Succession in the Context of Nepotism

January 20, 2022

By Chas Burkhart

One of the third rails in any discussion about employee-owned investment companies and succession is the topic of nepotism. Family-owned investment firms are essentially as old as the industry itself, going back to JP Morgan, Rockefeller and the many companies that were founded by men who ultimately passed on the reins to their sons. And while the father/son combination remains the most prevalent form, we see other combinations as well (Abby Johnson at Fidelity being one prominent father/daughter example). It’s natural for a principal owner to want to pass down such a material asset that they nurtured and benefited from, but we would argue that any firm—particularly smaller ones—are not being commercially minded when family members become entitled to leadership positions. If handled correctly—essentially meaning without entitlement—it can be a powerful transition tool. If handled poorly, however, it can mean the beginning of the end.

The issue is often best considered from a non-family leaders’ perspective: is the family member earning their keep? Are they the best person for the job? Do they feel they can be as honest and straightforward with them as any other colleague? For too many firms, family-driven succession (and family ownership blocks, such as husband/wife, children’s trusts, etc.) is simply not considered that way. The perspective is more the founders/owner’s mentality: “This is my firm to run how I see fit, and my family is entitled to the job or the opportunity because I own it and it’s my prerogative.” I smile as I write this, for I’m often asked by industry colleagues whether my daughter—a young investment banker—will ultimately join me at Rosemont and take over the business. The simple answer? It never crossed my mind. She’s far too young and inexperienced, and if my team didn’t support it, I wouldn’t force it anyway. How could I justify it is in the best interest of Rosemont?

Nonetheless, some leaders see a family handoff as the best option. And while we can all likely recall some cases where it went horribly wrong, there are a number of lesser-known cases that have gone very well. Several firms have navigated the nepotism gauntlet well, and the beneficiaries— the spouse, child, cousin, etc.— tended to have the following in common: they work as hard or harder than anyone else, are every bit as qualified as any other candidate, and bring a prove-it attitude to work every day – this isn’t the University of Entitlement. Several successful Rosemont investments have had aspects of nepotism and met these criteria, such as Westmount Asset Management (a wealth management firm in Los Angeles) and Southern Sun Asset Management (a small cap equity manager in Memphis). 1607 Capital Partners, a closed-end fund investment firm in Richmond and one of our current investments, successfully navigated it as well. Among the founders were father and son Fred and Kirk Tattersall; as Fred ultimately stepped down over the years, Kirk proved an excellent business and marketing leader, and the remaining partner chemistry was consistently strong.

To be fair, though, nepotism success stories are rare. Having observed a few thousand investment firms over more than 35 years, I’ve seen far more failure than success and noted a consistent formula in those that worked. Successful nepotism requires leaders to bring their family members along, with mentoring and full engagement as with any other employee and ensure the family members deserve the equity and position to the degree contemplated. Most importantly, pretty much everyone else at the firm should agree it’s a great work dynamic and they really respect their family colleague. There is your standard.