Who do you trust? The key issue in governance
30th March 2016
Would you choose to organise or govern a family business on the basis that the key players should not trust each other?
It would strike many of us as odd to do this, but then again distrust is the basis of governance in PLCs and this model is often recommended to family businesses. It is important to understand why PLC governance is so pessimistic.
It is assumed that PLC directors will act in their own self-interest and so shareholders need to be protected by formal governance in the form of laws, rules, codes, and guidelines. Managers need incentives to act in the shareholders’ interests, or they will act selfishly. In short the whole edifice is built on shareholders’ distrust of management.
Enterprising families who have problems trusting each other might find the PLC model a good fit, but it is the opposite of what many other family businesses prefer.
They want governance to reflect relationships of loyalty and trust. They want to encourage teamwork, foster long-term commitment among owners and avoid management by rulebook.
For such families, conventional PLC governance is not much use at all let alone being an example of best practice. The far more pertinent question for these families to ask is; ‘who do we trust?’ and then they should build governance on the foundations of their answer.
In broad terms, some families will answer, “we trust people we know or who have something in common with us.” This could be limited to direct family or be extended to include spouses and close friends or even members of the same cultural, ethnic or kinship group. This in-group attitude to trust means that if you are a part of the group –an insider - you can be trusted, but outsiders will be approached with caution.
Others, who we will call optimists, will find the in-group attitude way too limiting. Optimists prefer to adopt a trusting attitude in general and believe that this will be reciprocated rather than abused. Optimists no doubt assess various shared characteristics when deciding whom to trust, but their judgement of people does not rely mainly on these traits.
To sum up:
It is important to stress that one approach is not better than the other, although supporters of each attitude are likely to feel this because they are prone to compare the advantages of their view with the disadvantages of the other.
However, there is no ‘ought-to’ in family business governance and in order to be effective it is essential to go with the flow of a family’s innate values, including in relation to who do they trust?
The following table summarises some of the differences that flow from the different attitudes to trust.
The effect on governance
I think that is enough to prove the point that a family’s attitude to trust is at the core of governance. It is worth making the effort to decide ‘who do we trust?’ because there is a lot to be gained from injecting trust into governance, advantages that are beyond the reach of other types of business, like PLCs, that denigrate the notion that trust is an effective way to build business relationships.
 This is based on Uslaner, Eric M. The Moral Foundations of Trust. New York: Cambridge UP, 2002.