The ‘Achilles Heel’ of Family and Non-family Firms. Nepotism, Cronyism and Ideologism

By Rodrigo Basco, Ph.D.

Rodrigo1One of the main problems in a family firm is usually linked to human resources: attracting and retaining employees. Although family and non-family employees tend to be very committed to the fate of the company, it is difficult to escape from the vicious circle of relatives working there. As members of the family are part of the company, they would rarely be replaced.  They are likely to get the managerial positions, preventing -sometimes more competent- third parties from accessing the better positions in the organization and they tend to entrench the acquired knowledge and follow cultural traditions, making it difficult to make changes when the business requires them.

The family business is influenced by nepotism: the preference to employ family or friends regardless of merit for the position. What matters the most is loyalty. This is one of the Achilles heels of family firms: the best and most qualified do not access to positions of responsibility: family first and only then, the other faithful employees.

However, nepotism is not an exclusive practice of family firms; cronyism is also an Achilles heel in non-family firms. My experience shows that the dominant group in non-family firms favours certain employees who are friends or at least loyal to their superiors. It is funny to see how inept employees are appointed to positions of responsibility, projecting the image of the directors, as family successors do with their own family members (e.g. children imitating parents and extending their shadow).

Nepotism and cronyism are practices that can be found in public enterprises too, where ideologism is the key to encourage and promote employees. Sometimes that ideologism comes from the right, other times it comes from the left, other times it is simply family corruption. For example, in a country from Latin America, e.g. Argentina, over 50 percent of senators hire their relatives –a remarkable practice of family capitalism or Pujol case en Catalonia.

The practices of nepotism, cronyism and ideologism tend to be very effective for firms or organizations in the short term because they unite the group; there is a shared vision, clear game rules – though of dubious morality, solidarity and commitment. These features make up for the knowledge that is neglected by not promoting the most qualified people. But the positive effect only lasts for a limited period of time. These practices make the company, organization or public institution stagnant, and their knowledge, limited. Resources are locked-in. In the medium term, in this context, organizations will be less efficient, less innovative and will lose all its ability to be competitive.

Under the culture of nepotism, cronyism and/or ideologism, in the medium term, it is likely that there will be a revolt of elected troops. New leaders will choose their own relatives or friends to give a new but short boost to the organization. Vicious circle…

In the family business, the children want to take their parents’ place (ownership and management) to favour their immediate family, preventing the rest of the family from taking over the reins. In non-family businesses, people want to be the finger that chooses other friends and so they try to undermine the power of the management above them. At public institutions ideologism and family corruption survive until the next elections, and then the newly appointed elected officials may continue the same practices.

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