Nepotism In The Family Firm: Problem Or Solution?

Nepotism In The Family Firm:
Problem Or Solution?

One of the positive factors in family held or managed firms, is the succession from one generation to the next when son/daughter “takes over” from dad and the business continues to thrive and grow.

The successful “passing-of-the-torch,” so to speak, leads to stability, longevity, and successful growth. This is a positive factor not only for the family business, but also for the community at large as well. Nepotism (favoritism shown to family members) in family firms is a normal occurrence–otherwise we wouldn’t have a family firm. However, in some instances, nepotism can lead to difficulties not found in non-family firms.

In many family firms, only family members are allowed into top management positions. This can leave several negative results:

  • It limits drastically the available pool of potential leaders to draw from.  
  • Non-family members who are highly motivated by position and rank will be dissatisfied to work in family firms for very long–as they perceive their chances of “moving up” in the family firm as limited at best.  
  • It has significant impact upon the recruitment, training, reward system, and career development programs for non-family members of the family firm.

Combining all of the above, the problem reaches a critical stop when the key employees who are non-family members become disenchanted and disappointed when non-qualified, inexperienced family members are “promoted” to key positions within the company. At this point, many years of experience and service are lost, as the non-family member seeks employment elsewhere.

There are several positive steps the family firm can take to alleviate these problems. Probably one of the most common solutions is to have the”omitted one for future CEO status,” go out andprove him/herself with other similar companies. Iknow one family who has a four-year “cross-training program,” with his friend (also a family firm CEO) in another state.

Whenever the son/daughter of one of the family firms get to the position where they feel they want to continue in the business, the CEO sends them to the other family firm–where they are hired just like everyone else, and are given the opportunity to “work their way up” in the firm (or fail, as sometimes happens). After approximately three or four years, if the sibling has been successful, they are brought back to the “home” family firm and given an opportunity to continue their careers–hopefully leading to “taking over” the business as dad retires.

This method doesn’t always guarantee success. However it does provide a way for sons/daughters to get the necessary training and experience they need in a non-pressure atmosphere and it forces them to compete on an equal footing with non-family members during their training and development period.

Another solution to the succession problem, is for the present CEO of the family firm to form a “mentors committee or team” for the son/daughter who is to take over the family firm. (This assures the successor has been working their way up in the firm–maybe they are now an account or department executive). However, for the son/daughter to go from mid-level management to being company president is a large step–there needs to be some smaller steps along the way. Such things as how to manage people, how to separate people who have agendas that are not his and a myriad of other things a company president must know, must be learned before taking over as president or CEO.

The mentors team is normally headed by the CEO of a similar company, is usually a friend orbusiness associate of the father and is from outside the family firm. Other members of the mentors team are senior executives of the family firm itself. In one extremely successful case where the mentors team approach was used, the top senior executives were offered equity in the company. 38% of the company’s equity was offered to the top five non-family executives–including the two on the mentors team for the CEO’s son. This not only provided additional incentives to the top executives to stay on, it also gave them added motivation to help the mentors team succeed in it’s training and development of the CEO’s son.

Some large corporations, (Firestone, John Deere, General Motors) have executive training programs for younger family members who desire to take over the business when dad retires. These programs are normally from six months to two years in length and provide essential training and development for the successor in the family owned business. These are classified as “Executive Training,” “Management Development Training,” and “Training and Development Programs” for new executives by some major corporations. However, all have the same objective–assist in the training and development of the younger generation. Running the business so that they may at some future time be able to take over from the older generation.

Not all family firms have the option of sending their sons/daughters to other corporations training programs–nor would they want to. But, it is an option to those families who have family business franchises in one of the large corporations.

These are some of the methods that can help the secession process. There are others, but these mentioned have been used quite successfully by different family firms in the past.

Statistically, only 30% of all family firms in the U.S. survive to the third generation. Succession from father to son/daughter is one of the minor problems facing the family businesses when dad decides “It’s time to retire.” Young son/daughter can’t just “take over” and be successful without prior planning, training and development and experience. It is hoped that these methods of giving that training and development and experience will assist families of the Big Country. As stated before, nepotism is a “noun” in the family firm–but it can be a solution instead of a problem, if handled with care and prior planning.