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Secrecy--A Family Business Vice?

Disclosure and transparency are not widely promoted by family businesses. Imagine more public sharing of information about family business revenues, profits, capital structure and the like. Many family firms believe that their privacy and secrecy are competitive advantages. Sometimes they are.

But there’s a significant trade-off. We feel that The Economist expressed the issue very well: “If long-term thinking can be a family strength, ...secrecy is its vice. Tight family control may not always be bad, but without transparency, how can anyone tell?” We find that more secretive family firms are often less efficient and less effective. Management performance improves with more trust and more sharing of information. Some European countries have seemingly found that more public disclosure by a private company appears to improve family company performance. It seems the risks of divulging strategic insights are far outweighed by increasing professionalization.

One 500-employee family business CEO – who shares a public-company-style annual report with employees, suppliers, and customers – said, “I think competitors are more distracted after reading our financial statements. They become even more focused on where we were last year than where we are headed! But more important, disclosure sharpens us, intensifies our competitiveness, makes us all feel part of a team, and builds confidence and trust in the organization. Besides, our suppliers and distributors say they appreciate it. They feel stronger about us. I believe them.”

There may be another benefit, too. Business owners who share more information with others also may be more likely to better develop family shareholders and next generation family members. Examining the actual effects of disclosure and transparency by family firms would be an interesting topic for research. We’d certainly appreciate any thoughts our readers might have on this subject.

 

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