Everyone is familiar with the “good-old boy” concept — the social network philosophy of organizational management. It happens within huge corporate conglomerates, small independent businesses, even the individual colleges within universities. In some cultures, the system of decision-making based on who knows who is more prevalent than in others, but in every organization’s culture, it’s a potentially dangerous way of doing business.

A far better system for managing an organization, in my view, is “meritocracy,” the idea that performance, not connections, drives each individual’s — and thus the organization’s — success. If good people are not rewarded for good performance and good ideas, they’ll either leave the organization or lose their drive to perform. To keep an entity moving forward, leadership must separate “the wheat from the chaff” to keep its strongest people motivated and ready to generate and implement new ideas.

Take a look at these reasons why the good-old boy concept prevents any organization from getting ahead:

Social management doesn’t work in a competitive environment.
The good-old boy system of running an entity only works when the organization lacks real outside competition. When a company has no fear that another business will encroach on its customer base, it doesn’t matter who are running the departments — customers will buy the company’s product regardless.

Take, for example, American car companies in the ’50s and ’60s. These automakers built their foundations on the social network method of organizational management. When the industry was hit with increased competition from all over the world, those foundations crumbled and the organizations couldn’t progress. When there is competition, as in today’s competitive global marketplace, output really matters. And when the wrong people are in leadership roles, output suffers.

The best people don’t get the chance to do their best work.
In a social network-based organization, people are rewarded based on who they know, not what they do and how they do it. As a result, the person who could best do a certain job or best solve a certain problem is almost certainly not placed in the position to do it.

Avoiding this situation seems like common sense, yet socially based decisions take place in organizations every day.

Decisions are made for the good of individuals, not the organization.
A social network-based system is a closed system, meaning people within the system start to care more about themselves and their friends than the organizational good. When that happens, not only are decisions made that aren’t for the organization’s benefit, these decisions can actually do the organization harm.

Say, for example, a department leader bestows an award for productivity on a colleague. In a social network-based system, when the time comes for that colleague to bestow an award, he or she is likely to reciprocate. In this way, organizational leaders give each other accolades and pats on the back, but they’re meaningless outside the social network. What those leaders should really be concerned with is how these colleagues are performing in comparison to similar leaders outside the organization. True merit is judged not in the eyes of friends and colleagues, but in the eyes of external, unbiased viewers.

Processes are either not visible or not clearly articulated.
In a good-old boy system of management, criteria are not visibly articulated because leaders want to do things in ways that will help themselves and their friends. As a result, decisions are made in an underhanded manner that often undermines the goals of the organization. Where there’s no transparency, there’s no meritocracy.

Sabotage gets the upper hand.
The idea of rewarding one’s friends, in a social-network based system of management, can easily go one step further to the idea of hurting one’s enemies. Whether by leveraging the rumor mill or simply by hiring or rewarding employees based on who they are rather than what they do, leaders in this type of system are given the power to bring down good people and good ideas if they don’t benefit themselves or their friends.

Let’s say Employee A has a great idea. Employee A’s Boss knows if the idea is implemented, the Boss’ friend won’t be better off. So the Boss has to kill Employee A’s idea. The Boss can’t directly tell Employee A why the idea can’t be implemented; instead, the Boss brings his or her social network into play to make sure the idea is stymied.

Sounds extreme, right? But it happens all the time.

What’s it all mean?
The most difficult part of this situation is that in any organization, multiple networks like the ones described above exist. And that means that many many new ideas don’t get off the ground. But that’s not the worst of it. As I said above, if good people are not rewarded for their good performance and good ideas, they’re either going to leave the organization or stop performing. And that type of disincentive is a disaster on every level.