By W. Gibb Dyer - Special guest author
For the past four decades, I have been a consultant to many family business leaders and high-wealth individuals. Most often I have been asked to help them with the challenge of succession, the transferring of ownership, assets, and leadership to the next generation. Early in my career, I focused on helping these individuals with what I considered the "nuts and bolts" of such planning—preparing a will, deciding who should be future owners of the businesses, developing a plan to prepare future leaders, etc. Over time, however, I came to realize that what was most helpful to such leaders was to encourage them to think more broadly about the transition of leadership from one generation to the next. I realized that helping families transfer what I call "family capital" to the next generation was the most important thing that I could do. Family capital is the human, social, and financial resources (and other tangible assets) that are available to individuals or groups as a result of family affiliation.
Here is a brief description of each of the components of family capital:
FAMILY HUMAN CAPITAL refers to the knowledge, skills, and labor that resides within a family. By sharing their experience and expertise, the older generation can help younger family members better understand how to run a business and also impart wisdom that can help them in their everyday lives.
FAMILY SOCIAL CAPITAL refers to the bonds between family members and those outside the family—bankers, customers, suppliers, community leaders, etc.—relationships that can be used to obtain the resources needed to help the family achieve its goals. An example of family social capital's impact on business success is part of the early story of Microsoft. Bill Gates was able to sell his DOS operating system to IBM because his mother knew IBM CEO John R. Opel through their mutual involvement with United Way. As a result of that connection, Bill Gates was able to convince IBM to bundle Microsoft's software with its personal computers. Without the help of Bill's mother, Microsoft might not have been able to gain such a dominant position in the software industry.
FAMILY FINANCIAL CAPITAL and other tangible assets comprise the third aspect of family capital. Families often have money and other assets that can be used to help family members. For example, it's well known that Steve Jobs benefited from his parents' generosity when they allowed him to start Apple in their garage. And in the case of Sam Walton, founder of Walmart, he was able to launch the business by using seed money from his wealthy father-in-law. Such assets can play an important role in helping the next generation succeed.
Transferring Family Capital to the Next Generation
Too often, consultants like myself only pay attention to the third component of family capital, that of money and tangible assets. However, I've found that transferring the other two types of family capital is equally, if not more, important. Transferring family capital requires the family to answer the following questions:
- What kinds of family capital (human, social, financial) will be helpful to future generations of family members (those both in and outside the business)?
- What family capital do we currently have that needs to be transferred to the next generation or other family members?
- Who has access to this family capital, or, if we don’t have the family capital that is needed, how do we develop it so it can benefit future generations?
Family leaders need to think about these questions as they begin the process of transferring family capital. If not, younger family members may need to bring these issues to the attention of their elders to encourage the process to start, since it may take months or years to accomplish. Raising these issues is not easy since they may feel that they will be seen unfavorably by their elders if they ask questions about a possible inheritance. However, if the family has developed high levels of trust, that may open the door to have a discussion between generations on this topic, or family advisors may need to broach the subject with the family.
To facilitate the process of transferring all three types of family capital, I have found that it is useful to do the following:
- Create a genogram of one's nuclear and extended family. A genogram is essentially a pedigree chart that shows each generation of family members and describes the relationships between family members (e.g., close, conflicted, cut-off, etc.). While the chart can be complex, I generally suggest that the family put together a genogram that includes three generations of family members. Deceased family members should be included in the chart since their social contacts and other resources might be available to help the next generation.
- Create a "family capital genogram" that identifies who in the family has access to family capital. This genogram adds information about each person regarding:
- The family capital that each person has at his or her disposal, and
- The family capital that each family member may need in the future.
- The family capital that each person has at his or her disposal, and
- Develop a plan to improve relationships between those who have family capital and those who need it. In some cases, this may require the help of a skilled counselor or consultant.
- Develop specific plans to transfer family capital from one person to another by using the "learning by doing" approach. This may also require getting outside advisors (e.g., lawyers, accountants, etc.) to help in the process.
To help families transfer family capital to the next generation, I've learned one important lesson: make them earn it! Family human and social capital generally cannot be transferred unless family members are willing to put in the time and effort to obtain them.
I have found the “learning by doing” approach to be the most successful method to transfer family capital. This approach requires:
- Identifying what type of family capital needs to be transferred, and
- Identifying potential learning experiences that will help the person acquire the family capital.
This approach assumes that the person transferring the family capital will serve as a mentor (or find a mentor) for the persons receiving the family capital to help them and answer any questions they may have.
An example of someone who exemplifies this type of learning is J. Willard Marriott, founder of the Marriott Corporation, along with his father, Will. At age 14, Bill was asked by his father to take a herd of sheep from Ogden, Utah, to San Francisco by train, sell them, see the world's fair that was being held there, and then return safely.
This experience helped Bill gain new knowledge, develop confidence, and build relationships that would help him not only as a rancher, but as a future business leader. In today's world many parents wouldn't trust their 14-year-old son to pick up a gallon of milk at the local grocery store and bring it home, let alone have him take several thousand sheep by train hundreds of miles from home — and with no cell phone to check in!
There are a variety of approaches used by families to help transfer family capital using this learning-by-doing approach. For instance, I've seen some family leaders identify formal training (e.g., apprenticeships, degree programs) that will help the next generation develop the skills and experience they will need. Family leaders also may work with the next generation on projects or in a business to mentor them and teach them what they need to know.
For example, before transferring money to the next generation, a family leader might require the next generation to find a job, earn their own money, and make and keep a budget to demonstrate responsible use of finances. The family leader could provide support for the younger family members by helping them in their job search and teaching them how to manage money and live on a budget.
As an example of transferring social capital, Jon Huntsman, the founder of the Huntsman Corporation, took his son Peter (now the current CEO) on business trips to help Peter understand how the business worked and to build relationships with key company employees.
More importantly, when Peter started working in the family business, he started near the bottom of the organization as an oil truck driver.
This allowed Peter to understand the business from the bottom up, to demonstrate his competence at various levels in the company, and most importantly, begin to develop a social network which, when coupled with his father's social network, would help him in his future role as CEO.
To ensure the effective transfer of financial capital, family members may need to gain knowledge of the basics of finance and investing.
They might also be included in family projects that help them understand how financial and other assets can be used to grow a business or to help the family in some way. It's important for future leaders to have some hands-on experience related to managing money effectively.
In summary, transferring family capital is often the key to a successful transition between generations.
Families need to be aware of what family capital currently resides in the family and what family capital is needed by the next generation, and then create a plan to transfer that family capital, generally by using a "learning by doing" approach.
W. Gibb Dyer (Ph.D. MIT)is the O. Leslie and Dorothy Stone Professor in the Marriott School of Business at Brigham Young University. He is ranked as one of the top ten scholars in the world in the field of family business and has published nine books and more than 50 articles. Dyer's research has been featured in Fortune, The Wall Street Journal and Fast Company, and in 2008 he was given the outstanding faculty award from the Marriott School.
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