Dr Chengwei Liu is an Associate Professor of Strategy and Behavioural Science at England’s Warwick Business School. An expert in executive decision-making, Dr Liu’s papers are featured in leading academic journals around the world. 

His work on nepotism explores the complexity of its expression in practical situations. The behaviour is difficult to define outside of the classroom and is neither categorically harmful or beneficial. That said, however, Dr Liu asserts that nepotistic practices, rooted in the tribal protectionist societal structures of our ancestors, are becoming less relevant in modern business settings.

Recently, Tharawat Magazine sat down with Dr Liu to discuss the symptoms of nepotism in family business, how size plays a role in determining whether the behaviour is a detriment or an advantage and why family business leaders should embrace plurality.

Embracing Plurality to Avoid the Harmful Effects of Nepotism
Dr Chengwei Liu.

How do you define nepotism?

Nepotism isn’t binary. Rather, it’s a continuum, and in the case of employment, it revolves around relationships – family members, friends and relatives. Hiring individuals because of those connections without consideration of merit or qualification is clearly nepotistic. In practice, however, what happens often falls somewhere in-between. Sometimes, candidates are equally qualified, but when personal or family connections are also considered, one has an advantage. This is where the lines blur.

Studies suggest this practice only intensifies once it’s taken root. Generally, insular family businesses only become more insular over time. Furthermore, there is a correlation between this type of hiring and a decline in performance in the long run.

“Retention can be hugely problematic in family businesses; often, they can’t keep the best people. They can hire them, train them and give them experience, but eventually, they choose to leave because they know family members take precedence.”

Are family businesses, by definition, inherently nepotistic? 

In some ways, yes. That’s another challenge when we attempt to define nepotism and measure its degree in practice. Many family businesses were founded with the intent to create employment for family members. If we use a literal definition of nepotism, at least 80 per cent of family businesses are nepotistic; however, the spectrum is broad, and specific situations are often incomparable. If the successor of an executive is hired from within the family because the family felt they were the best candidate based on merit, it’s difficult to label it nepotism based on the subjective nature of merit.

That said, family businesses can avoid potentially damaging situations with in-built mechanisms that encourage objectivity. For example, the second-largest business in the world, the Swiss company Roche, has a rule: family members cannot hold executive positions. The company’s management and ownership are kept entirely separate. A family member can work in the firm at a sub-managerial level to gain experience, but ultimately, they are only allowed to serve as a board member. The ownership team gives direction and ensures executives follow the family’s vision, but they try not to intervene in the operational side.

This approach helps keep talent in the company. Quality executives see that upward mobility exists in management, and operational methods are not dictated by family.

Retention can be hugely problematic in family businesses; often, they can’t keep the best people. They can hire them, train them and give them experience, but eventually, they choose to leave because they know family members take precedence.

Despite nepotism’s negative implications, family businesses thrive around the world. Is nepotism beneficial in certain situations?

Examples where nepotism is a sum detriment apply more to a larger family business where size and scope significantly magnify shortcomings in leadership structure. However, small and mid-size family companies where sustainability is less certain benefit hugely from hiring within the family. Evidence suggests that smaller family businesses are less likely to react to short-term incentives such as the stock market. Family members in management roles often think long-term and don’t fall to the myopic pressures that drive many non-family-run companies. Thus, if family businesses can adhere to well-thought-out corporate governance mechanisms, they can overcome many of the challenges that stymy public firms.