Strategic Nepotism in Family Director Appointments: Evidence from Family Business Groups in South Korea

Abstract

Controlling families of family firms strive to preserve their socioemotional wealth (SEW) through family involvement in company leadership. Prior research points to a potential trade-off of family involvement, as underqualified and underprepared family members’ involvement would bring SEW gains at the expense of financial wealth. We examine how controlling families seek to shape this trade-off to be in their favor by systematically appointing family members to board positions favorable for building managerial competencies through what we call “strategic” nepotism. We find that compared to nonfamily insiders, family members are preferentially appointed to prestigious firms that provide opportunities for cultivating knowledge, skills, and reputation in a protected organizational environment. We also find that controlling family members are kept away from stigmatizing appointments that would undermine their managerial resource-building efforts. Consistent with an effort to overcome intergenerational deterioration of managerial talent and skills, we find that strategic nepotism is concentrated on later- rather than earlier-generation family members.