Article originally posted in and nationally syndicated by the American City Business Journals on December 5, 2017.

The Oxford dictionary defines “nepotism” as “the practice among those with power or influence of favoring relatives or friends, especially by giving them jobs.”

At family companies, the owner often will bring a son or daughter into the firm as part of the natural transition process to the next generation of family leadership and ownership of the firm. Nepotism in this case is appropriate.

The advice I give to friends who run family businesses is to have their son or daughter work outside the family firm for a few years and develop a track record of success. This enables them to bring relevant skills and experience when they join the family firm and establishes credibility with other employees and customers. These are important factors in building their track record of success as well as their confidence.

Owners of family companies must remember it is difficult to fire family members if they don’t perform.

Sons or daughters at family firms may rotate through a number of positions to learn the business, applying what they learned at previous companies. Other employees understand and accept the family succession objective of the owner — the continuation of the family firm by the next generation.

At public and larger private companies, no such succession objective exists. The objective of these companies is to hire the very best people so the company can effectively compete with what are in many cases world-class competitors.

Nepotism at these public and private companies is problematic because it undermines morale and may inhibit the best from rising to the top. Nepotism at these companies could raise conflict-of-interest issues, have a toxic impact on the workforce, and ultimately affect the company’s performance.

Employees with high potential may leave the company or may never join because they feel that relatives of the boss may be treated preferentially. Other employees within the organization question whether they are on a level playing field with respect to performance standards, accountability, salary increases, promotions and plum assignments. They wonder if they will ever be part of the “inner circle.”

What about the situation where an individual is hired by a company in which a family member already is employed, or two individuals within the company marry? These situations are not uncommon. Companies have policies prohibiting a direct or indirect reporting relationship to avoid the issues described above. Both individuals must report up through separate chains of command.

The two patriarchs of each of the founding families of the private company at which I worked, PQ Corporation, made a strategic decision in the early 1970s to end the firm’s limited practice of nepotism. The company had employed members of both families for many years. A decision had to be made whether the company would continue to be an employment vehicle for a handful of family members or if the company would be used to drive shareholder value for the hundreds of family shareholders who were not employed by the company.

The patriarchs chose the latter — hire the best people and create wealth for the shareholders. They resigned from their positions of CEO and CFO and became chairman and vice chairman of the company. They hired outside professional managers to fill their former C-suite positions. Other family members left the firm.

Under outside professional leadership, the company embarked on a strategy to expand globally from a small commodity chemicals business in the United States, Canada and Mexico. By the time PQ was sold in 2005, an engineered glass materials business was acquired, performance materials and catalyst businesses were developed, and the company expanded its presence to 19 countries.

Shareholder value increased significantly. This would not have happened if nepotism remained in place and the best and brightest were not recruited to develop and execute the strategy needed to grow the company.

So, what can happen when nepotism is practiced where it is not appropriate? One only has to look at President Donald Trump hiring his daughter Ivanka Trump and son-in-law Jared Kushner for an example. Trump named them to senior White House posts involving implementation of policy — jobs for which neither is qualified because they have little to no experience in the world of politics or diplomacy. Their hiring is not part of a succession plan in a family business where such appointments wouldn’t be unusual or draw scrutiny.

In an April 5 Business Insider article headlined, “Here are all the duties Jared Kushner has in the Trump administration,” columnist Maxwell Tani outlined Kushner’s responsibilities: Middle East peace, government reform, opioid crisis management, criminal justice reform, and liaison to Mexico, China and the Muslim community.

This is a portfolio of responsibilities that would challenge the most seasoned and experienced leaders and career diplomats, let alone someone with little to no experience or credibility in these areas. The fact that Kushner did not reject the broad scope of these assignments indicates the degree of his inexperience.

Kushner has the title of senior White House advisor. By giving Kushner these operating responsibilities, Trump undermined those within the administration whose specific job it is to work in these areas, something effective leaders don’t do.

Ivanka Trump, meanwhile, was asked by President Trump to represent the United States at the G20 economic summit in Germany this past July and has been asked to represent the country in other venues, as well. She lacks credibility, but she does have the ear of her father, which is valued by the people she deals with. However, this access may not be in the best interests of the United States.

If you are a governmental leader, don’t hire relatives. If you are the controlling stockholder of a private company, you need to decide whether to use the firm as an employment vehicle for family members, or reject nepotism and use the firm as a vehicle for wealth creation for all stockholders by not hiring family members — but, rather, hiring the best people you can find.

Stan Silverman is founder and CEO of Silverman Leadership. He is a speaker, advisor and nationally syndicated writer on leadership, entrepreneurship and corporate governance. Silverman earned a Bachelor of Science degree in chemical engineering and an MBA degree from Drexel University. He is also an alumnus of the Advanced Management Program at the Harvard Business School. He can be reached at Stan@SilvermanLeadership.com.
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