Nepotism – Another Way to Lose Great Employees


Avoiding the Perception of Nepotism in Multigenerational Businesses

In a family-owned and family-operated business, it’s vital to guard against the negative perceptions of nepotism. When other workers don’t respect and value second- or third-generation employees, you’re quickly going to face a big retention problem.

After all, few things are more frustrating to tenured, hardworking employees than finding out their new manager is a twenty-six-year-old whose only qualification is his last name.

With that in mind, here are some common pitfalls of multigenerational companies and how to avoid them and their negative business consequences.

Handing Off Responsibilities Too Early Breeds Discontent

A company’s founder often inadvertently causes suspicions of nepotism by inserting a family member into an important business role too early. This can have terrible financial ramifications.

This is because the decision impacts…

  • Other employees’ satisfaction, productivity, and motivation.
  • Customers’ overall experience with the business.
  • Team morale and cohesion.

Why Founders Relinquish the Reins Too Early

Based on my experience and observations, there are three main reasons a founder gives his or her children managerial or leadership positions before they are ready.

Handing Off Responsibilities
  1. The founder is anxious to detail a succession and retirement plan.
  2. The thinking here is not necessarily flawed. The founder wants the hand-off to occur with strategy and forethought. The problem comes when the founder’s readiness to retire does not align with the child’s readiness to take over.
  3. There is an idea that the sooner the child learns the business, the sooner the current owner can step back. Timing, however, is essential here. The successor must be ready, or the transition will cause more contention and disruption than good.
  1. The founder overestimates the child’s skill, work ethic, or value system.
  2. As parents, it’s extremely difficult to be objective about our children. This becomes especially problematic if that child is taking over the business.
  3. It can help to get third-party opinions here, especially from trusted advisors or confidants outside the family. This can bring more objectivity to a child’s ability to navigate the business, know the industry, and lead with the kind of values the company wants moving forward.
  1. The founder wants to keep the money in the family through higher-paying positions.
  2. Founders should be careful of this mindset. It often leads to placing successors into high-level, high-earning roles, even if they aren’t ready. It’s far better to let a successor work his or her way up and earn respect in the process than to simply ensure the windfall of the company stays in the family.
  3. If the calls of nepotism are pervasive enough, the company can start losing other talent, and it can quickly become a bigger financial negative in the long run.

How to Transition to the Second Generation Successfully

There a four practical, easy ways to avoid bringing in the second generation before they are ready.

If I could go back in time, I would follow this advice. The reason I felt compelled to write this blog in the first place was because I didn’t, and I wish I had. Hopefully someone out there can learn from my mistakes.

Here is what I would recommend to the current ownership or founders:

Second Generation
  1. Your children must work for other organizations before entering the family business.
  2. At a minimum, ensure the successor works at least five years outside the family business. This gives them real-world experience, and any success they have in that arena can be viewed objectively by the company’s other employees.
  3. “It’s always good for the kids to work in the business or the industry before they take over the family business,” said New Jersey CPA Mike Castle. “It’s not a bad thing for the kids to get experience at different companies as well before going back to the family business.”
  1. Your children must be proficient within the industry.
  2. The grooming process once inside the business takes one to three years. Mastery typically takes a decade, and it requires passion and dedication.
  3. The successor must also have a natural aptitude, talent, and interest in the specific industry
  1. Your children must develop critical business skills.
  2. The most essential skills include the following:
    • Leadership
    • Management
    • Communication
    • Sales
    • Financial acumen
    • Operational systems
  3. Learning on the job is slow, difficult, and quite costly. Every long-term employee is an investment, and second- or third-generator successors are no exception.
  1. If there are multiple children, it’s plausible that one or two should not enter the business.
  2. This one is hard and quite specific to the business, people involved, and situation. It requires impressive parenting and the ability to anticipate.

In the End, It All Comes Back to Hard Work

When it comes to the way workers view ownership, it’s simple.

If employees see the second generation working their tails off, managing fairly and effectively, and leading from the front, respect can be earned.

The problem with nepotism is that existing workers feel they are unrightly skipped over for promotions, influence, and financial compensation by people who are less deserving.

Prove you’ll put in the work, be open to learning, and lead with everyone’s best interest, and any hard feelings shouldn’t be sustained.

Any questions? Don’t hesitate to reach out. I’m always happy to share my story or any insight I’ve gained along the way!