The Hindu Business Line : Every family owns three forms of capital

Shirtsleeves to shirtsleeves in three generations. This proverb comes in various forms such as, `Rags to riches to rags', and `rice paddy to rice paddy', says James E. Hughes Jr in his foreword to The Dilemmas of Family Wealth, from Bloomberg (www.bloomberg.com). The proverb offers `a negative prophecy' — referring to `the process of the creation of a financial fortune in the first generation, the plateau or stasis of that family's financial growth in the second generation, and the consumption of the family fortune in the third.'

Few families are able to pass along their wealth successfully to the next generation, rues the author Judy Martel. The failure is not so much due to `poor investments and lack of estate planning' as due to `deficiency of trust and communication among family members, leading to poor preparation of heirs.'

Three forms of capital

Every family owns three forms of capital, says Martel. The first, and the easiest to understand, is the financial capital, comprising `property, securities, cash and so on.' More precious are the other two capitals, viz. human and intellectual. The three forms are intertwined. How so?

Intellectual capital helps amass financial capital. "Thereafter, the human capital of the family must continue to be developed to sustain unity and harmony, leading to the acquisition of more intellectual capital." Such a cycle can guarantee the retention and growth of the family's financial wealth, explains the author.

"If in a family human and intellectual capital fail to grow with each successive generation, an individual's prime urge to `take the money and run' will surface, and chances are, the money will rapidly disappear." The book discusses eight dilemmas, which are `particularly vexing because they force difficult choices.' A wrong choice can lead to the collapse of the family, cautions Martel. The first dilemma is, "It's time to plan form succession, but I don't know how to let go of the business."

A founder is rarely ready to let go of the reins. He may display his lack of trust in the next generation, making only vague promises for succession `with no clear process or timeline for it to occur.' Or, he may keep the choice of successor as his and his alone, `and then becoming paralysed with indecision.' How to resolve the stalemate? "Only when the founder recognises his lack of trust in the second generation can he begin to look for ways to overcome it."

The third dilemma is about family coffers vis-à-vis growing numbers in the family. "New entrepreneurs are needed to replenish the financial capital." How? "Family venture committees, created for the purpose of investing in new family start-ups by lending money to entrepreneurs, are an effective way to do it," says Martel. "These committees are sometimes part of the family council." Great help can come from the founder, as a mentor offering `invaluable guidance for new entrepreneurs.'

A key dilemma is about the tricky issue of keeping the family together on something more than wealth. "When family members argue about money, what they're really fighting about are their differing core values," bemoans Martel. "If members of the family think their values are not being compromised, they're more likely to work toward the greater good."

Dilemma five is about new family members, as through marriage. "Equalising the power comes only when couples reach a mutual understanding about the wealth," counsels the author. "As the couple is reaching accord, both partners must be attentive to the perceptions and concerns of other family members, who are sometimes threatened by a new marriage if the wealth has been in the nuclear family until that point."

A book about which you needn't harbour the Hamletian dilemma: To read or not to.

Top anxiety of most founders is that the successor should run the business as he would, and also continue its success. "These may be opposing forces," reasons the author. "To continue the success of the business might mean that the business has to change." The founder has to set the vision, and allow the next generation "to modify it and live out its own dreams... write its own chapters in the family narrative." The second dilemma is of keeping future generations connected, even as the family seeks a new identity, after `discovering a new role for the founder.' The book cites the advice of Gerald Le Van — that families can form a `family council.' Such a council "coordinates wealth with the family's relational estate — the complex web of DNA, history, heritage, and interpersonal and interdependent relationships that connect them across the generations." It also helps to chronicle the family history. "The commitment to complete the record needn't always come from the founder."

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