The Hidden Risk in Family Enterprises: When Trust Undermines Competence
In the world of profit-driven organizations, trust is undeniably important, but it has never been the sole factor for scaling a business. Trust alone does not constitute a talent strategy; competence does. This distinction becomes critically evident in family enterprises, where governance risks often lurk beneath the surface.
The Real Strain Lies Below the CEO
Following discussions on next-generation CEO failures, many C-suite executives have privately highlighted a recurring issue. The real strain in family businesses frequently resides not at the CEO level, but one tier below. Across multigenerational companies, a quiet but pervasive risk emerges: unqualified family members occupying sensitive executive roles due to trust rather than capability.
Founders, guided by parental confidence, often appoint siblings to senior management positions. On paper, this structure seems harmonious, but in practice, standards begin to diverge. Some family executives shoulder the burden of performance, while others merely carry the title. Entitlement at this level manifests subtly yet corrosively—through optional KPIs, casual strategic reviews, and normalized absences during critical periods.
A Case Study in Governance Fragility
Consider a family enterprise where the eldest sibling, after his father's passing, assumed the CEO role with strong qualifications: external operating experience, banking industry background, lender credibility, and respect from professional managers. His individual capability was never in doubt.
However, the environment surrounding him proved challenging. Four siblings held vice-presidential roles, appointed primarily based on trust. Over time, their performance discipline diverged from business demands, slowing strategic initiatives and making accountability conversations delicate. Professional executives quietly compensated for these gaps.
The inflection point arrived during market pressure and capital strain. While management worked to stabilize operations, the least engaged family executives suggested selling—not from strategic timing, but from discomfort with operational intensity. This scenario underscores an uncomfortable truth: the issue is rarely the capable CEO, but the uneven application of standards within the family's executive bench.
The Founder's Unintended Legacy
Founders often, unintentionally, set this dynamic in motion. Out of loyalty and affection, trust becomes the primary qualification for sensitive roles. Yet, organizations run on competence, discipline, and consequence—not trust alone. After the founder's passing, the situation grows more fragile. In the case above, equal ownership among siblings appeared fair but proved destabilizing. The CEO bore a disproportionate operational burden with only equal economic authority, making policy enforcement politically complex and performance management emotionally charged.
Over time, fatigue replaced resolve. The CEO reflected privately that while confident in the business model, he was less so in the governance environment needed to sustain it. Exit, once unthinkable, entered his consideration. Family enterprises rarely decline due to a single incapable leader; they erode when performance standards become negotiable for those closest to power.
Building Capability Over Trust
Founders must ask a critical question: Are you building trust, or are you building capability? They are not synonymous. Bloodline may justify ownership, but it must never excuse underperformance. To address this, Prof. Enrique M. Soriano will explore board-level accountability and governance standards in his upcoming webinar, "Director Duties: What It Means in Practice in Family Enterprises," on March 4 at 10 a.m. He will also continue examining next-generation leadership and governance themes in his Governance Masterclass at Vivere Hotel, Alabang, on March 28, 2026. For reservations, contact Christine at +63 917 324 7216.
