In family businesses, nepotism or favoring family members in employment and decision-making can profoundly impact the family and the company. This article delves into its effects, highlighting 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 prioritizing meritocracy. Additionally, 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.

As a result, owners, who often juggle dual roles as both parents and leaders with a deep bond to their children, tend to see their offspring as natural successors and rightful heirs responsible for upholding the company's name, values, and traditions, regardless of their qualifications. Trust and familiarity additionally sway hiring decisions, with founders believing in their children's loyalty as a safeguard for the business.

This preference, often fueled by a desire to carry forward the family legacy, lends owners a sense of control and autonomy as they anticipate their children adhering to their directives, thereby preserving the founder's vision.

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 promoted to the position of Vice President (VP) in charge of purchasing by his founder/father. Shortly after assuming the role, he began closing significant deals that seemed to favor his friends and relatives from his spouse's side. There were also allegations of him receiving a share of certain transactions. This situation posed a dilemma for his older brother, who serves as the company's COO. They both sit as members of the company's Board with equal shares and the same voting rights. 

On top of that, the head of HR, a non-family executive, filed an incident report after she was berated and called names by the VP ("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 reach him when there are urgent issues that require 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 familial 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 blood relations. 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...

Are you eager to expand your knowledge, both in theory and application? Join me and other influential figures in the family business world, each with their own success stories, in the journey of harmonizing tradition and progress at our upcoming webinar on December 2, titled "The Family-First vs. Business-First Dilemma." Discover the key to striking the perfect balance that leads to success by aligning business and family values, ultimately creating a governance structure that benefits the entire family business.

With limited slots available, I strongly recommend securing your spot promptly by reaching out to Pat at We look forward to your participation in this enlightening discussion.