I've worked for a husband-and-wife team and a father-and-son duo, and my daughter works at Peppercomm. So I know a bit about family-run businesses.

I also know nepotism when I see it. At the father-and-son firm, we watched helplessly as the heir apparent destroyed everything his dad had built with horrific acquisitions, inept hirings and bad decisions.

My world

I was unaware of nepotism at Peppercomm until we lost our largest client several years back and were forced to make layoffs. At that time we had hired not only my daughter, but also three other employees with close family ties to other top managers. Our executive team (minus those of us with family connections) objectively evaluated and rated every single employee, identified the weakest links, and terminated six employees.

At a town hall meeting to announce the layoffs, one employee accused us of nepotism by shouting out that "no employee with family ties was laid off." We discussed the carefully conceived and executed performance evaluation, and explained why the six who failed to make the cut had failed to make the cut. (The accuser was temporarily satisfied, but is no longer with Peppercomm.)

So what should you do to avoid any hint of nepotism (regardless of whether you own a family business)? Here are my five tips:

  1. Utilize a 360-degree employee evaluation that does not include an employee relative, connection, or paramour in the process.
  2. Provide a detailed job description that includes specific goals an employee must master before she can be considered for promotion.
  3. Make in-depth announcements to all staff when an employee is promoted that explain exactly why that individual has moved up in the ranks.
  4. Have a separate hiring and screening process to assure the very best candidate is hired for an open position, regardless of any connections to someone in the firm.
  5. Be willing to fire relatives. Not too long ago, we fired a senior executive's nephew for poor performance. We didn't need to draw the obvious bloodline connection in our e-mail to staff, but it helped put to rest any lingering feelings that nepotism had taken hold at Peppercomm.

For some additional tips, I turned to other executives with experience in this area. Steve Carroll, president of Robert Mann Packaging in Salinas, California (who reports to the 82-year-old founder and manages his two sons) gave this advice:

  1. Exclude family members from all sales and other awards. "That sends a strong message to the entire organization that they're valued as much as the offspring." (Note: Carroll says it also requires a level of maturity from family members to know they'll be left out.)
  2. Don't hire family members until they've first proven themselves at another company. "That provides instant credibility for the family members," he says.

Bobby Stover , EY's Southwest region leader, private client services, EY, says one of his clients, a ninth-generation European company, will not hire family members unless they receive prior board approval. That's what I call leveling the playing field! Stover provides this eighth, and perhaps most important, tip.

  1. Create a clear governance structure as early as possible in the company's life cycle that benefits the business and the family as well. "It's critical that family members and employees alike know the roles and responsibilities so that it's built into the culture."

Stover adds that family members should discuss and define the roles/hats that family members could wear at any one time (family member, business owner, or business manager). A three-pronged governance process should be set up to cover family governance, business governance, and ownership governance to guide how the family and business interact and communicate based on their roles.

He also suggests schooling family members about the business and financial responsibilities as early as possible in life. "It's better they learn about financial literacy at eight than at 25. One of our clients actually began discussing the family business as soon as the kids were in school. ... So as the kids are growing up, they're being prepared to take the reins," he noted.

So what tip is my favorite? Sorry, you won't see me picking one over the other. I know too well how unfair those kinds of choices can be.

Published on: Sep 8, 2014
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.