Trust plays an important role in the governance of most organizations. For the family firm, trust represents a particularly important source of strategic advantage. For example, in the early stages of firm development, the trust indigenous in most family relationships allows firms to reduce transaction costs substantially. As family firms evolve, so does the optimal role of trust as a governance mechanism. Ironically, in some cases, what was once a very resilient trust is replaced by an atmosphere of fragile trust or even distrust and an important source of strategic advantage is lost. As family firms naturally evolve, a major transitional task for them is optimizing the changing role of trust in firm governance. Using research-based case examples, this paper seeks to further the understanding of the dynamics of trust as a governance mechanism and source of competitive advantage within family firms.
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