ISSUE 8 APRIL 2009

Nepotism, it is claimed, can destroy the motivation of non-family managers and lead to dreadful underperformance. How do family businesses defend themselves against claims that they are made weaker by nepotism?

Here is a five-step argument that defends family businesses against such claims:

1. We recognize and agree that 'bad nepotism' can harm the business.
2. That's why strong family businesses have structures to avoid bad nepotism.
3. In some situations there may be a case for 'intelligent nepotism'.
4. 'Intelligent nepotism' works better in some sectors than others.
5. Always looks at the particular situation before rushing to a judgement

Let's look at each step of the argument in more detail:

There is no question that bad nepotism can be very harmful. As a case study, the Borgia family from Italy became notorious for using their power to put relatives in undeserved positions of influence. When Alfonso Borgia became head of the Catholic Church (pope) in 1455 he made two of his nephews into senior leaders (cardinals). This scandal became known as 'nepotism' from the Latin word for nephew ('nepos'). The practice spread and another pope, Rodrigo Borgia, had ten cardinal-nephews while a later pope had cardinal-nephews aged as young 14 and 16. This all caused many ordinary people to hate nepotism.

Some business families have followed the example of the Borgias, with short-term gain in terms of family satisfaction but long-term loss in terms of business performance and credibility. But by no means all business families are affected and members of the Family Business Network have repeatedly shown different and better approaches.

At Family Business Network conferences our members have presented the following approaches:

Written hiring policies for family members - most family businesses will only allow family members to join if they have all the educational requirements that would also be expected from non-family members. Many other family businesses require family members to at least match the suitability of any other candidate before they are hired or promoted.

Excluding family members from certain jobs - a leading Indian family business told our latest Global Summit that family members were allowed to gain experience of working in the business but were not allowed to spend long periods as a Chief Executive Officer of any part of it. Family members could aspire to membership of the Group Board, if they proved themselves, but not to permanent positions at the highest levels of day-to-day management. This ensured that non-family members felt they had the opportunity to rise to the top of the company with no fear of being stopped by a family-only 'glass ceiling'.

Excluding family members from any jobs in the family business - a leading German family business is among those that refuse to allow any family member to work for any of their companies. Family members may apply to join a Board but otherwise they have to find a job away from the family business. This certainly guarantees no nepotism among the executives (though it also cuts off any access to family members who might make talented managers).

Once a banker was asked how his (non-family) bank recruited its next generation of senior leaders. He said, 'We know the type of people that we are looking for and they are often found among the relatives and in-laws of our group of Managing Directors. There is of course no question of choosing someone simply because of who they were. But it happens that there are usually a few nephews or other relatives who are very suitable by reason of their upbringing, education and connections. We simply choose between them to find the very best people to lead the bank forward; it's what we call intelligent nepotism.'

The benefits of intelligent nepotism can include the following:

Taking advantage of unique experience and connections - in some niche family businesses, family members really do have great advantages. If a young person has spent vacations working for a particular business, and has already caught a deep understanding of the purpose, values and principles of the business, then they are much further along the road than another candidate fresh from college who has no experience or feel for the business.

Benefiting from the extra passion that comes from emotional ownership - relatives may have an even greater commitment to the business because they grew up with it and passionately want it to succeed.

Relatives
could only take up high positions
'if otherwise suitable'.

Reducing risk - with intelligent nepotism you have a good chance of fully knowing about a person's background. Some may say that a good vetting process will provide equal knowledge but this is not always the case - as new US presidents have discovered when some of their nominated (and vetted) candidates turned out to have hidden flaws that prevented their confirmation. There could be less risk in selecting a 'known' relative than an 'unknown' non-family candidate.

The leader of a UK family business is not alone when she says, 'If there were two equally qualified candidates for a position, and one was a family member and the other was not, we believe it's better to choose the relative.' Of course she does not speak for all family businesses - like the German business that would still never hire a family member for an executive role even if they were the best qualified person in the whole world.

In general, there is more value in intelligent nepotism in business sectors where social networks are important. For example, in the large-scale construction sector there are a relatively small number of clients and it's a benefit to have a family name that has some credibility and a track record. Also, there may be large numbers of employees on particular projects and they may be more motivated by working for a known family rather than a faceless corporation. So it may well make good sense to choose a relative - as long as they have the relevant qualifications, experience and ability - than a complete outsider who has equal but not better qualifications.

In contrast, in a fast emerging sector like mobile telecommunications there is probably less advantage in having a known name. There are millions/billions of potential customers who will make their decisions on factors such as coverage, price and reliability. Most customers probably won't ever meet anyone from the provider so from their perspective there is no additional benefit in having family continuity at the top of the company.

Let's return to the Catholic Church where the Borgias had made such a scandal with their nepotism. In 1692 a new pope (who was not a Borgia family member) moved to stop the scandal by banning all future popes from giving jobs or positions to any relative. He set himself against the example of the Borgia popes by declaring that 'the poor were his nephews'.

There was one exception, however. One relative (just one) was allowed to become a cardinal 'if otherwise suitable'. This recognized that some talent might be available within a family and it would be unwise to cut off this source of talent completely.

Over 300 years on, many family businesses have also put in place formal arrangements like 'no automatic jobs for family members'. This recognizes that bad nepotism should be avoided...'85but at the same time it may make sense to offer a route for talented family members to use their potential within the family business 'if otherwise suitable'.

So are family businesses undermined by nepotism? Some may be but that's not the universal experience, especially among members of the Family Business Network. Many family businesses have good structures to avoid bad nepotism while leaving themselves open to intelligent nepotism, if it works in particular situations with particular people.

In this issue

The benefit of 'patient capital'
'In the good times it was easy to say that our priority was to build a long-term profitable business,'

Next Generation money training
Parents find it easier to
train their children in
money management if
they understand their
children's natural 'money
styles'.

A lesson from past economic crises
What values and approaches have helped long-lasting family businesses to survive through past booms and busts?

Case study on using bonuses to motivate employees
Today's banking crisis has caused the media to ask questions about the wisdom of some types of bonus systems.

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