In family businesses, human resource decisions are rarely black and white. Decisions about who gets promoted, who takes control of new projects, or who has to leave are often not just administrative issues. They often carry deep emotional implications. One persistent and uncomfortable question inevitably arises: is it better to retain people who have been loyal for a long time, or to give opportunities to those who are most capable, even if they are relatively new?
This is a classic dilemma that has shaped the trajectory of many family businesses across generations. Unlike non-family businesses that glorify meritocracy (at least on paper), family businesses live in two overlapping worlds: the world of family and the world of work. Unfortunately, these two worlds operate under different standards and values. Family talks about loyalty, trust, and emotional bonds. The world of work talks about performance, expertise, and targets.
When these two logics collide, family leaders are put to the test. The maturity of their governance is ultimately revealed in how they navigate this tension.
The Strategic Value of Loyalty
Loyalty in a family business should not be underestimated. In fact, this is usually where the foundation of a company is first laid.
Consider the early days of many family businesses. They started their businesses with their siblings, spouses, cousins, or first employees who were willing to work hard. In difficult times, when cash was low and the risks were high, what they needed most was not prestigious credentials or impressive titles. They needed people they could trust, who would not run away or leak secrets to others.
This culture of loyalty, if managed well, can become a powerful strategic asset. For example, employees tend to remain committed during periods of crisis. They have a strong sense of belonging. The risk of misconduct is reduced due to high levels of internal trust and transparency. They think long-term, not just about today.
Samsung provides a notable example. They grew big under strict family control. Loyalty to the founding Lee family has historically played a significant role in shaping the company’s culture. Or in Southeast Asia, there is the Ayala Corporation from the Philippines. Their businesses have survived for generations because they have trusted insiders whose values are aligned with those of the family.
In this context, loyalty is the glue. It protects the company from harmful impulsive decisions and the temptation of short-term profits.
However, loyalty alone is not enough, especially as businesses become more complex.
The Dangers of Blind Loyalty
As a company grows, it has more and more to manage. The market becomes more cutthroat, regulations multiply, and everything is now digital. At this stage, loyalty without competence can become a liability.
The warning signs are often visible. There are family members who occupy important positions but whose abilities are mediocre. Loyal long-time employees become barriers to change. Honest conversations about underperformance become increasingly rare.
As a result, the organization becomes fragile. Decision-making becomes chaotic. Highly skilled external professionals often choose to leave due to perceived favoritism.
A real-life example that is often used as a lesson is the case of Satyam Computer Services from India. Although it was not a small family business, weak oversight combined with excessive deference to leadership contributed to a massive accounting scandal. Trusting insiders is necessary, but without professional control, the impact can be fatal.
The Limitations of Competence Alone
Relying solely on loyalty is certainly wrong. If so, should competence be the only thing we rely on? The answer is not that simple.
Great professional managers who are not in tune with family values can be a source of new problems. They may be more focused on pursuing big profits now without thinking about the consequences in the future. They may often clash with traditions and customs that are deeply rooted in the family. If they receive a more promising job offer, they may leave if a more attractive opportunity arises.
Take the case of Ford Motor Company. They once had great success recruiting Alan Mulally from outside the family. In addition to being skilled, Mulally also respected the history and values of the Ford family. His success stemmed not only from competence but also from his respect for the company’s heritage.
Conversely, many family businesses are disappointed after bringing in “stars” from multinational companies. They forget to prepare a cultural welcome process. In the end, both parties feel cornered. The professional feels like they are in a cage, while the family feels that their territory has been invaded by strangers
Root Cause: Unclear Roles
When viewed from the perspective of a family business system, the tug-of-war between loyalty and competence is actually only a surface symptom. The core issue lies in fluid and poorly defined role boundaries.
A family member may simultaneously occupy multiple roles. They can be an owner, manager, older sibling, younger sibling, uncle, nephew, parent, child, and so on. When there are no clear rules, human resource (HR) matters can easily be swayed by emotions. Performance feedback can easily be interpreted as a personal attack. Likewise, decisions to demote someone are often interpreted as exclusion from the family circle.
So, the crux of the matter is not choosing between loyalty or competence. Rather, it is how we can clarify the logic behind each role. This separation of roles requires a formal structure such as a family constitution, an independent board of directors, clear competency standards, and transparent promotion criteria.
We can learn from BMW, which is managed by the Quandt family. They have proven that family influence can remain strong without sacrificing professionalism. This means that control in the hands of the family does not necessarily mean haphazard management.
Effective Strategies for Resolving Dilemmas
1. Establish non-negotiable competency standards
Before assuming an executive position, family members must meet the requirements set from the outset. These may include minimum educational qualifications, external work experience, and structured leadership assessments. Many business families now require the next generation to work elsewhere for at least five years before they can join the family business. This approach helps reduce entitlement and strengthens professional credibility. As a result, competency becomes a matter of the system, not a personal matter.
2. Separate personal matters from ownership
Family members still have power as shareholders, but day-to-day operations are left entirely to professional managers. The Lego Group is an interesting example. This toy company remains family-owned, but during the crisis in the early 2000s, they professionalized their management. The family retains strategic control, but day-to-day execution is left to the experts. This illustrates that loyal ownership does not require operational interference.
3. Instill the idea that loyalty must be earned, not given freely
Loyalty does not mean unconditional obedience, but rather a shared commitment to advancing the company. In this new perspective, loyalty is defined as the determination to safeguard the company’s future. Competence is a form of respect for the family legacy.
Beyond Structure: The Psychological Dimension
Often, the biggest barrier is not complicated rules, but feelings. Company founders, for example, may equate loyalty with love. Firing a nephew who is underperforming feels like betraying the family. Similarly, long-serving employees may feel it is only natural to be promoted even if their abilities are mediocre.
In reality, avoiding difficult decisions can be deeply destructive over time. Professional employees from outside the family will lose motivation. Succession plans will be disrupted. The next generation will inherit a company that is fragile from within.
Enduring family businesses eventually accept a difficult truth: that professionalism is not betrayal, but a form of evolution of loyalty itself.
Resilient family businesses are those that successfully break out of the “either/or” mindset. They understand very well that loyalty without competence will only keep the company stuck in place. Conversely, competence without loyalty risks causing the company to lose direction. The integration of both becomes the foundation of sustainable success.
This HR dilemma is actually a test of leadership maturity. Can a family articulate shared values while upholding objective standards? Are they able to maintain warm relationships without sacrificing accountability?
If the answer is yes, then the company will be able to avoid nepotism without losing its identity.
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