Family Over Meritocracy or Meriticarcy Over Family?

By Prof. Enrique Soriano

Family businesses are the backbone of many economies, known for their strong bonds and shared values. However, nepotism, the practice of favoring family members in employment and decision-making, can have profound impacts on these enterprises. In this article, we delve into the effects of nepotism in family businesses, highlighting both the challenges and consequences and why meritocracy must be institutionalized for the greater good.

Emotional attachment unquestionably plays a pivotal role in the inclination to hire family members without giving priority to meritocracy. Owners, often serving dual roles as parents, share an intrinsic bond with their children, viewing them as the natural successors, irrespective of their qualifications. This connection is further amplified by a desire to perpetuate the family legacy, seeing their offspring as the rightful heirs entrusted with carrying forward the business’s name and values. Trust and familiarity additionally sway hiring decisions, with founders believing in their children’s loyalty as a safeguard for the business.

This preference also lends a sense of control and autonomy to owners, as they anticipate their children adhering to their directives, thereby preserving the founder’s vision. A long-term perspective often supersedes short-term business performance, with many business leaders viewing the inclusion of their children as a cornerstone of succession planning. In numerous family businesses across Asia, particularly those with Chinese heritage, cultural and societal norms exert significant influence. Many founders sense a compelling pressure to conform to traditional expectations, further reinforcing the bias toward hiring family members.

Case: A 40 year old sibling was recently promoted by his founder/father as VP in charge of purchasing. Barely a few months in his position, he started closing major deals that favored his friends and relatives from his spouse’s side. It was also alleged that he was receiving a cut on some of the transactions. His older brother, the COO, was in a dilemma. They both sit in the Board with equal shares and the same voting rights. The head of HR, a non-family executive, also filed an incident report after she was berated and called names by the VP son (“Who do you think you are? I am an owner, a member of the Board! I am not covered by any B***S*** HR policies!”) for reporting his regular absences. He only goes to the office three days a week making it difficult for his subordinates to locate him when there are urgent issues that need his attention.

The Impact of Nepotism and its Dire Consequences

Erosion of Meritocracy: As illustrated in the case, nepotism frequently results in the erosion of meritocracy. This occurs when individuals are appointed to roles primarily based on family ties rather than their qualifications or competence. In the mentioned case, a founder’s child with limited experience was placed in a critical leadership position due to familial ties. The outcome ended unethically (conflict of interest) and hindered the overall performance of the business, as it failed to optimally harness the talent within the organization. Competent non-family employees were overlooked, and the business missed out on valuable expertise that could have propelled it forward.

Lower Employee Morale: Nepotism can instigate discontent and significantly lower morale, particularly among non-family employees who may possess superior qualifications. When these employees perceive that family members receive preferential treatment, it can lead to feelings of frustration, reduced job satisfaction, and ultimately, diminished productivity. In the case mentioned, non-family employees were being bullied and many expressed growing dissatisfaction with the preferential treatment afforded to the founder’s child. This discontentment not only lowered morale but also led to decreased collaboration and teamwork within the organization, hampering its overall performance.

To be continued…

Uncover the secrets of balancing tradition and progress in the December 2 webinar entitled, “The Family-First vs. Business-First Dilemma.” This aims to help family business owners find the right balance to achieve success by aligning business and family values to create a governance structure that benefits the entire family business. Limited seats available—reserve yours now c/o Pat at rplatorre@wbadvisoryasia.com