The answer to this deceptively simple question is key to understanding how a trusting relationship forms between a family business and their adviser. It is relevant to explore this because many advisers are seeking to become the ‘trusted adviser’ to a family business at a time when there seems to be a general decline in trust across many levels of society.
In broad terms, some families will prefer to trust people who are like them, while others will adopt a generally trusting attitude to everyone and not just people with whom they have some shared characteristics. The argument offered here is that the different attitudes will affect which advisers a family choose to work with and so it is important to be aware of the pros and cons of the different attitudes.
The in-group attitude
The in-group attitude to trust in a family business can be summed up as, “we trust people we know or who have something in common with us.”
The shared characteristics of the group could limit those who are assumed to be trustworthy to just direct family or close friends or could extend to members of the same cultural, ethnic or kinship group. It could also include those with whom some in the family share an educational or professional background or other social connection, like membership of a club or association.
All of us are part of in-groups and this contributes to our sense of identity partly because it generates that insider/outsider mentality. Insiders are members of the group to whom we have an attachment and who it is assumed can be trusted because of this sense of shared identity. Outsiders are strangers who should not be trusted unless they are very carefully vetted or can be monitored and controlled, but even then insiders may still find it difficult to trust the outsiders completely. A consequence of this attitude is that trust beyond the in-group tends to develop slowly, if at all, and outsiders are generally treated with some suspicion.
Networking with your in-group
The in-group attitude is the basis of much business networking. We often seek to exploit our family and social networks for business gain because it is assumed that we are working among people who have a bias in favour of trusting us.
Sometimes an adviser will venture beyond their in-groups and seek to join a group that includes family businesses who are potential clients. For example, they become members of clubs or associations and attend events where they hope to gain acceptance by the “right” people, meaning members of a family business whose trust could lead to business opportunities.
This, however, does not always work as intended and the schmoozing fails because outside advisers who are seen as seeking to gain advantage by imitating the characteristics of the in-group are viewed by family members who are actual insiders as displaying the type of insincerity that is branded as untrustworthy.
Limitations of the in-group attitude
The potential limitations of an in-group attitude for a family business in choosing advisers is illustrated by the case of Neroli.
This manufacturer and distributor of leather goods was founded in Istanbul by Ishmael Karov in the late-1990s after he emigrated with his family from Bulgaria to Turkey. His wife joined him in the business, then he made his brothers partners in the firm and, as the business expanded, he involved more distant relatives (aunts, uncles, cousins and some close friends of the family) and people from the same immigrant community. It seems that the underlying assumption was that they could all be trusted.
But as the enterprise grew the selection bias in favour of the in-group resulted in the family business not having access to the skilled professionals it needed in accounting, marketing, and information technology. When this situation arises in families with an in-group attitude to trust it cannot, however, be assumed that they will abandon their natural biases and start hiring outsiders. Instead the family could be willing to trade off the value of potentially better advice against achieving the peace of mind that comes from the business being advised by insiders who can be trusted, implicitly.
This is an understandable compromise but one that should be made with a clear mind. If the family prefer advisers from their in-group who are less skilled than better qualified outsiders, they should not then complain if the advice they receive occasionally turns out to be less valuable than could have been obtained from an outsider.
The problems arising from the in-group attitude can be a lot worse, as shown by cases of affinity fraud where a fraudster deliberately preys upon a shared group identity. The largest example of this so far in U.S. history is BernieMadoff who defrauded billions of dollars from thousands of investors.
Madoff was chairman of Bernard L. Madoff Investment Securities LLC from 1960 until his arrest in December 2008. His brother Peter was the senior managing director and chief compliance officer. Peter's daughterwas the firm's attorney and rules and compliance officer and Bernie’s two sons were also employed in the family business.
Madoff’s in-group attitude to trust is evident in how he ran his business, but he also exploited his social connections to court investments from individuals and institutions among the Jewish community. Some of his clients seem to have relied on their shared background with Madoff to overcome any doubts they had about the barely believable financial returns that were promised. Investors it seems were persuaded that it was plausible that someone from the same community, or in-group, could be trusted to give them a great deal that would have sounded too good to be true had it been offered by an outsider without such ties.
Even the Madoff case, however, will not persuade business families with an in-group attitude that this is a risky way to conduct business with their advisers. Instead it illustrates how those with an in-group mind-set react to breaches of trust.
Violations by insiders, as in the case of Madoff, are likely to be punished severely by a breakdown of relationships and ultimately by expulsion from the group. This means that an insider becomes an outsider and the overall attitude to trust among the continuing insiders is reinforced.
If a family with an in-group attitude does engage an outsider as adviser and then they let them down in some way, the likely consequence is that this reminds the insiders that it is better not to trust outsiders in the first place.
“Optimists” is used here to describe people with a propensity to trust, those who believe that if they adopt a trusting attitude it will be reciprocated rather than abused. Optimists no doubt assess various shared characteristics when choosing advisers, but their judgement of people does not rely primarily on these traits.
As a result, optimists are generally quicker to form and maintain trusting relationships without being constrained by the sense of vulnerability that makes those with an in-group attitude take things more slowly whenever it is necessary to trust someone outside the group. Optimists, in other words, find it easier to work with strangers without the same level of checking or controls that would be needed to convince anyone with an in-group attitude that an outsider can be trusted.
A family with an optimist’s attitude will feel comfortable trusting an adviser without having to be part of the same group. If shared characteristics matter at all, they will in comes near the end of a list of other attributes that matter a lot more, like the competence of the adviser.
The intrinsic optimism in this attitude usually means that setbacks involving breach of trust by an adviser are absorbed without an enterprising family sacrificing the view that people are generally trustworthy and that this attitude is the right way to live and conduct the affairs of the family business.
Optimists would object to being described as being gullible and credulous, although they are likely to be criticised in these ways by those who feel more comfortable with an in-group attitude. Optimists would retort that the in-group are not immune from being cheated or defrauded by one of their own (Madoff again).
Optimists would argue that the in-group attitude is unduly restricting when it comes to doing business. They would probably feel that their attitude to trust is pragmatic in a rapidly changing world. As the family and their business expand and become more complex, there is not enough time always to build advisory relationships based on shared in-group characteristics.
Indeed, selecting advisers from the same in-group becomes challenging as future generations in a family business grow up and often grow apart to some extent. In international families it will be increasingly difficult to build a relationship based on an in-group attitude when there is little direct contact among some family members, let alone between them and their advisers.
How attitudes affect relationships
One attitude to trust is not better than the other, although in-group supporters and optimists are each likely to argue this point because they are prone to compare the advantages of their attitude with the disadvantages they perceive in the other. I would argue, however, that the distinction between the different attitudes to trust matters in practice.
For this purpose we need to assume for a moment that all other relevant variables in a family and adviser deciding to work together are equal, and we are only concerned with the possible effect of the respective attitudes to trust.
Families and advisers who lean strongly towards the optimist’s end of the spectrum will feel uncomfortable relying on shared in-group characteristics as a decisive factor in agreeing to work together because this feels to them like an irrational bias when making such an important decision. If it matters at all, the in-group identity comes near the end of a list of other attributes that matter a lot more, like experience, competence, price and so on.
Some families and advisers with this optimist’s attitude might go so far as to say they would prefer to have little in common with each other beyond whatever professional connection and relationship is needed to get the job done. They see merit in having a fixed boundary between their professional relationship and their personal lives. They might even not be too bothered about liking each other without this meaning that they cannot trust each other in the domain of the adviser’s services.
This might strike some as an arid and unattractive relationship but that does not diminish the point that this is a relationship based on an attitude to trust that rates elements like competence and attributes little value to inter-personal relationships.
Others, still with an optimistic bias in deciding who to trust, might be less explicit about having a boundary that separates the domains of business life and personal relationships. They would each acknowledge that it is helpful for the family and their adviser to have something in common, but they would still see social interaction outside of the professional relationship as an add-on and be vigilant in avoiding negative spill over from the personal domain into professional life.
Neither the family nor the adviser, for example, would expect preferential business terms from each other based on a personal connection, nor would any social obligations deter them from criticising each other for any failings. They would share a desire to ensure that the adviser’s independence is preserved by him or her not forming too close a relationship with any of the family that could be perceived as a bias by other relatives who then feel less willing to trust the adviser.
For example, if the adviser is a personal and trusted friend and confidant of the senior generation but is barely known to the successors, the next generation could view this close connection as unhealthy, perhaps bordering on a conflict of interest that impedes their willingness to trust the adviser. The next generation might feel wary about sharing too much with the adviser who has a particularly close relationship with their parents, especially when it is the parents who pay the advisers’ fees.
The above accounts of a trusted relationship between a family business and their adviser will trouble those who feel that the essence of a trusted adviser is one who has a special personal bond with the family. Advisers and families with an in-group attitude to trust will welcome the opportunity to spend time together in business and social domains because this overlap contributes to a cohesive and closer relationship. Advisers and families may be expected to attend each other’s family celebrations, like weddings, and the adviser might even be told that they are “almost one of the family.”
As already illustrated by Neroli, family businesses with an in-group attitude might find it more challenging to grow their business unless the talent they need can be sourced from the in-group. The trade-off is essentially do they keep to the in-group mentality and accept the chance of this acting as a brake on business performance and growth? Advisers and families in favour of sticking with the in-group attitude when such tough decisions arise might argue the following.
- They feel secure in trusting one of their own this provides peace of mind.
- This relationship generates desirable psychological returns. Family and advisers each feel confident that they can rely on the other and this encourages personal qualities like empathy, sympathy.
These are impressive gains for those with an in-group attitude but, of course, the optimists would claim that they can secure all these benefits doing trust their way and the only difference is that they are willing to trust outsiders who are rejected by those with an in-group mind-set. This simply goes to prove that both attitudes to trust can work, but knowing that there are different attitudes gives families and advisers an insight into how they can strategically mobilise trust in their relationship. Both optimists and in-group adherents will at least agree that there is a lot to be gained by injecting trust into their relationship, advantages that are beyond the reach of those that denigrate the notion that trust is an effective way to build business relationships.
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 This is based on Uslaner, Eric M. The Moral Foundations of Trust. New York: Cambridge UP, 2002.
 Karra, N., Tracey, P. and Phillips, N. (2006), Altruism and Agency in the Family Firm: Exploring the Role of Family, Kinship, and Ethnicity. Entrepreneurship Theory and Practice, 30: 861–877.