successors have to demonstrate that they have the knowledge and experience to handle the responsibilities of leadership. Without it, they may never acquire enough authority to lead.

Competence is also vital to building trust within the family. Typically, the family members who enjoy the most trust are those who have shown by their actions that they will nurture the development of the family and protect its safety rather than act solely in their own self-interest.

Trust is also enhanced when we “walk the talk”—when what we do is congruent with what we say. So if the two suspected robbers have pledged to each other never to confess if caught—and each knows the other is true to his word in this situation—both will remain silent. If one violates their agreement and confesses, trust between the two will evaporate.

Family businesses often develop elaborate constitutions and codes of conduct for dealing with the issues that arise. One reason ground rules are important is that they hold family members accountable for their behavior. If the rules are ignored, however—if they are not congruent with actual behavior—the governance of the enterprise will suffer. If the family has an agreed-upon entry policy for hiring relatives, for example, how much will people trust the rules if the CEO makes an exception for a son who does not meet the requirements? Similarly, how can the brother in the example above ever trust his sister if they have agreed to work as equals and she is trying to negotiate a deal with her father that will give her an edge in the succession?

The third requirement for building trust—consistency—stresses the importance of predictability. If one of the partners to the robbery did not do what he said he would all the time but only occasionally, it would be hard for the other to put his fate in the partner’s hands by remaining silent. Similarly, the partner would be distrusted if he had proved to be capable of seeing through police deceptions accurately some of the time but not consistently.

People who are most trusted in family businesses usually have proved consistently attentive to the family’s needs and wishes. Let them just violate that trust once, however, and they may find it extremely difficult to regain. A single extramarital indiscretion, for example, can destroy trust built through years of devotion and fidelity in a marriage. It takes a long time in a family business for those who have violated the family’s trust to repair the damage and redeem themselves. Once broken, trust, like Humpty Dumpty, is hard to put back together again.

The last of the four C’s—communication—is essential for providing the data people need to interpret behavior and assess trustworthiness. It is hardly coincidental that one of the givens in the dilemma faced by the two prisoners is that they have no possibility of communicating. They are held in separate rooms and cannot discuss each other’s needs and priorities and work out a common strategy.

In many family businesses, the walls are psychological, but just as real. Good communication is often spoken about and, like trust, valued as a principle. But it is seldom practiced. Indeed, too many families seem to think that talking and communicating is the same thing. When our destinies are closely intertwined—as they are in family businesses—communication is the only way we can understand, and empathize with, the needs of others. It provides the antennae through which family members monitor trust, flag and deal with violations, and continue to strengthen the basis of their collaboration.

The choice between whether to pursue one’s short- or long-term interest is obviously not hypothetical in a family business. The dilemma occurs all the time, and a misguided  choice can have lifelong consequences. In the prisoner’s dilemma, after all, the two accused bank robbers are not related. A choice based on short-term self-interest by one or both partners may cause a breach, and the two are likely to go their separate ways (after serving their sentences). In a family business, your partner may be a blood relative. A short-term choice may cause long-term bitterness in the family and irreparable damage to the bonds of trust. ▪

Ivan Lansberg, Ph.D. is a co-founder of Lansberg • Gersick a research and consulting firm in New Haven, Connecticut, that serves family businesses, family offices and family foundations. Ivan was previously on the faculty of the Yale School of Management, and is currently on the faculty of Kellogg School of Management at Northwestern University. He is an advisor to business families worldwide, a frequent presenter at conferences, and the author of many articles and publications, including Succeeding Generations (1999, Harvard Business School Press).

Source: Family Business Magazine, Autumn 1997

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