Nepotism in Business

This is going to be a controversial video, because we are talking about nepotism. This is one of those difficult topics that people are too scared to talk about. People will mention it, but they do not get into the details of what is really going on. Well, today I will be breaking down for you the concept of nepotism in business.

VIDEO SUMMARY

If you were to ask me what is the thing I hate the most about business, I would say nepotism. It drives me nuts. Nepotism is everywhere. It is shocking. When you go out into the business world, you are going to encounter nepotism over and over again. It is in big companies and small companies. So it is really important for you to understand the concept.

Definition

What is nepotism? Nepotism is when decisions are made based on family relationships. The common example is in hiring, for instance someone hiring their son, daughter, spouse, cousin, or other family member to work in a business. What I want to highlight, is that nepotism and business are often opposite. This is not always the case, but it does happen often. Business is when decisions are made based on productivity. These are two very different approaches to making decisions. With a business approach, you look at the metrics and decide the option that creates the highest level of productivity. In nepotism, you decide the option that is best for your family. Those to approaches are not always the same thing.

So why are people scared to talk about nepotism? It is because nepotism is so common. More than half the businesses in the US are “family businesses.” The exact statistic is going to vary based on how you define a family business, but it is more than half the businesses in the US. A family business by definition means there is going to be nepotism, where multiple family members work in the business. So people do not want to speak out about nepotism because they are afraid of losing half their customers that operate family businesses. I want to talk about it, because it is such a huge part of business, and I think it is important that we talk about it openly and honestly.

Problems with Nepotism

Let us talk about how nepotism can create a problem. Imagine that a business owner works two decades to build a successful business. And let us say this business owner wants to start thinking about succession and retirement. The business owner has one son. The business owner knows that when he dies, he wants the inheritance to go to his son, which includes the business. The owner decides to make his son the new CEO so he can start learning the business. Here is the problem: The son knows nothing about business, the industry, or the two decades of struggle to build the place. This is the criticism of nepotism. People end up in positions of power who are incompetent for the job.

I have personally seen this happen so many times that it drives me nuts. You see incompetent people in authority making horrible decisions. It really ends up hurting the business. This shows up in the statistics as well, because a lot of family businesses go out of business when they transfer to the second or third generation of ownership.

The Business Method

The opposite approach of nepotism is the business method. In this method, when you have a job opening, you look at people in the job market, and select the most competent person. That is the difference. Under the business method, you have the most competent person doing the work. Under nepotism, you have your family member doing the work. It is possible, that the family member also happens to be the most competent person in the job market, but that is certainly not the case all the time.

This begs the question: If the business method creates higher productivity, why is there so much nepotism? The reason is more legal than anything else. We have chosen to live a society where there is the legal concept of inheritance. Most people agree they want to be able to leave something for their children when they die. A lot of people talk about trying to create generational wealth. Most people’s wealth contains company stocks, which is ownership of businesses. In some cases, people inherit entire businesses, whether they know how to run them or not. As long as we want inheritance in society, nepotism is going to continue to be a large part of business.

We have these two approaches to decisions: nepotism and business. My goal is this video is not to say that one approach is better than the other. I just want to talk about why these two opposite approaches exist and how you can deal with it. It is really easy to get caught up in the idea of fairness, and that nepotism creates unfair situations. It is helpful to approach these situations with understanding.

History of Nepotism

Let us look at history and how nepotism has developed. 2,000 years ago, Nepotism was the main way of doing business. If you were born into a family of farmers, you were going to be a farmer and take over the family business. Assets are passed down from generation to generation. As business ideas became more developed over time, we see a shift. Resources become allocated to the areas of highest productivity.

What does this mean? A good example is if you are born into a family of farmers, but you are not good at farming. Instead, you might be really good at baking. You would be able to create more value for the community, and more money for yourself, by leaving your family and starting your own business as a bakery. That is a decision based on business rather than nepotism. We see this progression throughout history, of people leaving their family businesses, and making business-based decisions because it creates more value. But it has been a slow progression, and as I said before, there are still a lot of family businesses.

How to Deal with Nepotism

What does this mean for you? This is where I want to share some advice, because this is something that I have struggled with. I did not grow up with wealth, so I have never been in a position to benefit from nepotism. I have always been in a position to see other people use nepotism and end up hurting companies. If you find yourself in that situation, what you need to realize is that nepotism is part of the business world. It is not going anywhere. When you run into nepotism, I would encourage you to approach the situation with understanding. That person is in a position of authority because we want to live in a society with the concept of inheritance.

What do you do, in a situation where there is conflict? If you are a business person, you will likely find yourself in a situation one day where you disagree with someone over a decision. You might be disagreeing with someone who is in power because of their family. You are in conflict with them, because they are making really bad business decisions that are hurting the company. You need to realize an important idea. In a conflict between business and nepotism, all things being equal, nepotism always wins.

It does not matter how bad the decisions, in the short term, nepotism is always going to win out. The reason is because nepotism won out years earlier when that person was put in a position of power. That is when the original bad business decision was made. Whatever situation you find yourself in today is just a result of that original bad business decision. The outcome is already decided, and nepotism is going to win out.

In the long term, business always wins over nepotism, because economics always wins in the end. But the long term does not help you deal with your immediate situation. Now I am not saying you should not voice your opinion. Of course you should. I am telling you, that when you deal with nepotism to be careful. I am encouraging you to recognize the true situation for what it is, and to communicate effectively to get the best outcome possible.

Conclusion

If you are a business person, your job is to take any situation and make the best of it. It does not matter if the situation is unfair. It does not matter if your boss is incompetent. Your job is to take your situation and influence it so the greatest amount of productivity is achieved. Business is full of complicated, unfair, unexpected situations. Nepotism is just one example. You are going to encounter many crazy situations. Your job is to deal with them in a professional way.

If you are watching this and you are currently in your position because of nepotism, here is my advice. Surround yourself with good accountants, and listen to their advice.

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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.