Risk of Nepotism?

Published: Feb 22, 2022

I just watched the show Succession. Episode 2 is a lot of fun to watch. The 80 year old billionaire media patriarch has a brain seizure, becomes unconscious and is hospitalized in the ICU.  Almost immediately, right in the hospital, every one of his shallow and inept sons lobby themselves to take over as the new CEO. To get board approval, two of the sons team up as CEO and COO. But that does not inspire any shareholder confidence, and the share price plummets, causing a breach of loan covenants.    

Fiction is pretty close to fact in this instance. In the absence of a well thought out succession plan, where a deserving successor has been selected and groomed to take over as the future leader, there can be a huge gap created when an incumbent leader has a sudden and material health catastrophe or, worse, passes away suddenly.

In the absence of a succession plan, nepotism takes over. Those with the loudest voice, or most egotistic or aggressive personalities, can force their way into the executive suite. This can lead to catastrophic results where non-family and family staff leave, customers and suppliers start to question the future of their relationships, and bankers and investors start to worry about the safety of their capital.

Often, families place family members in senior management roles simply because they feel they have a right, notwithstanding a lack of merit or needed skillset.   Merit includes training and education, work experience and ethic, vision, and strong collegiate leadership skills. 

A family enterprise continuity plan requires the right person in the right job.  And it requires timely and effective performance appraisals to provide constructive feedback, and compensation based on goal attainment.  It should not reward mediocrity, or permit substandard performance to carry on without remediation or a change of staff member. 

Nepotism can seriously challenge the continuity of a healthy family enterprise, and alienate all of the parties with an interest in the best outcome.

A family enterprise needs a leader with the skills training, and leadership qualities to not only motivate the staff, but also bring the necessary vision, values, and strategy for leading the way forward.  And part of the job description of any current leader should include the development of a continuity plan for the replacement of the most senior members of the management team, as this can take a lot of time and advance thought.

Nepotism can kill a family enterprise, or at the very least set it back in the eyes of its most interested parties, including family members, management, suppliers, bankers, and other shareholders. Of late, we have seen a number of board battles caused by nepotism at the expense of independent board decision making.  In the absence of good governance, there are no checks and balances to assure the best decisions.   Sometimes families resort to the courts to force a change when mired in nepotism. Invariably it reflects poorly on the family, and incurs a lot of legal fees and negative publicity.

Of course, in practice, too few families use professional management or objective appraisal techniques to ensure good performance over right and privilege.  But the most successful family enterprises in existence over the generations realize that the human resource skills population available from non-family outsiders is far greater than within the family, and can heighten the likelihood of the achievement of long term success and continuity when working with family members.

So the question each family enterprise must ask at some point is, do we really have the best talent to succeed.  And if not, are we willing to hire, reward and retain the best people?

Decision Tree Question: Are You Ready to Hire, Reward and Retain the Best People?

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