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The importance of meritocracy in family businesses

Stephen Campbell

By Stephen Campbell

Chairman of Citi Private Capital Group

May 31, 2019Posted InFamily Office

Building and preserving wealth to benefit future generations is a key priority for many of the world’s leading families and their family offices. But despite the best efforts of family heads, attorneys, tax advisors, and wealth managers, too many families see their wealth largely dissipated within three generations. So, what do the families that succeed in preserving their wealth over the long run do differently?

The dissipation of family wealth within a couple of generations is neither a recent phenomenon nor unique to Western society. Its causes are complex but are often related to concentration of wealth in a single business, sector, or geography, the excessive use of debt, depletion through taxation, extravagance, growth in the number of family members drawing down wealth, divorces, badly prepared heirs, and poor decision making.

To this list can also be added nepotism: unduly favoring family members for positions of influence in family businesses and family wealth management. Employment in any family enterprise should be based primarily upon merit, rather than upon bloodline. No employment or board seats should be guaranteed for children, cousins, or in-laws. Compensation for family members who do serve in such capacities should realistically reflect their role, responsibilities, skill, and performance. 

In practice, upholding such a meritocracy can be very difficult. Family businesses may find it hard not to involve family members in a business that is meant for their ultimate benefit. There is often a sense that family members may be more discreet and trustworthy than outsiders, helping also to uphold family values within the business. 

As valid as many of these considerations can be, family heads must still think carefully about what is really best for the business. A vital element of this is hiring people who have the right skillset and experience for the job rather than the same lineage. Where young family members are taken on, it is usually better for them to have gained some genuine experience first at a business outside of the family enterprise. As well as potentially holding back business performance, hiring and promoting unqualified family members can often demoralize other employees.

Eliminating any sense of entitlement among family members can help to avoid many of these unfortunate issues from arising. Successful families typically speak candidly with their children from an early age about the responsibilities that come with their wealth. They teach children about choices and limits, deny some of their requests, and take them grocery shopping to instill in them the importance of budgeting. Some even live deliberately beneath their means, eschewing such trappings of wealth as yachts and private aircraft.

In the same spirit, wealthy families need to speak openly among themselves about the importance of meritocracy within the family business and around the management of family wealth. The overriding message should be that ‘keeping it in the family’ when it comes to employment today could well cost future family members dear.

To find out more on how to sustain family wealth across multiple generations, read our white paper.