The reason nepotism is a problem is not necessarily that the wrong people get the jobs. If a relative does a terrible job but his family refuses to fire him, the company will just collapse or, at best, not fulfil its potential, and then the job goes away entirely. No, the real problem with nepotism is the mixing of power structures. If I work for you, but then you hire your son as my subordinate, I can't actually tell him he's doing a bad job or fire him if necessary, because that counts as a slight against you, my boss. The person who is supposed to be my responsibility is actually someone I have to treat as my superior, even if you tell me not to.
Mokalus of Borg
PS - That particular arrangement won't usually happen, though.
PPS - Because, if you're going to hire your son, you won't put him more than one level below you.