The twilight of the nepotists

By Felix Salmon
August 20, 2013

The first thing you need to know about nepotism is that it is endemic among the rich, in every country in the world. If you’re the scion of a wealthy family, the chances are that you will end up working for the same company your father works for, at some key point in your career. Most of the time, it will be the father driving the deal; the child will accept the job with a greater or lesser degree of reluctance.

Blood ties are stronger than just about any other kind of tie. Sandy Weill originally hired Jamie Dimon because Weill had worked closely with Dimon’s father; eventually, Dimon fils would become almost a surrogate son to Weill. But when Dimon failed to promote Weill’s daughter fast or far enough, Weill was so furious that Dimon was soon fired.

Direct nepotism of this sort is, as a rule, neither illegal nor prosecuted. But it’s also easy to see the inefficiencies in such a world. As David Ricardo would have been the first to tell you, if you have a system where kids all work for their parents, it’s easy to make it much more lucrative for all concerned if the companies start trading kids between each other. Unsurprisingly, that’s exactly what happens in practice; in China, it even has a formal name, guanxi .

In China, then, even more than in other countries, businesses thrive by hiring the children of the rich and powerful. If you’re a western bank, trying to muscle in on the world’s most exciting market, such hires are table stakes: without them, you don’t even get your foot in the door. Patrick Jenkins gives a few examples:

Margaret Ren, the daughter-in-law of former party chief Zhao Ziyang, is chairman of Bank of America Merrill Lynch in China, and was earlier at Bear Stearns, Citigroup and BNP Paribas.

Another former Merrill China boss was Wilson Feng, son-in-law of the former head of the National People’s Congress, Wu Bangguo. Both bankers generated important privatisation business.

Similarly, Credit Suisse employed Levin Zhu, son of former premier Zhu Rongji, and now head of China International Capital Corp, while Alvin Jiang, grandson of former president Jiang Zemin, did a stint at Goldman Sachs.

Is there something wrong with this? Yes there’s something wrong with this. Here’s Jenkins:

Power in many of these markets is concentrated in the hands of so few unelected individuals that single unchecked decisions can have far-reaching multibillion-dollar consequences.

Some bankers and officials may see that as an opportunity. It is not. A clearer line has to be drawn between cultural tradition and criminality.

The SEC probe into JP Morgan’s hiring practices seems, on its face, to be an attempt to draw exactly that line. Andrew Ross Sorkin tries to defend JP Morgan, today, saying it’s “hard to fault a business for hiring someone who has better contacts than someone else,” and using lots of examples from the US to bolster his point.

But the fact is that there is a line, there should be a line, and it is entirely right and proper that the SEC attempt to draw that line. After all, outright bribery is clearly illegal, and the Foreign Corrupt Practices Act (FCPA) would be pretty toothless if you could get around it just by hiring a relative for a no-show job instead of paying a bribe directly. Remember, too, that the whole point here is to give the powerful decision maker something he values. That might well be cash — or he could value a powerful, well-paid job for his child even higher than cash. In other words, creating a job where the kid has to show up can be a more effective bribe than creating a no-show job.

JP Morgan can be forgiven for feeling upset that it’s suddenly the target of an SEC probe when so many other banks have hired the children of so many other senior officials. But the SEC has to start somewhere. And the question here is not so hard to formulate: did JP Morgan hire Tang Xiaoning and Zhang Xixi with the express motive of getting lucrative deals from their respective fathers? As the WSJ explains today in an excellent piece, hiring relatives of foreign officials can absolutely be a violation of the FCPA — both Tyson Foods and Daimler have been fined for doing exactly that. And the bar for proving corruption is relatively low:

One U.S. official said on Monday that the government wouldn’t even have to show a benefit was actually derived from a hire. “Corrupt intent is the beginning and the end of the analysis,” the official said. “It’s what your intent was, not if you were successful.”

The problem, of course, is that it’s hard to nail down exactly what “corrupt intent” comprises. Right here in the US, for instance, inter-dealer brokers regularly take out clients for insanely expensive nights out, involving front-row seats at sporting events, bottle-service nightclubs, and the like, in the none-too-subtle expectation that their generosity will be rewarded with business. Is that corruption? More generally, just about anybody in sales is happy to spend a lot of money on anybody who makes big purchasing decisions on behalf of a company — including, of course, decisions related to the purchase of financial services.

Conversely, if you’re a Chinese executive hiring a western bank to be the bookrunner for your IPO, the main thing you want is to be able to trust the bank in question. And it stands to reason that if your child is employed in a senior capacity at that bank, you’ll have an extra channel of communication, and slightly more trust in what’s going on internally. Which could quite reasonably mean that you chose that bank rather than a competitor.

This is why bribery and corruption are so hard to eradicate: there’s a simple and real economic logic behind them. On a macroeconomic basis, they’re bad, but on a deal-by-deal basis they can make certain individuals and certain companies lots of money. Sorkin says that “It’s not what you know, but whom you know” is a “reality of life”, while conceding that it’s “hard to defend”. So here’s an idea: let’s start chipping away at it, both at home and abroad, using all the various tools at our disposal. As Sorkin himself notes, Bear Stearns successfully implemented an anti-nepotism policy, in the full knowledge that it was denying itself potentially excellent hires.

So if the SEC thinks it has good reason to believe that the two employees in question were hired in contravention of the FCPA, good on it for investigating that. Such actions won’t eradicate corruption and nepotism at a stroke. But they’ll help, at the margin. And JP Morgan shouldn’t be too upset, either: after all, the more level the playing field in China, the better its prospects become.

8 comments

Comments are closed.