Review – Complete Family Wealth

Complete Family Wealth

by James E. Hughes, Jr., Susan E. Massenzio, Keith Whitaker

Chapter 1 – Complete Wealth

There are five forms of family wealth: human, intellectual, social and financial. A family can be rich in the first four without any of the fifth. Financial wealth is primarily useful for enhancing and developing the other four forms of wealth. The failure to acknowledge, measure and grow the four qualitative forms of wealth are the principal causes for the failure of family flourishing.

The Five Types of Capital

1. Human, the individuals who make up the family including their physical and emotional well-being, their ability to find meaningful work, to establish positive identities and to pursue their individual happiness
2. Intellectual, knowledge gained through education and experience by the family over time and the ability to transmit this knowledge across the family
3. Social, the family’s relationships with each other and their community, including shared decision-making, the adoption of new members into the family and the giving of family resources to the larger society in which it belongs
4. Spiritual, a shared sense of purpose and meaning for the family, primarily translated through stories and vivid experiences passed down through the generations
5. Financial, the family’s assets, property, cash flows and other equity interests that provide it with money used to pursue all other ends

For a family to grow its five forms of capital over time, every family member must adopt an attitude of being responsible for contributing to the family capital’s growth in the ways they are able to do so.

Things Families Can Do To Grow Their Wealth

1. Human
   1. Promote individual flourishing
   2. Ensure basic needs for food, shelter and clothing are met and provide for those experiencing a life emergency
   3. Emphasize the importance of finding meaningful work to promoting a sense of individual self-worth
   4. Encourage the development of strong personal identities separate from the family’s financial position
   5. Promote geographic diversity of the family to ensure the family is a participant in a changing global environment
2. Intellectual
   1. Encourage each family member to achieve their maximum level of learning however they do that best
   2. Provide a means for the collection and dissemination of the accumulated knowledge of all family members (Wisdom Book)
   3. Include all family members in family governance issues at the highest level of each person’s ability to understand and provide feedback
   4. Ensure all family members understand, to the best of their ability, the workings of the family enterprise
   5. Diversify the family’s intellectual capital by encouraging the study of world cultures and languages
3. Social
   1. Hold well designed family meetings to provide time to connect as a family, conduct business and deal with difficult topics in productive ways
   2. Encourage family members with challenging interpersonal relationships to seek professional consultation aimed at resolving their conflicts
   3. Articulate a clear family governance system that encourages members to come to thoughtful decisions together
   4. Provide incentives for the family’s highest achievers to take representative and leadership roles within the family governance system
   5. Provide the rising generation early opportunities to participate in the family’s business and philanthropies to foster community involvement
4. Spiritual
   1. Tell the family’s stories of success and failure, good times and bad times and allow the rising generation to transmit these stories down the line
   2. Clarify the family’s shared values and make sure they are expressed in business, philanthropy and gift-giving
   3. Approach important decisions with “seventh-generation thinking”
   4. Promote humility by acknowledging the fact that every family member is a part of a larger society and limits to act must be respected
   5. End every family gathering with a brief gratitude exercise by having each member identify someone they want to thank and ways to offer those thanks
5. Financial capital
   1. Avoid the temptation of defining success within the family strictly in financial terms
   2. Learn productive ways to discuss money and financial management with all family members so all can be participants in caring for the family’s financial wealth within their ability and know-how

Many families create budgets for managing and growing their financial wealth, but few think to create such budgets for caring for their qualitative capital. Imagine forming such a budget. What would the relative amounts budgeted for in each category say about the relative importance of these forms of capital to the family?

The “Family Balance Sheet” exercise provides a short survey approach to quantifying the existence and growth of family qualitative capital over time.

Chapter 2 – Family Enterprise

Families that flourish over time define themselves as families of affinity. Their first principle is inclusion and they look for ways to be inclusive toward people who share their affinity.

• Who in my family shares this vision of family based on affinity rather than blood?
• Who are the members of my family of affinity?
• Who could be potential members of my family of affinity?

7 Keys to Flourishing Over Multiple Generations

1. Early on the fundamental intention is set to build a great family, not just a great business
2. These families articulate and share their core values amongst themselves and with others, through example, education and discussion
3. These families respect and encourage individual differences and encourage and support each member in achieving their unique dreams
4. They keep their collective focus on their strengths, even when facing challenges
5. They share history with story-telling that is told and re-told through the generations, creating a reputation and tradition for each person to live up to and contribute to
6. Parents see themselves as teachers AND learners
7. These families understand the importance of individual stages of development and integrate that into their understanding of parenting

Keys for Flourishing Amid Wealth

1. Giving wisely, this requires thought and care on the part of both givers and recipients
2. Promote and encourage individual identities separate from the wealth, especially for the rising generation
3. Utilize trusts, which are primarily human rather than legal relationships in their focus and structure
4. Philanthropy provides a shared focus

Families are built on individual flourishing within a larger structure of shared identity, values and stories and a connection to the wider community.

• Is each family member flourishing?
• Does the family enjoy a shared culture aimed at promoting individual flourishing?
• Do family members know how to chart their own paths apart from the family enterprise?

When a family has an intention to grow all its forms of capital over multiple generations through coordinated effort it creates a family enterprise. The three main parts of any family enterprise are family (inclusion), owners (preservation) and managers (performance). Trouble arises when one of these parts takes priority over the others.

Common sources of conflict in family enterprises:

• Parent-child and sibling conflict over managerial control
• Conflicts over managerial strategy and direction
• Conflicts over ownership strategy (keep vs. sell)
• Conflicts between shareholders who are also managers versus shareholders who are outside the business, ie, reinvest profits or distribute as dividends
• Conflicts over employment and compensation of family members
• Tensions between the spouses of family members who are owners or managers in the business
• Failure of communication and understanding between trustees (family or nonfamily), the legal owners of title, and beneficiaries, especially when most of the family’s financial capital is held in trust

Ideally, for long-term success the family circle should be larger than the owners or managers circles in terms of the time and resources employed the care for it.

In addition to keeping the family circle strong, family enterprises need to pay attention to the ownership circle by finding ways for each owner to take responsibility for his position. Without this, they become passive on questions of strategy and defer to management. Active ownership is cultivated by understanding:

• Ownership is a responsibility; management is a calling.
• The enterprise is a “we” and “us”, not “they” or “them”
• Passive ownership leads to paternalism and resentment
• Managing risk is a complex discipline that every owner must undertake, and the balance between taking too much risk and taking too little risk is one that can be learned and managed
• Trustees, because of their duty of prudence, are entropic owners and cannot take the same risks as owners in competing enterprises
• Beneficiaries must step up to be active owners, meaning meeting regularly with trustees and asking questions in an effort to learn
• Family owners must possess a basic understanding of systems theory, leadership science, the process of leadership transitions and the methods for assessing the health of the enterprise and the performance of management
• Family owners must communicate with each other and truly listen to each other to develop their dreams for the enterprise as it evolves beyond the dream of the founder or creator generation