Financial Daily from THE HINDU group of publications
Monday, Dec 15, 2003
Columns - American Periscope
Nepotism isn't good, is it?
Nepotism is usually most closely associated with family businesses and is considered an undesirable part of it. I wonder why? When a farmer asks his son to help with the ploughing, we would not be particularly concerned that it is going to affect the efficiency of the farm. Yet, when a business owner appoints his son as a manager, our sense of professionalism is offended and we decry the practice. Ownership of an enterprise confers rights as to its management and surely hiring and appointing people is one of those activities that comes with management. Moreover, if the owners are concerned with the success of their investment, they would be careful in hiring the right people.
A new book by Adam Bellow, In praise of nepotism tries to make the strong case in its favour. His argument rests on the fact that family-run businesses have built the US economy and, therefore, it cannot be a bad thing. He cites research to suggest that family-run businesses are 5-6 per cent more profitable and tend to be valued 10 per cent higher in the stock market than non-family businesses.
It appears that family businesses have come back into favour. In November, Business Week, the US business magazine, ran a major report on family business and argued that one-third of the major companies in the US have founding families involved in their management and these companies are also performing well. The magazine defines `family business' fairly loosely, to include ``those in which the founders or their families maintain a presence in senior management, on the board, or in senior management". Lest you jump to conclusions, the relationship to performance is only association and not causation. That is, the article does not show that these companies are doing well because they have representatives of founding families in their management, only that there is a strong correlation.
When we look around, we can see several enterprises which are, well owner run even today. This would include successful companies such as Dell Computers and Microsoft in the hi-tech world, but also include Motorola where the grandson of the founder was recently eased out by the board on grounds of poor performance.
Nepotism can run into problems when the person appointed does not have the inherent ability to perform. This not only results in bad decisions leading to inefficiency and financial loss, but can have other insidious effects. Others with their own selfish agendas, who see this individual as the power centre, would congregate around him hijacking the rational purpose of the organisation. We could call that the Sanjay Gandhi effect to remind us of how he ruled the roost at the time of his mother's rule. But another problem is that the efficient people lose morale, are discouraged by what happens, and exit.
Wise heads of family businesses have usually groomed the relative or heir by making them work in other enterprises to learn the ropes, and also asking other senior executives within the enterprise to mentor them. In such enterprises, although the position at the top may be reserved for the scion, it is not a discouragement for others who see plenty of opportunities and also see that whether you are a relative or not, the culture demands good performance and it is rewarded. Thus, it may not be nepotism that is the key issue but whether the founders have set up a valued tradition. Where there is a strong sense of stewardship, a feeling that this business is more than a piece of personal property; it is also an activity that was founded to meet some super ordinate goals such as doing good in the community, or serving a need.
Having the family name on the company name plate or on its products can create an indirect pressure to excel. Once a reputation for quality and excellence has been built, it becomes a tradition that would have to be maintained. Moving beyond family businesses, when professional managers indulge in nepotism, it can result in a lot of resentment since the individual, without ownership rights, may be seen as merely exploiting his position. However, we can see that some companies extend the idea of nepotism as an institutionalised human resource practice. Employees may be encouraged to recommend people they know, whether relatives or friends, when a position falls vacant. There is even a system of paying a referral fee when such introductions come to fruition. I used to work in a company where my boss, the head of the organisation, would ask me to recommend people I knew when important positions fell vacant.
This was a parallel effort that did not interfere with the Human Resource Department's efforts or procedures for recruitment. His rationale was simple: I know you, he would say, and can be sure you would only recommend someone who would be reliable. It was in one sense a simplistic form of a reference check, to be sure you got someone whose background you knew. But in a more sophisticated way, it worked to build loyalty within the organisation, where people came to work not just for the salary check but because they had networks within. That is probably the answer to the bad side of nepotism let us instead call it networking and make it sound more professional. Part of the exercise of building a career strategy is to get to know people and build relationships. If we turnaround and make use of the connections, then the person helping us cannot be accused of nepotism! In many societies where familial responsibilities are taken seriously, if a person did not use his position to secure benefits for his family, he would be scorned. Not just by his family but also his close friends who will wonder why he is abdicating his responsibilities. It would be interesting to examine if there was a word for nepotism in these cultures in their local languages and also whether the word has any negative connotations.
Finally, in case you wondered, Michael Eisner, the CEO of Walt Disney Co. did not make Roy Patrick a Director. Not that he thought there was anything wrong with that. He already had the Principal of the school his children went to as a director. Another director of the company was the President of the University to which his son went. It was just that Michael Eisner did not see eye to eye with many of Roy Disney's views. But whether Eisner should behave like he owned the company is not the subject of this column.
(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is email@example.com)
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