Family business

The hiring of relatives has risen along with growth in family-run firms

July 12, 2006|By HANAH CHO | HANAH CHO,SUN REPORTER

It's practically a family affair at Southwest Airlines. The company boasts 1,100 married couples among its 31,000 employees, and spouses and family members are encouraged to join the carrier's ranks.

But when it comes to executives, Southwest follows a more stringent hiring rule - the company generally will not hire a family member of management.

"We make it a point not to do that," said spokeswoman Whitney Eichinger. "It's a matter of perception. An officer having a spouse work here, we wouldn't want to have employees perceive that that person would get special treatment."

Corporate governance watchdogs and others generally frown on public companies hiring family members because of concerns over the appearance of nepotism. But the practice still occurs, primarily because of the growth of family-owned businesses and companies that view the practice as an opportunity to build loyalty, trust and responsibility among their work forces.

"Not only has it always been widespread, it seems to be making a major comeback," said Adam Bellow, author of the 2003 book, In Praise of Nepotism. "This is because of the surge of family-based businesses."

Workplace experts said nepotism can produce hard feelings among workers who feel they have been passed over for a promotion because of a lack of connections to management. But most companies run by families make it clear how succession will take place.

Unless something goes wrong, most experts say nepotism often is something workers and shareholders tolerate. While scandals involving public companies have touched on nepotism claims - family members who ran Adelphia Communications were convicted of conspiracy and fraud in 2004 - the issue has not generated a furor for reforms, experts say.

The troubles faced by WorldCom Inc., Tyco International Ltd. and Enron Corp. arose from other problems.

"Shareholders have tended to be more focused on accounting practices, on board member independence generally," said Edward Nebb, an investor relations consultant at Euro RSCG Magnet in New York, a marketing and public relations firm specializing in financial communications. "In the most recent rash of corporate misdeeds, nepotism didn't seem to be a major factor."

Joshua A. Newberg, an associate professor at University of Maryland's Robert H. Smith School of Business who teaches law and business ethics, called nepotism a "perennial issue in the background" that draws scrutiny from time to time.

"Shareholders are concerned with performance, so it's likely to raise eyebrows and likely to be a concern if nepotism correlates with poor performance or less-than-optimal performance," Newberg said. "But if it doesn't, it's going to be a matter of indifference."

Some public companies have anti-nepotism policies banning the practice altogether. Others, such as Southwest, have guidelines on supervision when relatives are involved.

The Securities and Exchange Commission requires companies to report any business dealings over $60,000 done with executives, board members or any of their family members.

The practice of hiring family members, especially in the executive suite, raises questions about whether the company is tapping the most qualified candidate for the job or whether favoritism played a part in the hiring. And some are worried that family problems could spill over to the business.

"I would advise a client that if you have two equally qualified candidates, it's safer not to hire the family member," said Ross A. Albert, a partner at Morris, Manning & Martin in Atlanta, and a former senior special counsel for the Securities and Exchange Commission. "There will be some who will perceive that a [family member] hiring resulted from nepotism, not merit."

Accusations of nepotism were one of several issues involved in the Adelphia Communications fraud trial. John J. Rigas, the former chairman and co-founder, was convicted in 2004 of looting hundreds of millions of dollars from the cable company. His son Timothy J. Rigas, who was the company's chief financial officer and a director, also was convicted of conspiracy and fraud.

Moreover, two other sons sat on the board at the bankrupt company.

In 2003, a year after John and Timothy Rigas were accused of using the company for their personal gain and resigned from the company and board of directors, Adelphia approved a code of business conduct and ethics policy. It includes an anti-nepotism provision that prohibits employees from reporting to a relative. And it bans hiring a relative of a company officer.

"The key reason is clearly that nepotism sets up a clear conflict of interest that can run counter to the fiduciary obligations a publicly traded company has to its shareholders. Adelphia is the perfect example," said spokesman Paul Jacobson. "Independence gives boards the power, or perhaps more correctly the freedom, to ask management the tough questions that should be asked. Nepotism denies it that freedom."

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