Enhancing Family Capital
Updated: May 9, 2020
It’s standard practice to prepare a year-end balance sheet if you own a business. Individuals will also create a net worth statement as a measure of financial well being. And what if we employed the same discipline for our family members? Human capital often refers to the stock of knowledge, habits and personality attributes that contribute to the ability to perform tasks and produces economic profits. Accordingly, can we list our assets and liabilities for those involved in a family enterprise or profession, and do investments in education or activities that contribute to preserving and growing our family capital?
Family Values and History - Clearly, our values represent the long- term equity of a family. Tradition and custom transmit family values, be they hard work, perseverance or risk taking, to the next generation. A family identity creates a concept that future generations can preserve and rally around. With today’s changing definition of the family, an ongoing challenge will be to adapt family values to incorporate the views of newcomers to the fold.
Legacy Planning - Succession planning literally pays dividends to family members in terms of the profits generated by a family enterprise that support individual lifestyles. In view of accepted thinking that family wealth is unlikely to last past the third generation, it is key for the heads of families to distribute family wealth so that individuals have the opportunity to diversify and invest their share. The other option is to provide a mechanism whereby succeeding generations can get involved in the family enterprise, allowing them to control their own fortunes. Family involvement leads to matters of engagement.
Engagement - Family members involved in an enterprise represent the working capital of the family. Second generation children will typically be involved since they are exposed to and often grow up with the family enterprise. The third generation of cousins will be larger, more diverse and likely distanced from the business. Regardless, there still should be room for the DNA of the founder(s) to surface in these successors in order to carry on the family enterprise. At the same time, there will be a larger group of passive beneficiaries who have a claim to continued support and who require a process through which they can be informed on the prospects for the family enterprise.
Education – Most of us view education as an essential investment, both current and long term. Original thinking of family members represents the “greenfield” opportunities that will allow an enterprise to grow. The nature of the education, formal or on the job training may vary and seemingly unrelated lines of education should be encouraged to stimulate innovation.
Social & Philanthropic Activities – Family gatherings and community work form the goodwill of an enterprise. The reputation of a family will be reflected in the willingness of business and community leaders to work with the family enterprise. That willingness will one day add real value should an enterprise run into business difficulties or look to be sold.
Since it’s our family members, we may prefer to use the term ‘potential’ over ‘capital’. Yet, taking stock in our family members should lead us to shore up our family balance sheet when needed and to make the necessary investments in our future business and community leaders.