What is Family Capital and Why Does it Matter to Your Family Business?

Recently, I attended the Purposeful Planning Institute’s 2023 conference with 240 people from over 20 disciplines. Most were wealth advisors, estate attorneys and business psychologists (like me).  All struggled to answer the question, “What is family capital?”

Economists know that “family capital” is a real or perceived asset that can be measured, bought, sold or exchanged.  Growth, risk, profitability and liquidity (the GRPL construct) are examples of how wealth advisors assess and distribute family capital.

Attorneys know that “family capital” is a real or perceived asset distributed by governance decisions and contracts designed to provide assets to beneficiaries.  Trusts, wills, and family offices are examples of how estate attorneys protect and distribute family capital.

Psychologists know that “family capital” is a real or perceived understanding of shared values, lived by a social network of bloodlines, partners, and former partners.  Family charters, reinforced with family meetings or family councils, asset maps, and succession plans are examples of how business psychologists assess and reinforce family capital.

Here's my definition of family capital, subject to changes as my practice evolves. 

“Family Capital” is a dynamic social construct of shared values lived intentionally.

Dynamic systems evolve, as people age and social variables impact changes.  The emergence of well-educated women in family business leadership, social impact investments (e.g., B corp business, Environmental Social and Governance (ESG) initiatives), and fluid gender definitions are current examples of those dynamic variables in families. Your sister may be better qualified to lead the next phase of your business than the first-born son

Social constructs are those stated or unstated assumptions that describe how we trust and interact with others.  When your niece rants about her political views on Facebook or Instagram, or when your uncle posts a photo of that new vacation property purchased in Hawaii, they are sharing what they assume is acceptable. 

Values define what we hold dear. Common values for my family business clients include honesty, loyalty, customer-focus, protecting our loved ones, education, philanthropy, and continuity.  That list of values may change with every generation, because rising/next generation family members expect their voices to be included.  But it may not change much. 

As an example, the United States Preamble to the Constitution now has 27 amendments, but the values written in the Preamble have not changed.  

As a personal example, when I became an Eagle Boy Scout in 1978 I was advised to embrace the Scout Oath and the 12 values in the Scout Law.  When I joined Rotary I was expected to embrace the “Four-way Test of the things we think, say or do.”   When I recite the Family Business Consulting Group vision, mission, and 9 principles, I am expected to practice those values.  When I lead a blessing at our family dinner or when we share embarrassing stories during dinner, we are sharing the values that we hold dear.

Living intentionally does not imply that we are motivated by reason.  In fact, some emerging research in behavioral economics and psychology suggests that we are motivated by loss aversion and bias more than we know.  If cousin Charlie receives distributions from the family business, but does not participate in the family council or business, then Charlie may fear the loss of those distributions.  If Charlie makes disparaging comments based on his sexual bias or his racial bias, then Charlie may be uninvited to the next annual family retreat.

So let's assume the definition of family capital that we have given above is acceptable. 

The real question is, “So what?” 

My experience is that Family Capital drives all other aspects of capital (e.g., financial, social, human, psychological capital).  My friend, Lee Hausner, describes family capital using the FISH acronym for Financial (wealth management), Intellectual (Governance, decision-making),  Social (Community, philanthropy) and Human capital (leadership and legacy)¹.  My acquaintance, Jim Grubman, has expanded that FISH model.²

In short, the family’s understanding of financial capital will drive all other aspects of its capital.

When Kent Rhodes, Ed.D., and I created the Assess Next Gen Leadership 360 assessment process, we started with a theoretical model that includes 5 interwoven systems:  the individual, family, business, ownership and learning systems.  Each system is critical.  

We also developed four assumptions about each system, so that we could develop and assess behaviors that we thought were valid descriptions of the family system. 

Our four assumptions for family systems are:

1. Your elders have shared values, assumptions, behaviors that may be stated or unstated
2. Your current family will change over time
3. How you communicate, make decisions, and address conflict can be improved
4. You need a safe process for assessing and developing the unique strengths of your key leaders

Pause here...

As you read and re-read each of these assumptions, ask yourself if these assumptions are true or beneficial for your understanding of family capital.

The next article in this short series will:

1. Describe each of these four assumptions.
2. Explain how you can assess your individual and team behaviors relating to them.
3. Based on our research to date, state the top two behaviors that family business leaders should develop.

The bottom line:  Family capital can be assessed and developed by anyone at any age.

Do you need help assessing the state of your own family capital, or developing it for a more flourishing family? Visit www.assessnextgen.com.

Resources:

1. Hausner, L.  (1990).   Children of Paradise; Successful Parenting for Prosperous Families.   Tarcher Press; Los Angeles, CA.
2. Grubman, J. (2013).  Strangers in Paradise; How Families Adapt to Wealth Across Generations.  Self-published; Middleton, DE.