Sally Alspaugh, CAP®

Chartered Advisor in Philanthropy®

building family legacy

Book Review by Sally Alspaugh

book coverFamily Wealth — Keeping it in the Family, or How Family Members and Their Advisers Preserve Human, Intellectual, and Financial Assets for Generations

Authored by: James E. Hughes, Jr.

In the old proverb, “shirtsleeves to shirtsleeves in three generations” the older generation is depicted to have started with nothing, worked hard, amassed wealth, and passed it to the second generation who respected it. But by the time their great-grandchildren inherit the business, the family is back where they started, with nothing. Andrew Carnegie put it a different way, “Clogs to clogs in three generations.”

The point is, that when a first generation is observed acquiring wealth the second generation respects it and preserves it. But because the third generation wasn’t around to see the hard work that it took to make the wealth, they tend to spend it. Make it, respect it, and spend it is a theme too often repeated.

James Hughes, in his book Family Wealth is dedicated to fighting this trend. He offers advice on combating this all too frequent inevitability. His premise is that family wealth includes both human and intellectual capital, not just financial capital, and must be intentionally preserved otherwise it will not last.

First of all, he says that long-term wealth preservation is a question of family governance. It is not naturally self-perpetuating. So wealth preservation starts with a long time horizon of say 100 years or four generations. Without intentionality, entropy will occur, hence the shirtsleeves to shirtsleeves phenomenon. Here in a nutshell is his formula based on the study of many families of wealth.

  1. The assets of the family are its individuals
  2. The wealth of the family consists of the human and intellectual capital of its members
  3. Financial capital is only a tool to support and grow the human and intellectual capital of its members
  4. To successfully preserve its wealth, the family must form a social compact reflecting shared values that is then passed on from generation to generation
  5. A representative governance system needs to be in place that will serve as a way of doing the family business, actively practicing their unique family values

It is well known that businesses often fail due to poor succession planning. Hughes wants his readers to see preserving family wealth as a business enterprise to be passed on from generation to generation. It is important to remember that, to Hughes, family wealth means human, intellectual and financial capital, not just the financial capital that is so often emphasized to the neglect of the others. In his opinion, “The issue most critical to the failure of a family to preserve its wealth is concentration on the family’s financial capital to the exclusion of its human and intellectual capital.”

What does promoting human and intellectual capital look like? It is a dedication to the promotion of the pursuit of happiness of each of the members of a family. It is a study of human behavior at its core and the enhancement of the lives of each member to their fullest potential. It is a qualitative, not quantitative, enhancement for the physical and emotional well being of everyone. Also, it’s about understanding that the whole is greater than the sum of its parts.

A family’s success is the sum of each member’s personal successes in life. That is why shared knowledge of family stories is important. Multiple generations of family stories will usually lead to some common values held by the family that will guide and preserve successive generations going forward.

At its core, the business of a family is to make more positive decisions as opposed to more negative decisions. Decisions can cover a whole host of topics e.g. legal, monetary, investment, educational, recreational etc. All of this leads back to preserving the whole family’s wealth not just the individual’s. Each member needs to see themselves in a family first, then a community, then a society, then a culture in order to have a multi-cultural view of their place in the world.

What does this all have to do with philanthropy? Hughes claims that, “Families learn more about long-term wealth preservation through giving than they do through spending or accumulating.” Imagine a multi-generational family sitting around a large dining room table. The topic of discussion is about giving away an amount to philanthropy. I can guarantee that the patriarch is pleased that the emotional issue of wanting a new car or new house is off the table. The money must go to charities –the other emotional issues are gone. Now the business of the family is to figure out to whom, how much, why, when and what for. Will they give locally, nationally, internationally, around what causes? Will they give a one-time gift or will it be annually. Will it go for endowment, projects or for administrative over-head? Who will do the homework to find out what charity is worthy and whether or not the gifts were later used for their intended purposes and to what effect? Doesn’t this sound like the family has a job to do; to come to consensus and then to follow through? Could this be deemed a family business where all the parts are needed to form a whole?

In conclusion, Hughes’ book says it better, in my opinion, than anywhere else that philanthropy can be the laboratory of learning for life; for example, learning about people, values, finances, goals, outcomes, disappointments, achievements, and on and on. How better to teach younger family members about dealing with advisors, the markets, risk taking etc. than along the learning curve of philanthropy perhaps before that younger family member comes into their own inheritance and has to learn these the hard way?

As Terry Hunt, PhD, said at a Conversations and Coffee event last year, “In the end, it’s not about the money or the philanthropy, it’s about the family!” James Hughes’ book brings it all together just the way Terry’s quote did. I highly recommend this small book that is packed with wisdom around a subject that is at the core of all the families I know, no matter how many zeros are at the end of their net worth.

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