Fund Industry Marred by Nepotism: Poll

By Danielle Sottosanti June 19, 2013 The fund industry has its share of family-dominated firms including Franklin Resources and Fidelity and a high proportion of Ignites poll respondents perceive it as a form of damaging nepotism. Roughly 44%, or 117 respondents, say nepotism prevents some of the best from rising to the top in the industry. That was the most popular individual response to the poll as of press time Tuesday, at which point 264 readers had voted. Click here to vote in the ongoing poll. A total of 35%, or 92 respondents, see the question of whether or not nepotism exists only as a matter of perception. On the other hand, 21%, or 55 respondents, do not consider nepotism to be an issue at all. These sentiments come after some of the biggest firms have undergone reorganizations, in which senior-level positions have gone to family members of the firms founder. Most recently, Franklin Resources appointed Greg Johnson as chairman, succeeding his father Charles B. Johnson and extending the Johnson familys influence over the company, as reported. At Fidelity, another Johnson family dominates. Abigail Johnson became president of Fidelity Financial Services last year, fueling speculation that she will succeed her father Ned Johnson as the firms chairman and CEO, as reported. When making these appointments, publicly traded companies such as Franklin face more stakeholders to satisfy than private companies such as Fidelity, points out Niels Holch, executive director of the Coalition of Mutual Fund Investors. However, the question of nepotism matters more within a firm, among employees, than to shareholders, experts say.

It is not an issue for most investors, according to Holch. While there may be a perception problem within the industry with certain family members and their roles, the bottom line for most investors is performance, he explains. Meanwhile, within a firm, even just the perception of nepotism can weaken morale, according to Mark Elzweig, president of executive recruitment firm Mark Elzweig Company. When family members hold senior positions at fund companies, they must be supremely competent at their jobs, he says. Its important for firm morale that they are not perceived as having been placed in their roles for reasons of nepotism. Family members have to work especially hard to earn the respect and loyalty of peers and subordinates. However, firms should not shy away from appointing family members because they fear it will be attributed to nepotism, experts say. Keeping firm leadership within a family has some potential benefits, including passing on institutional knowledge that is difficult to explain or write down, according to an academic study led by University of Alberta School of Business assistant professor Peter Jaskiewicz. Additionally, firm leaders may appoint family members to alleviate succession fears, Holch notes. Some fund firms may be concerned about maintaining the culture of the firm after the founder steps down and so appointing a family member to a position of responsibility may be part of a succession plan, similar to what Warren Buffett is doing at Berkshire Hathaway, he explains. Buffett has defended his decision to appoint his son who is a farmer but also has a business background as his successor as non-executive chairman by saying that it would protect firm culture, according to The Times of London. Indeed, the institutional knowledge benefits of hiring family members can potentially outweigh the advantage of hiring a professional with better qualifications, Jaskiewiczs study argues. But that is not always the case, the study notes. For instance, if a firm leader appoints their eldest son as successor simply because of his birth order, irrespective of other factors of their relationship, that type of nepotism can be dysfunctional, dangerous and detrimental to firms, the study says.