What potential problems might a business encounter as a result of having only family memebers serve as CEO?

Many corporations and universities now have rules against hiring family. The only organizations that still allow are government ones(cities, states, and federal). Many cities have started putting restrictions on it because the best person for the job is usually not the family member.

Hiring family is just another form of welfare. The person usually can't cut in the real world so a relative hires them.

http://search.yahoo.com/search?p=nepotism+problems&fr=yfp-t-501&toggle=1&cop=mss&ei=UTF-8

What if it's the son-in-law and then he divorces the daughter?

This is a very difficult question because there are actually two sides to the question.
1) When families are very close and someone starts and grows a business and then brings in the children; and they get older and become more experienced in their judgment calling, the owner, whether father, mother, or both, begin by turning to reins over more and more until one of the children becomes the Chief Executive Officer (CEO). In this instance, I believe everything is very positive as there have been years of teaching and trust between the family members.
2) On the other hand, things can get very problematic, for example, when partners open a business. If you are not happy with your partner's wife's involvement in the company, you could have a problem. If she is not really trained at what she's doing the company could be in trouble very quickly. If reports are not available regularly so that you can see for eg. where the money is going, what deals are done without your knowledge, what kind of loans are being leveraged that you don't know about, the company could be in trouble. Also, if your wife does not like your partner for all the same reasons you could have a problem. Is your partner bringing the money and you are bringing some money but all the knowledge? This makes some people think they can do anything they want. If you are going to get into a partnership make sure that you and your wife and your TO BE partner and his wife (or his future wife) have what is called a BUY and SELL Agreement. This way, if something happens to your partner you can buy out his share and you will not be stuck being in business with his wife.
3) The best way overall, do not jump into business without really thinking things through. Make sure that you write out your plans, make sure you know who is going to have what authority and decision-making ability. Don't get left on the short end with a CEO who is ruining your business and whom you cannot get rid of.

The family member may not be the best choice for the job and may ruin the business.

Depends on if the company is private or public. If it is public then the question is if the family controls the majority stake. If they do own the majority, the family would vote in the Board of Directors(BOD) which in turn elect the officers.

The officers and BOD are responsible for maximizing shareholder value...its their fiduciary duty. If this "family CEO" is not performing and therefore not maximizing shareholder value, then the shareholders(assuming the family does not have control) should do a proxy vote and re-elect the BOD which then elects the officers.

Does this help?

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