Family Business or Nepotism?

On Behalf of | May 2, 2022 | Business Law

Many entrepreneurs dream of running a family business. They imagine working with people they know and trust, then handing the company down to their children when they retire.

It’s an attractive goal, and while keeping it in the family is certainly possible, nepotism can erode this vision and jeopardize a business in a few costly ways. Here are some pitfalls of which to be aware:

What is nepotism?

Nepotism involves showing favor to relatives in the work environment, regardless of merit. It can happen in a million different ways, but often includes:

  • Hiring or promoting family members over other more qualified candidates;
  • Deferring to relatives for important decisions, even when presented with more informed recommendations from others;
  • Giving family members unjustified bonuses; and
  • Failing to penalize or hold relatives accountable for misconduct or poor performance.

These acts cross the line between working with people you trust and letting personal relationships trump the best interests of a business.

What harm can nepotism do to a family business?

Employers who favor family members can create several obstacles for themselves.

As discussed in this article, nepotism can:

  • Weaken employee morale and reduce confidence in leadership;
  • Result in poor decisions that lessen the value of business products and services; and
  • Lead to inadequate structures for ensuring the capabilities of future successors.

These consequences can be disruptive and costly for the business both now and down the road.

Working with family without it being a liability

Working with family members can be a successful endeavor as long as owners set clear expectations and boundaries.

For instance, employers can prevent the fallout from nepotism by creating and enforcing strict policies regarding:

Employers may also have anti-nepotism policies in place. They could restrict family members from working for or too closely with the business, or having disproportionate control.

Having these protective measures in place can help family and work relationships co-exist, without compromising the business’s success.