Trust and Legacy in Family Businesses
In episode 94 we explore the unique dynamics of family businesses with James Davis, a distinguished professor at the Huntsman School of Business at Utah State University. Jim explains the critical roles of trust and legacy in family enterprises and the differences between stewardship theory and agency theory. Stewardship theory suggests that leaders can be trusted to act in the best interests of the organization and its employees, while agency theory posits that leaders are self-interested and need to be controlled.
Jim discusses how these theories uniquely apply to family businesses, highlighting the challenges and opportunities in balancing tradition with the need for innovation and sustainability. He addresses the paradox of legacy; while it provides continuity and a strong cultural foundation, it can also become a source of strategic inertia, limiting entrepreneurial behavior. Jim emphasizes the importance of co-creating legacy, where each generation decides which values and traditions to retain and which to adapt. He also touches on the concept of social-emotional wealth (SEW), which leads family businesses to prioritize family benefits over purely financial returns.
The interview explores the psychological traits of good stewards, including needs for personal growth, achievement, affiliation, and self-actualization. Jim explains that businesses can cultivate stewardship by sharing responsibility and opportunities for growth rather than imposing control. He highlights the evolving landscape of business, where sustainability and multiple performance measures among stakeholders are becoming increasingly important. He calls for more research into the dynamics of trust, especially how to restore it once broken, and the distinction between low trust and distrust.
(The full interview is on this website, on Apple Podcasts, Spotify and all major podcast platforms, for the full transcript of the interview, see below).
About stewardship theory
(…) when we started stewardship theory, we started stewardship theory by going to boards of directors and saying, well, how do you control? Oh, and they’d say, no, we don’t have to control our CEO. In fact, our CEO is also chairman of the board. We have a good one who is out for our best interest, we trust him. And it is completely inconsistent with agency theory and the things that we were hearing that the boards very often have this trusted leader. And so examples might be Satya Nadella of Microsoft, who is not only the CEO, the chief executive officer, but is also chairman of the board. The board sees him as somebody that is a good steward who should be empowered rather than controlled. Tim Cook with Apple is another example, but there are examples where they can’t be trusted and they turn out to be bad stewards. In this trust book that I mentioned that is one of the most interesting things that I’ve often seen is when the second or third generation of the family business, that new leader comes in and they see it as a way to enrich themselves, and they’re there to basically harvest the family business to their own personal gain. And we see that quite often in the second and third generation family businesses
What is a good steward?
The defining characteristics, psychological characteristics of a good steward, is a good steward seeks opportunity for personal growth, not financial growth, but personal growth. Achievement, they have a need to achieve. They have a need for affiliation and association, and they have a need for self-actualization. They have a need to succeed and that’s part of their psychology. These come from working on behalf of the organization. They’re found in established theories of motivation from Hackman and Oldman and Mantz and Maslow and Alderfer, McClelland and McGregor. Manson’s theory of self-efficacy, self-determination, a feeling of purpose. It goes well beyond formal reward systems, that’s what drives and creates a good steward. When a business faces a crisis, you create stewards by sharing the responsibility of finding a solution, rather than taking that away from the person you share finding the solution so that they have the opportunity of achieving, of growing, of self actualizing. If you take that away from them, you come up with a solution and you control them to implement your solution, you create an agent, a self-serving agent. If you want a steward, you give them those opportunities for growth, affiliation, and self-actualization.