Whats wrong with a lil' bit of nepotism?

Whats wrong with a lil' bit of nepotism? Probably nothing in the greater scheme of things.
Very likely goes on all the time.
A lot of family businesses may even owe their successes to a bit of "keep it in the family" kinda nepotism.
May even work in many cases, where it does not impede or injure others.

So! When exactly can we say that nepotism or any of its henchmen such as cronyism and favouritism becomes a problem?

First of all, it usually works in small Mom and Pop organizations, where problems are more readily apparent, than in larger organizations where there are many more variables.

It becomes a problem when the organization itself starts becoming dysfunctional and when others are trampled, over-looked or impeded in their own careers. It becomes a problem when it becomes the nepotism of the arrogant. Thats when nepotism becomes truly lethal, as in the case of New Orleans where real live, tax paying citizens have been, killed, injured, or worse, left living at the mercy of an Administration that, compounding the arrogance of appointing a one-time horse trainer to head up a national disaster relief/preparedness agency, continues to give disaster-relief tax dollars to its most favourite corporations to administer. This ensures that profit comes first and that relief is fitted in there somewhere, but thats another story for "accountabilitynow" for another time.

Nepotism thus takes on different meanings. Nepotism for survival in a small/family organization may be workable even desirable.

The nepotism of arrogance, the just because one can attitude, becomes a whole different kind of monster. A deadly monster in larger organizations, because arrogance invariably and demonstrably appoints mediocrity.

Bears repeating. Arrogance appoints mediocrity. Mediocrity breeds mediocrity.

Mediocrity always leads to corruption. Mediocrity inevitably leads to the demise of excellence, because mediocrity is the enemy of excellence. So! You end up with mediocre members who, in order to keep their own positions as cushy as can possibly be, recommend other mediocrities with the same goal and thus banishes the hard/visionary/inspired/creative work that excellence brings to the table. The kind of work that helps an organization stay competitive with the other sharks out there.

An organization that is filled with the spawn of nepotism is an unstable organization. It is riven with internal factions, each striving for dominance. Depending on the rank of ones relatives, levels of factions begin to form. Factions within factions. It is the perfect breeding ground for a possible dictator within the organization, as those appointed out of arrogance aren't usually the sharpest knives in the drawer. Their own survival will always, always, take precedence over the survival or the future health of the organization.

Mediocrity costs an organization more in real dollars as well, because as anyone knows it just simply takes a lot more mediocre people to do the job of a few talented ones. Mistakes and mediocrity also go hand in hand. A lot of resources that also cost real dollars get wasted like this.
Mediocrity fills an organizations rivals with talent. How? Remember that mediocrity always banishes excellence. That excellence sometimes ends up with a competitor, usually at much higher compensation. Thats because loyalty never needs to be highly compensated.
All this leads to sub-standard service, product, profits and eventually the demise of the organization itself.
They'll probably blame it all on the departure of the talent from their organization, because in the end.......Mediocrity always blames the excellent for the predictable result of mediocrity.