Monday Mornings with Madison

Nepotism, Part 2

How Nepotism Undermines Companies

Nepotism can be found in practically every industry in the world, even in the highly competitive fields of construction, real estate and finance.  Billionaire real estate tycoon Donald Trump has always given his adult children special employment opportunities.  His son, Donald, Jr., age 35, is Executive Vice President of the privately-held Trump Organization.  His daughter, Ivanka, age 31, also works in her father’s organization.    His son Eric, age 29, is Executive Vice President of Development and Acquisitions.  It is doubtful that even the most exceptionally brilliant, well-educated and hard-working 29-year-old could land an EVP position at a billion dollar organization unless he was related to the owner.  In fact, Trump’s children openly admit that nepotism got them in the door, but also assert they’ve had to pull their weight after landing the job.

If nepotism is that widespread and prevalent in businesses big and small, it stands to reason that there must be some benefits to nepotism.  Certainly, it could be argued that the children of the world’s most successful entrepreneurs are likely to have attended the finest schools and have a keener understanding of the family business than any outsider.  Yet, many human resource experts have come to regard nepotism as ultimately damaging to business.  That is because it often interferes with a company’s operations and possibly creates an environment that is demoralizing to employees.  Even though widespread, nepotism as a strategy to fill the best jobs has some serious drawbacks.

The Downsides of Nepotism

Here are the three most common issues with nepotism.

1.  Disruption of the Workforce
A primary complaint heard at companies that allow nepotism is the patent lack of fairness. Perceived favoritism of a relative can cause dissatisfaction among existing employees and lower morale. Employees may have less incentive to perform their responsibilities diligently and proficiently if they feel that the path to promotion is undermined by nepotism. Indeed, a company employing such tactics may find its more valuable employees seeking new employment where their talent is more likely to be recognized and fully rewarded. Even if it is not causing turnover, workers will likely complain and become embittered and less productive in the face of blatant nepotism.

Case in point.  In 2013, multi-millionaire, co-founder and publisher of ultra successful Rolling Stone magazine Jann Wenner appointed his 22-year-old son, Gus Wenner, to head  Right after graduating from Brown University with a Bachelors degree, the young Wenner was initially brought in to Rolling Stone to be an assistant to Chief Digital Officer David Kang.  That, in and of itself, was quite a choice opportunity for someone fresh out of college with absolutely no work experience in publishing or marketing.  Then Gus Wenner was assigned to the company’s site redesign project, an important assignment.  Again, that was a choice task with a lot of opportunity to shine.  Then, after being at Rolling Stone for just six months, Gus Wenner was promoted (over his own boss and everyone else at the company) to head all aspects of   Before working at Rolling Stone, Gus Wenner’s biggest claim to fame was that he played in a collegiate alt-country music band.  The young Wenner was ridiculed by the media for being so green in the publishing industry that he didn’t even have a Twitter account at the time of his appointment (even after working at RS for a half year).  Twitter is considered the publishing world’s social media site of preference.  His appointment was dubbed by one reporter as the most flagrant case of nepotism…. ever.

In his new job, Gus Wenner assumed responsibility for managing 15 to 20 employees (even though he had never managed anyone or anything before), overseeing all aspects of the dot-com including editing, advertising, social, etc.  It is hard to imagine how a Bachelor’s degree and some experience playing in a music band qualified him to become the head of the dot com division of a national, reputable magazine focused on popular culture.  For Rolling Stone’s existing employees, it must have been a particularly difficult pill to swallow given that originally the company’s job posting said the new head of web would need “7+ years experience.”

Even if no one dared to voice it, many Rolling Stone employees must have resented such blatant favoritism; a resentment that has likely impacted staff creativity, commitment, productivity and loyalty.   Of course, Jann Wenner is not nearly alone in embracing nepotism in the publishing industry.  The biggest names in the mainstream media have often given choice jobs to family. The New York Times has been run by four generations of the Sulzberger family. Family members have also regularly landed jobs on the editorial staff. Christina Huffington, daughter of Arianna Huffington, is a writer for The Huffington Post.  Of course, in last week’s post, we looked at the appointment of James Murdoch to head up the Fox empire when Rupert Murdoch retires.  The list of such cherry appointments goes on and on in the world of media.   But it does raise the question of whether such blatant nepotism is wise at a time when the publishing industry is imploding under the weight of competition and suffering from a multitude of ailments.

2.  Loss of productivity
Nepotism often leads to inferior work product from those who were passed over while the boss’ family member got the job. Employees who realize that no matter how hard they work, they are never going to get promoted are likely to lose their drive and not do their best work.  Moreover, employees who are promoted because of their relationships with the owner or boss are likely to be under-qualified for the positions they are expected to fill.  Family members filling important roles but lacking the qualifications to do those jobs are unlikely to be successful.  There is a reason why most top jobs require ample experience. As Albert Einstein once said, “The only real source of knowledge is experience.”

To counteract the decline in productivity, company owners have used the issue of nepotism to push existing staff to compete with family members for key jobs.  The idea is that this gets everyone to work harder, thus increasing productivity.  Unfortunately, this is only effective temporarily and also has the potential to backfire.  Case in point.  Currently Sumner Redstone, Chairman of the Board of Viacom, CBS and National Amusements – who himself inherited his position from his own father who founded National Amusements — has appointed CEOs to each of his companies who are not related to him.  However, Sumner’s daughter, Shari – who is 20% owner of National Amusements – is rumored to be a possible successor for his seat as Chairman of the Board if he ever retires or when he passes.  At age 91, his succession plans are of major concern to his daughter as well as to the multitude of top talent within the organization.  The result is that they are all working hard to show why they deserve the top slot.  But that is short-lived.  Should the position pass to Shari Redstone, it is likely to have the effect of reducing the productivity of those who were passed over.  It is also likely to spur a lot of turnover and/or restructuring, which will hurt productivity long-term.

3.  Increased Risk of Lawsuits
Even though many states have no laws prohibiting nepotism, nepotism could still increase a company’s risk of being sued for discrimination.  There are many laws, both state and federal, that prohibit discrimination based on race, nationality, religion or gender.  Cases where nepotism and discrimination overlap are where grounds may exist for an employee to file a lawsuit.  A claim for employment discrimination must be able to show that an employer’s practices disadvantaged employees based on one of those prohibited categories.

A company can also be sued for hostile work environment.  When interactions between coworkers makes one employee so uncomfortable that it interferes with that person’s ability to do the work, that can also be a legal problem.  In cases where nepotism and hostile work environment overlap, there is also fertile ground for an employee to file a lawsuit.

Even if a conflict arising from nepotism never escalates to legal action, the quarrel can permanently disrupt the work environment for those involved as well as their coworkers. Those kinds of situations can easily lead to the termination of one or both of the quarreling individuals.

Even in the case where a business owner is favoring a family member and none of the employees mind, nepotism can still go wrong.  Indeed, Sumner Redstone’s son, Brent, sued his father’s company, National Amusements in 2006, and left the family business after being frozen out by his father.  In that situation, the reversal of nepotism resulted in a lawsuit.

Anti-Nepotism Policies

For these reasons, many companies are now embracing anti-nepotism policies in their employee handbook. Some policies prohibit the hiring of an employee’s relatives under any circumstances, while others only prohibit it if there would be a direct or indirect reporting relationship between the two related individuals. These precautionary policies are sensible.  Companies are also requiring employees to fill out an annual conflict-of-interest form that discloses whether they have initiated or participated in any decisions providing a direct benefit to a relative or person with whom they have a personal relationship.  That speaks not only to nepotism, but also cronyism.  More about that next week.  Stay tuned.

Quote of the Week

“Nepotism sometimes can be a lose-lose situation.” Vikram Chatwal

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

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