Stewardship of Wealth: How to Perpetuate Capital into Future Generations
The "shirtsleeves to shirtsleeves" saying is an all too common phenomenon. Statistics show us that 70% of wealth transfers fail. It was very problematic in history, but even more of a concern with the anticipation of the Greatest Wealth Transfer in history soon arriving. But instead of focusing on the failures, how does the next generation succeed in this transfer?
To be successful, we need to change our mindset. When we refer to the assets passed down to the future inheritors, we need to rephrase the terminology. The next generation is not "heirs," they are "stewards." The definition of an heir is a person legally entitled to the property or rank of another on that person's death. According to Tomorrows Company, a steward is the active and responsible management of entrusted resources now and in the longer term, to hand them on in better condition. Instead of receiving an inheritance, the next generation receives an heirloom consisting of several forms of capital where they become the stewards.
Accumulated assets come in four different types of capital: Intellectual, Human, Social, and Financial. Intellectual capital is all of the knowledge collected within the family. It could be in the form of conventional education or the school of hard knocks, the collection of experiences the individuals and the group have acquired over time. Human capital comprises being healthy physically, mentally, and emotionally—the family harmony of working together in a healthy relationship. How the family and family name connect with the community is the Social capital. Sometimes it is in the form of philanthropy, but always about the reputation in the community. Financial capital is the resource to be preserved but also grows the other forms of capital.
In order to be proper stewards of the family’s capital, these principles should be followed:
Set the Course – knowing your vision, mission, and the core values that guide the family's purpose and structuring the governance to provide for good relationships among members.
Driving Improved Performance – making sure the challenging discussions and sound decisions are made on the financial bottom line. Having a balance between short-term gain and long-term vision.
Acknowledging and Shaping the Landscape – anticipating, influencing, and dealing with changes in the internal and external world. Expecting change and moving in the right direction.
Planning for the Future - planting seeds for future success and knowing that the family might not reap the benefit until the next generation. Like planting a tree for the next generation to sit in the shade.
The essence of good stewardship is the quest to leave the next generation of the family's capital in better condition. To accomplish good stewardship, the following elements are essential:
Effective leadership aligned between family and business following the vision, mission, and values of the family.
Structured governance, including a succession plan for continued revitalization across multiple generations, is written down.
Unless these elements are in the core plan of the stewards, failure is probable. Developing a culture of good stewardship instead of inheritors is up to leadership. How does your family educate the next generation?
