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It Runs in the Family

How nepotism turns good business into bad blood

Back Article Apr 30, 2014 By Steven Yoder

Left unchecked, underachievers can drag down an entire team’s performance, and that goes double when the problem staffer is family. So when Roy Hill Jr., chief operating officer at Innovative Maintenance Solutions, found out that his brother wasn’t keeping up with the landscaping crew, he took swift action. He pulled his brother in for a stern conversation and some coaching. Hill also let him know that, as the son of company founder Roy Hill Sr., his behavior had an outsized effect on the rest of the crew. 

Soon after, the brother showed up two hours late for a job. When his manager reprimanded him, the brother rebuffed his superior and pulled the “family” card. When Roy Jr. heard of the incident, he suspended his brother immediately. That evening, Roy Sr. handed his son his last check. 

“Our rules are the same for everybody,” Roy Jr. says. “We don’t tolerate going against our core values.” 

Hill doesn’t just oversee a culture of excellence and compliance, he embodies it. He calls himself a “CEO in training,” and if something were to happen to his father tomorrow, the company would likely pass over Junior for the top spot and instead hire an interim executive. That’s because the Hill family has agreed that it wants the best people in each position. Down the road, that could mean eliminating family from the business altogether. They want the company to serve as the family’s legacy and take care of future generations, and “the only way it’s going to do that is if you have the right people running it,” he says. 

Studies have confirmed the wisdom behind that objectivity. Research published in 2005 by the Fisher College of Business at Ohio State University concluded that up to 30 percent of the variation in a company’s performance can be attributed to its CEO. So company-first decisions can keep the short-term gains of nepotism from stunting the growth of a family business.

MAKE THEM EARN IT

Businesses that want to get serious about keeping family loyalty in check can best help themselves by developing a formal family employment policy. Like preventive medicine, those plans work best when they are in place well before they are needed, when the next generation is “two, three, four years old,” says Peter Johnson, director of the University of the Pacific’s Institute for Family Business. Having a policy makes it easier to say no when your brother’s child comes of age and applies for a job without the necessary skills or character, he says. 

Even without a formal policy, family businesses can take steps that keep individual interests in check. Dan Chan and his cousin Tom are third-generation executives at Sacramento’s General Produce Co., a food distribution business that delivers to three states and the Pacific Rim, employing more than 200 people. But they didn’t just join the company right out of school. Their fathers mandated that they work elsewhere first. 

Both graduated college with degrees in finance and went to work in San Francisco. Dan became a CPA at PricewaterhouseCoopers, and Tom worked in sales for the Kellogg Co. and S.E. Rykoff, a national wholesale grocer. After two years, they got together and decided to pursue General Produce, bringing in complementary specialties in finance and marketing. 

When children come into a business straight from college, there is a tendency for them to say, “I want the same car Dad has,” Johnson says. “They don’t realize what it took for him to get there.” More importantly, other employees respect the decision to bring family into leadership positions when their added value is clear.

Family-owned companies also do well to ensure that family members who move up earn their way. Jeremy Federico serves as president at Sacramento’s Federico Beauty Institute and is the grandson of one of its founders. While in high school, he started work at the company’s lowest rung, sweeping floors and manning the reception desk. He went off to college, got a degree in industrial technology and worked in project management for several years at companies like Oracle and IBM. That gave him the day-to-day management experience he needed to re-enter Federico Beauty as director of operations in 2000. He moved to the top role when his father stepped down in 2008. 

At IMS, after Roy Hill Jr. successfully managed two company accounts in the early 2000s, his father asked him to help run the firm’s new custodial unit, which, like many startups, was losing money. He turned it around, and it became the company’s top revenue generator. Then in 2010, when the company’s landscaping unit was losing money, his father handed it to Roy Jr., and today it’s in the black. Now as COO, he oversees three of the company’s seven business units, manages the company’s vehicle fleet and safety policies, and is in charge of the company’s cultural development and overall unity. 

GIVE THEM TOOLS

While dispassionate personnel decisions might be best, some family firms understandably want to give the next generation every opportunity to take over. If so, they should create development opportunities for the next generation to pick up C-level skills and knowledge, says Hal Johnson, CEO of LeadershipOne Inc., which helps companies and families with transition planning and implementation services. 

Last summer, the Chan cousins created internships for two of their teen children, allowing them to work in different company divisions so they could learn the business. But whether the fourth generation eventually takes over will depend on the children’s own initiative, Chan says. 

For children already working in the business, companies can use outside resources to provide additional training or coaching. IMS invested in a year-long leadership training for Hill and his step-brother Ryan Petree, a manager, through the Capital Region Family Business Center. Hill says that, because he lacked formal management training, the mentoring was invaluable, teaching him not just how to manage, but how to lead. 

If relatives do move up through the company, leaders can put a check on favoritism by having them report to non-family members wherever possible. Company executives need to tell their managers that they want honest assessments, and they need to respect managers’ decisions about their relatives. 

“The minute you start to show bias or start to dismiss things … [managers] will stop giving you good information, and they’ll tell you only what you want to hear,” says Peter Johnson. 

MAKE THE TOUGH DECISIONS

When family members are hurting the business, the company has to find a way to let them go, gracefully if possible. Though that’s never easy, and “the longer you wait, the more frustrating it will get,” says Peter Johnson. 

Hal Johnson suggests that some situations can be handled in ways that minimize family harm — like a buyout. One business owner he counseled had to terminate his own father, whom he’d brought in when the father was going through a rough patch. Decisions like that risk creating lasting family ruptures. But most people who are fired know they should have been and were finding their jobs stressful as a result, says Stephen Murrill, executive director of the Capital Region Family Business Center. “I’ve seen situations where a few months later, people who’ve been fired come back and say ‘thank you very much.’” 

For messy situations, outside consultants can help get a family business out of a jam. Hal Johnson says one struggling company brought in a LeadershipOne consultant when the company’s president resigned and three of his family members applied for the job. The consultant facilitated an outside advisory group to do the interviewing and evaluations, talk to other family members and recommend a candidate, who was ultimately hired. Almost three years later, Johnson says, it’s clear their choice has worked out well. 

That captures the point of well-thought-out family hiring practices: “They wanted what was best for the business,” Johnson says.                    


Steven Yoder writes about business, real estate and criminal justice. His work has appeared in The Fiscal Times, Salon, The American Prospect and elsewhere. Online at stevenyoder.net.

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