[olivierduval]

Logically, "As the employee with more power and rank at the company in question", he's the one giving the most value to the company (or he wouldn't have promoted, would he?) so - in regard to any company's interest - it's best to keep him where he give most value than to move him to some other where he would give less value.

Company's interest is most often not a question a moral, but efficiency.

[secabeen]

The question then becomes is there another employee who would step up and give a similar value if given the opportunity, what is the impact to the organization of other employees seeing how people were treated in this case, etc., etc. Judging value to the company by existing power/rank in the company is certainly the simplest way to do it, but it's not necessarily the best way.

This train of thought has a lot of similarity to the discussions going on around corporations maximizing only share-holder value, or if it is better for them to include stakeholders, and other non-stock-price factors when making decisions.

Rules against nepotism in companies are there to prevent people in a personal relationship from giving their partner an unfair advantage over other employees, but also to prevent higher-ups from using their power within the workplace to victimize their subordinates. In either case, when a pair of employees clearly and willfully violates the policy to the level of having a kid together, I think the company should assume that the higher ranking person is more culpable, and should be punished for their actions, not the other way around.