In Box

Privileged Performance

If you want to ruin a business fast, give it to your kid. According to a recent study in the American Economic Review, firms that appoint a CEO who is related to either the departing CEO, a founder, or a major shareholder significantly underperform when compared to companies that bring new blood into the corner ...

If you want to ruin a business fast, give it to your kid. According to a recent study in the American Economic Review, firms that appoint a CEO who is related to either the departing CEO, a founder, or a major shareholder significantly underperform when compared to companies that bring new blood into the corner office. Hiring the new boss based on the family tree translates into a 14 percent decline in profits within the first three years. And if the heir apparent didn’t attend a selective U.S. university, profits sink a whopping 25 percent.

"The results suggest that CEO talent is very valuable," says author Francisco Pérez-González. Last year, a London School of Economics/McKinsey study found similar performance lags in firms run by second generations in Britain, France, and Germany. The combination of a small selection pool, along with the lack of motivation by family members who are guaranteed jobs, predictably leads to less successful businesses.

Pérez-González puts it another way: "Think about a soccer tournament. Are you going to choose Ronaldinho? Or the children of Pelé?" In other words, nepotism gets a red card.

Trending Now Sponsored Links by Taboola

By Taboola

More from Foreign Policy

By Taboola