Family Office

Toxic Loyalty In Family Offices: Risks, Practical Solutions To Remain A Healthy, High-Performing Organization

Rich Wolkowitz August 21, 2023

Toxic Loyalty In Family Offices: Risks, Practical Solutions To Remain A Healthy, High-Performing Organization

If loyalty is what we all strive for, which has tremendous personal benefits and business attributes, is there ever such a thing as “too much loyalty”? The author of this article asks what happens if the answer is "yes" and how to manage this.

Loyalty is an important quality in families and the family offices they create, but it can turn “toxic” in particular situations. Rich Wolkowitz (more on the author below), founder of Xylogenesis Family Office Advisory, explains how to spot signs of trouble, what the challenges are, and how to ensure that family offices succeed in their mission. The editors are pleased to share these views; the usual disclaimers apply. Email tom.burroughes@wealthbriefing.com

Humans strive for many things in life, loyalty chief among them. It helps to create and reinforce trust, which is something that we all seek from others but often give sparingly. Loyalty is developed over time; it is special and rare.

When there is mutual or reciprocal loyalty it opens the way for acceptance, even love. This allows one to feel safe, secure, happy, and confident. Over time and through experience, repeated acts of loyalty create an almost impenetrable bond. 

From a professional or business perspective, we work diligently to create loyalty with our business partners, employees and colleagues, community of vendors, and in the marketplace of customers and analysts. This is the essence of branding and having a strong reputation. 

The business of loyalty
The greater the loyalty, generally, the deeper the bond and connectivity. Hence, the greater the chance for continuity, care, and concern in our dealings with and for each other (i.e., higher performance), and to achieve both endearing and enduring relationships which often lead to repeatable, scalable, and more businesses (i.e., higher revenues). Simply put, deep loyalty creates the opportunity for employees to work at a higher capacity and for consumers to purchase goods/services at a greater frequency, perhaps, even a higher price point. 

Entire industries have evolved to encourage loyalty through loyalty rewards programs and employee/customer incentive programs. Industry tools and benchmarks, such as Net Promoter Scoring, have been established to understand and measure one’s own comparative loyalty to others in the same or different industries to provide a competitive advantage.

Is there such a thing as “too much loyalty”
If loyalty is what we all strive for, which has tremendous personal benefits and business attributes, is there ever such a thing as “too much loyalty”?

There can be too much or extreme loyalty, leading to “toxic loyalty.” 

Family business or family enterprises are ripe for toxic loyalty. In founder led businesses, there is often the “cult” of the personality. In successive family generations, there is a deeply established and devoted culture. Outsiders or newcomers are often judged on “their fit” within that culture where conformity is prioritized, sometimes above everything else. Multi-generational family businesses/enterprises are often composed of multi-generational family employees, including non-family multi-generational employees, vendors, and customers. This serves to reinforce a self-contained, closed environment and to reinforce and drive loyalty to an extreme. 

Family offices, like family businesses, have an even greater potential for the pitfall of “toxic loyalty,” as their very essence is dynastic family and wealth legacy. This is often supported by another layer of insiders and a deep structure of multi-generational board members and trustees who know the family intimately and intensely. 

Intense life cycle events are not theoretical but actual and ever-present in a family office, by its very definition of supporting life-cycle business/wealth, personal, and philanthropic events and endeavors. These shared experiences create greater bonding and loyalty. 

Non-family employees of a family office can be so entrenched that the proverbial “jump in front of a bullet” for a family member is often offered and expected. This only serves to intensify an already intensely loyal environment. And this deep commitment can lead someone to look out for another’s interests, possibly even to the detriment of oneself.

Most businesses strive for the type of loyalty found in family offices, family businesses, and family enterprises. The rewards can be positive and create a dynamic culture that is rare among other forms of business organizations.

While there are tremendous positives for loyalty, as with any extreme, it can also create certain risks, particularly when loyalty becomes blind or uncritical.

Consequences of toxic loyalty 
Toxic loyalty in a family office is a situation where those in the system remain loyal despite negative behaviors or poor performance. This can be harmful because it may lead to:

1. Inefficiency: An incompetent family (or non-family) member might hold an important position because of their perceived loyalty, leading to operational inefficiencies and poor decision-making. 
2. Stifled innovation: A fear of challenging other family (or non-family) members can discourage new ideas and innovation, limiting the business’s growth potential.
3. Lack of growth and improvement: A system based on loyalty and not on merit may miss opportunities for organizational improvement, self-improvement, or an inability to acknowledge and address weaknesses.
4. Resentment: Family (or non-family) employees may feel undervalued or marginalized, leading to resentment and decreased morale due to an unhealthy culture.
5. Conflict avoidance: Problems within the business might be overlooked or ignored to avoid confronting family (or non-family) members, which can worsen things over time.
6. Lack of objectivity and diversity: Inability to discuss, disagree or challenge because it is considered disloyal or insubordinate, leading to “groupthink,” an organization of “yes” people, and less diversity of thought.
7. Family and financial strain: Poor business decisions driven by toxic loyalty can lead to financial losses and jeopardize the company’s sustainability and durable family (and organizational) harmony.
8. Lack of accountability: Family members may escape accountability for their actions, leading to an unhealthy work culture. High performing employees may exit the business, leaving less qualified employees who all think and act alike.
9. Succession challenges: Inadequate succession planning due to toxic loyalty can hinder the transition of leadership to the next generation, risking the future of the business because of burnout, stagnation, and a lack of work-life blend.
10. Decline in reputation: Continual poor performance due to loyalty-based decisions can damage the reputation of the business in the industry and lead to unethical conduct and behavior, perhaps even wrongdoing.

Toxic loyalty can erode the overall health and success of a family and their family office, making it crucial to prioritize competence, open communication, and merit-based decisions. 

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