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Going Up? Governance in Crony Companies

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Governance in Crony Companies

One indication of a firm’s good governance is hiring and promotion decisions free of nepotism[i], cronyism or any other form of favouritism. Yet, despite the growing importance stakeholders attach to the ‘G’ in ESG, many organisations, both public and private, struggle to change their ways. Evidence remains of advancement based on family, nationality, language, politics, religion, alma mater and, of course, gender and ethnicity.

The consequences of unfair patronage for the subsequent performance of the patron and their protégés are varied, and (annoyingly) not always negative. However, the impact on everyone else in the organisation, is unambiguously bad. They include low motivation, weak productivity, stress, brain drain, and a fractured workplace culture. One must also not forget that many forms of favouritism are unethical, if not illegal.

Dealing with favouritism

The common response to evidence or complaints of favouritism is greater scrutiny by human resources departments. HR managers will monitor recruitment and promotion decisions more closely and try to ensure that rewards genuinely match performance. They also roll out new guidelines and disciplinary measures to keep would-be nepotists in check. But what if the apparent favouritism is not due to the promoted being a crony or a relative? What if actions by the human resources department, apart from being onerous and expensive, prove to be wholly ineffective? What if, even worse, those actions provoke an equally unhelpful effect: managers hiring or promoting the candidate that ‘looks’ objectively selected rather than the one that genuinely is?

Social trust

Some observations of apparent favouritism might simply be due to a generalised lack of trust among the employees of a firm or organisation. Indeed, evidence suggests that higher levels of favouritism is associated with low levels of generalised, or ‘social’ trust.

Take, for example, the sharing of information, expertise and experience within a team. It is not only an essential ingredient of overall performance, it is quite probably the reason the team was put together in the first place. Yet, without trust, it is hindered. This is because sharing involves risks – social risks (holding unpopular beliefs), status risks (saying something foolish), career risks (disagreeing with the boss), etc. Few will take these risks unless there is trust.

Take the simple act of asking a co-worker for help or support with a task, and the act of giving that help. There are risks for both parties:

- The asker reveals a lack of expertise and risks appearing less competent to others. Consequently, he might prefer to ask someone he trusts, even though the other is less qualified to provide this help.

- The giver risks not receiving credit for her assistance when the task is successfully completed. She, too, might prefer to reserve her best contributions for those she trusts, even though they might be in less need of help.

Both reactions represent a huge mis-allocation of organisational resources, and result, not from a lack of skill or expertise, but simply a lack of intra-organisational trust. Team building is pointless unless one first builds the team’s trust in each other.

So, consider how would you respond to a question readily used to estimate the level of social trust: Generally speaking, would you say that most people [in your organisation] can be trusted, or that you can’t be too careful in dealing with people? Notably, the question doesn’t seek to identify any specific individual or group. It refers to a bond that stretches across economic, political, religious, or ethnic groups. Social trust is what unites us with people who are different from ourselves.

High levels of social trust within firms have been shown to be associated with greater information sharing, enhanced collaboration, greater operational flexibility, earlier conflict resolution, and improved staff satisfaction with the work experience. These are precisely the behaviours managers must harness to drive performance. Hence, if social trust across the organisation is scarce, i.e., most people agree that ‘one can’t be too careful’, managers will rely on any individual or group where it is likely to be abundant, namely, among other people who are like them. They will also find ways to do it that bypass any new guidelines or scrutiny the human resources department puts in place.

Trust building

If low levels of social trust are the cause of the apparent patronage, rather than procedural flaws or nepotism, then the appropriate policy response must be very different. Research suggests that trust-building efforts must focus on reducing intra-organisational inequality, for instance, by ensuring universal access to corporate benefits. Attention must also be paid to facilitating visibility and communication between indviduals at all levels in the organisation. Finally, as organisational norms, like social trust, are heavily dependent on certain key players – the norm-setters – these individuals must lead by example.

Even in the absence of apparent favouritism, social trust building is a worthwhile pursuit because the related behaviours bring with them a meaningful competitive advantage. In addition, initiatives to support social trust are likely to encounter far less opposition in the workplace than the rules, scrutiny and penalties of the alternatives. Social trust is also a self-monitoring, self-reinforcing governance mechanism, and has sanctions at its disposal, like ‘shaming’, that are not available to other HR-initiated measures. It is for these reasons that many scholars see it as the most efficient corporate governance mechanism available.


[i] nepotism


"favouritism shown to relatives, especially in appointment to high office," 1660s, from French népotisme (1650s), from Italian nepotismo, from nepote "nephew," from Latin nepotem (nominative nepos) "grandson, nephew". Originally, practice of granting privileges to a pope's "nephew" which was a euphemism for his natural son.

Online Etymology Dictionary, © 2010 Douglas Harper

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