Four Ways Nepotism Can Hurt Your Family Business

Four Ways Nepotism Can Hurt Your Family Business

Few words in modern business culture carry as much stigma as that of “nepotism”. The word immediately harkens negative feelings of corruption, unfairness, and frustration from many who have experienced it in the workplace. There’s no question that the practice of advancing family members or close friends within an organization is something that can cause issues in today’s work culture, as Donald Trump’s White House can attest.

The term refers to the practice of early Catholic Bishops who would bequeath property and wealth to their “nephews” who were often their illegitimate children. So it’s little wonder the practice is commonly reviled today.

But what about instances of family owned businesses? Many owners dream of working closely with their children in the business and grooming them to take over when they step down. According to a 2006 study, approximately one-third of all American Fortune 500 firms are family owned, and these firms account for half of the U.S. GDP and 60% of total employment. That is a huge sector of the corporate world which wrestles with the question: where does one draw the line between promoting family succession and nepotism?

Making the Case For Nepotism

There are no laws which explicitly prevent nepotism however it is estimated that between 10% and 40% of U.S. companies have established anti-nepotism policies. And yet, there is a vocal minority who believe such policies are actually counter-productive, especially in the case of family-owned businesses.

One such example involves the Thomas Publishing Company where, as of 1998, there were seven 3rd and 4th generation employees working there. Third generation President, Tom Knudson, has gone on record encouraging nepotism among their independent sales contractors citing high performance, stability, and long-term commitment as the key reasons. Eric Trump had something similar to say in an interview with The Independent, claiming, “Is that nepotism? Absolutely. Is that also a beautiful thing? Absolutely. Family business is a beautiful thing.”

The Stronger Case Against Nepotism

For every voice which argues that nepotism can create stability and commitment in the upper levels of management, there are seemingly a hundred more that caution against the corrosive effects it can have on your organization. Here are four ways nepotism hurts your family business.

1. It’s a Morale Killer

One of the most important factors in any organization is its esprit de corps. It is one of those intangible that determine if someone will go that extra mile, stay late a few nights a week, work weekends to make sure their division meets that crucial deadline. And the fastest way to kill it is to create the impression that despite all their hard work and sacrifice, promotion within the company is based more on who you’re related to rather the merits of your work.

Once morale begins to drop, it’s not long before resentment and distrust starts to take root amongst the employees. It’s why nepotism has been called the workplace cancer. It can infect and destroy an organization in little time at all.

2. It Hurts The End Product

Of course, there can be bright and talented family members who get promoted in the organization. But often when a promotion is based on family connections rather than past performance, you run the risk of having less qualified people making key decisions in the organization. This can’t help but have a negative domino effect all the way down to the end product. Poor decisions regarding production, marketing, sales strategy can topple a business in the blink of an eye.

Look no further than the case of Adelphia Communications where in 2004, CEO John Rigas and his two sons were charged with a very public case of corporate fraud. Here is an example of how rampant nepotism led to the downfall of the entire organization.

3. It Invites Litigation from Within

Often when someone is unfairly passed over for a promotion due to nepotism, they accept that they can’t fight the power at the top and accept their fate begrudgingly. More and more however, people are filing lawsuits and pursuing other legal means to find some sense of justice they believe they are owed.

These lawsuits are not just sour grapes from disgruntled employees. When you consider the increased monetary value from salary, health benefits, and pension benefits that go with getting promoted to the middle and upper levels of management, it should come as no surprise people will go to the courts to seek compensation. It doesn’t matter that there is very little in state and federal regulation to protect them against nepotism. Many of the suits are filed under the premise of discrimination or the creation of a hostile work environment.

4. It Hurts Your Ability to Recruit and Retain Top Talent

Any business that wants to stay on top needs the best and brightest in their key executive positions. To attract the very best, your company needs to send the message that advancement is based on hard work and performance. Once you create the impression that family connections are the most important factor in career advancement, it becomes virtually impossible to recruit top talent to your firm. And those who are there will quickly start looking to get out where their performance will be rewarded.