Monday Mornings with Madison

Nepotism, Part 1

Human Resources Affliction or Invaluable Talent Pipeline?

It was recently announced that 84-year-old media mogul Rupert Murdoch will be handing the leadership reigns of the 21st Century Fox / News Corp. media conglomerate to his son, James Murdoch.  As part of the reorganization, Fox COO Chase Carey will step down from his role.  James Murdoch got the appointment despite the 2011 revelation that News Corp’s News of the World reporters were hacking phones to get the scoop on stories.  At that time, News of the World, a U.K.-based newspaper, was managed by James Murdoch, who was called before British Parliament to answer questions about the matter.  News of the World closed shortly after the scandal.  The debacle did not affect James Murdoch’s selection to take over leadership of the media conglomerate from his father.

For as long as businesses have existed, so has nepotism.  Nepotism is the practice among those with power or influence to favor relatives or friends, especially by giving them jobs.  It stems from the Latin word for nephew, which kind of goes to the heart of the practice.  The most familiar forms of nepotism have been passing down the leadership of a family business from father to son and giving key positions in a family business to children, grandchildren, nieces, and of course, nephews.  It’s a practice that has been around — and accepted — since ancient times.  With small family businesses in olden times, it was only natural that a son apprenticed with his father, learned the family business, and eventually took over when the father passed or was too old to work.  Back before there were colleges, technical programs and other paths to learn a trade, an apprenticeship in the family-business was the primary way to pass skills from generation to generation.  It was not only a good thing, but also a necessary one.  It was also natural for a parent to want his family to continue to benefit from a business he built from scratch.  But nepotism hasn’t been restricted to just mom-n-pop shops.  Like Century 21 Fox / News Corp., conglomerates have been handed down from parent to child.  Indeed, sons have even inherited kingdoms from their fathers since time immemorial.

The world has changed a lot since ancient times.  Almost everything about how businesses operate has changed, evolving to accommodate new technology, systems for teaching trades and occupations, and methods for recruiting and managing staff.  There is no longer a need for nepotism.  Yet, nepotism still exists; alive and well in the 21st century in organizations large and small.  What has changed is how nepotism is viewed by many.  Not only do some complain about the unfairness of nepotism, but business pundits question if nepotism is bad for business.  That begs the question:  is nepotism a good thing or a bad thing?  Is it an invaluable pipeline of highly-qualified talent that business owners and leaders can tap inexpensively to fill key vacancies?  Or is it a human resources scourge that, when allowed to spread unchecked, contaminates and kills businesses?

Nepotism Success Stories

In the public sector – such as government organizations and education systems – nepotism is usually frowned-upon.  When elected officials, chancellors, superintendants and university presidents fill top positions with family members and close friends, it is generally viewed as unfair and unethical.  Sometimes it is even expressly forbidden.  It exists nonetheless.

In privately-owned companies that are free to make up their own rules of conduct, however, it is not at all uncommon for organizations to not only allow nepotism, but embrace it.  More than a few American companies that have stood the test of time are family-owned and managed.  In fact, around a third of all companies in the Standard & Poors 500 index are family-owned and controlled.  At the top of the heap, with 2.1 million employees globally, is retail behemoth Wal-Mart.  Wal-Mart is owned (50% of the stock) by family of the founders, the Waltons.  Sam Walton’s son, Rob Walton, is the current Chairman of the Board of Wal-Mart.  Rob Walton’s son-in-law, Greg Penner, was formerly Wal-Mart’s Senior Vice President and CFO in Japan.  Given the Walton family’s current combined net worth is estimated to be about $174 Billion – due almost entirely to Wal-Mart’s success — there is strong motivation for the family to continue to pass the leadership torch from generation to generation.

There are also many, many other U.S. companies that have been and continue to be owned and managed by family members of the original founders.  Some of those include Cargill (152,000 employees), Koch Industries (100,000 employees globally), and Viacom (122,000 employees).  Mega high-powered engineering and construction giant Betchel Group (58,000 employees) was founded in 1925 and has been owned and managed by five generations of the Betchel family.  Brenden Bechtel is the current president and COO.  Riley P. Bechtel, Brenden’s father and current Chairman of the Board, stepped down as CEO in 2013.  Another family-owned and managed company is global media and technology company Comcast (126,000 employees), which is managed by Chairman of the Board Brian Roberts, son of Comcast founder Ralph Roberts.  Both Brian and Ralph Roberts still sit on Comcast’s Board of Directors.  Carlson Companies (175,000 employees globally) is yet another family-owned and managed company.  Founded in 1938 and now specializing in the hotel and travel industries, the company’s Chairman of the Board is currently Diana Nelson, granddaughter of Carlson founder Curtis Carlson.  She is also daughter of former Carlson CEO Marilyn Carlson-Nelson, who continues to serve on the Board of Directors.  Given the success of those companies, it would seem that nepotism is a good thing that has served those organizations well.

Nepotism Rejects

However, not all companies find nepotism to be the best way to ensure top talent fills key positions.  Motorola (19,000 employees), for example, is a company that has been run by the founding Galvin family since its inception in 1928.  Although it has grown, Motorolla has arguably not performed as well as it might have under other leadership.  Mars, the candy, food and beverage company (72,000 employees globally), is owned by the fourth generation of the Mars family but recently stopped being managed by Mars family members.  Whether that is because the company’s owners choose not to manage it or they recognize that they lack the talent to do it best is unknown.  Qualcomm, the world’s top wireless chip company is in the same boat.  Paul Jacobs ran Qualcomm for a decade after his father Irwin retired.  But recently he was succeeded by Steve Mollenkopf, who is not a member of the Jacobs family.  Why is unknown.  That said, today’s mega corporations are much more complex and demanding businesses than even a half century ago.  The heirs of mega corporations are not always ready, willing or able to lead or even fully understand the complexities of a multi-national business.

What happens when the heirs of business founders are willing – but not necessarily qualified or capable – of handling a job, especially an important leadership position?  In the U.S., very few laws regulate nepotism at either the state or federal level. In fact, many states have no laws prohibiting the practice.  Thus, in most cases, nepotism is legal.  But is it fair to the staff and stockholders of a company for a business owner to give family members jobs in the company that are better filled by more talented and qualified individuals?   And do business owners even have any obligation to consider fairness when deciding who to hire at their companies, who to place in key leadership slots, and who should succeed them after they retire or pass?  Given that in some cases companies employ hundreds or thousands of employees (which support countless families), do business owners have some responsibility and obligation to put the well-being of the organization above the success of their own family members?

Case in point.  Enron’s former chief executive, Kenneth Lay, the child of a Baptist preacher who grew up poor in Missouri, helped relatives with opportunities through his position at Enron.  For example, Ken Lay’s 33-year-old son, Mark, sold a paper manufacturing business he co-owned to Enron and received a three-year $850,000 management contract in the deal.  Mark Lay also simultaneously owned or worked for three other companies that did business with Enron.  Ken Lay’s sister, Sharon, booked all Enron staff’s travel through her travel agency, Travel Agency in the Park.  Half of her company’s business, nearly $7 million per year, came from Enron.  Given how Enron ultimately imploded from gross mismanagement, it does call into question what part nepotism played in the energy company’s ultimate demise.  Nepotism, after all, is not just about giving family members jobs, but also about showing family members favor in other ways too… ways that might not necessarily be in the best interest of the business.

Next week, we will examine the kinds of problems that nepotism can create at companies that allow it.  Stay tuned.

Quote of the Week

“Nepotism works if you get on the right side of it.” Dan Keeton


© 2015, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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