Compliance Glossary

Nepotism

The most common form of nepotism is increasing employment opportunities for relatives. Although there are arguments for nepotism practices when it comes to small, family-run businesses, most studies show that nepotism can cause decreased morale and commitment from employees that are not related to employers. 

What is Nepotism? 

Nepotism is a form of favoritism shown to acquaintances and family members. Nepotism is the act of abusing one’s power or official position to offer a job or a favor to a family member while disregarding their merit and qualification. 

What is an Example of Nepotism? 

On a larger scale, nepotism practices can turn into massive corruption scandals. Several examples of corporate cases involving nepotism can be found, but one of the most significant is the case of the South Korean giant Samsung, which, since inception, was passed down from father to son. The company leader, Lee Jae-yong, whose grandfather founded the company, stated that the recent corruption scandals that have engulfed his company were due to the nepotistic approach the company had adopted over the decades. He announced that he would be the last of his family to lead the organization and vowed on national TV to ban his children from taking over. In South Korea, genetic lineage is closely tied to social class and future aspirations; however, recently the government has passed laws and reforms to discourage nepotism practices. 

Is Nepotism a Crime?

In the US, the Federal Anti-Nepotism Law restricts public officials (including the President and Members of Congress) in all three branches of the federal government from appointing hiring or promoting a relative or even advocating such actions. Anti-Nepotism regulations differ from state to state as well as from one country to another. 

In the private sector, nepotism is not illegal. However, companies have an obligation under the Sarbanes-Oxley corporate governance law to disclose ‘relationships that may present actual or potential conflicts of interest that may affect officers’. Even if it is not directly illegal, managers still need to be cautious when hiring or promoting relatives. 

What is the Difference Between Nepotism and Cronyism?

Nepotism is typically the act of favoring family members, while cronyism is when one abuses one’s power in favor of providing undue advantages and benefits to friends.  

How Can You Prevent Nepotism in an Organization? 

Despite being legal in the private sector, most companies discourage or restrict the practice. Preventing nepotism starts with having a clearly defined anti-nepotism policy. Companies should transparently articulate what it’s position on nepotism is, what procedures are in place to avoid the occurrence of such practices, and what the consequences of non-compliance with these policies are. If nepotism is considered a legitimate means of hiring employees then robust mechanisms to mitigate potential conflicts of interest, discrimination, and other collateral risk nepotism might entail should be properly implemented. 

Establishing robust reporting channels will also allow employees to raise concerns around the potentially damaging effects of nepotistic practices to the company.