Nepotism and Investment

Investment by firms is a key determinant of future growth and value of the business. This is the reason why shareholders often sacrifice current dividends in return for future capital growth. Workers selected based on family ties rather than merit may lack the requisite skills for investment decisions. Relatives are often less qualified than outside workers because they are selected from a smaller pool of candidates and for reasons that are unrelated to their skill. As a result, they are not adept in  recognising valuable investment opportunities. In addition, they may enjoy protection from being fired when performance is subpar or receive utterly unwarranted  remuneration not commensurate with performance.

Relatives often  often exert minimal effort. And  lenders perceive firms employing family members as riskier thereby reducing the ability to procure external finance for investments. It is pertinent to note that siblings and children have the more damaging effect than spouses and distant relatives. This could be attributed to the fact that directors are often reluctant in delegating real authority to spouses and distant relatives.

The presence of several ties among top managers is detrimental to investment in physical assets and R&D. Nepotism in recruitment does not increase the  value of the firm and private investments in the economy.

Courtesy of BIS