Book_Report

Analysis of “Family Wealth: Keeping It in the Family” by James E. Hughes, Jr. The checkered history of long-term wealth preservation in families is mockingly captured by the adage: “Shirtsleeves to shirtsleeves in three generations.” In his book, James Hughes presents a roadmap for navigating through fractious family relationships, competing inter/intra-generational interests, poorly-designed succession plans and many other universal family business challenges. Although his prose can be disjointed – frequently interrupted by vague esoteric references to philosophical, psychological, anthropological and political theories – he manages to outline specific steps families must take to ensure long-term wealth preservation. Of course, he is careful to mention that the success of these strategies is predicated upon the existence of a well-developed sense of ethical centeredness and spirituality within the family. As Hughes explains: “Every family I have observed that is successfully preserving its wealth is a reflection of the five virtues of truth, beauty, goodness, community and compassion. It reflects these values in its relationships with both family members and with all persons outside the family. I am convinced that without this spiritual component, a family cannot succeed in preserving itself, since its value system will fail and with that failure will come disintegration.” For those families that possess the required cultural underpinnings, Hughes has organized his ideas/results in a very linear format – he first introduces his philosophy regarding family wealth preservation; he then discusses best practices in defining a mission, measuring success and leveraging individual skill-sets of both family and non-family employees; and he ends with an examination of estate planning techniques and reflections on the development of individual and collective responsibility to the family members and to the family business. Hughes’s Philosophy of Wealth Preservation Hughes disagrees with the inevitability of “shirtsleeves to shirtsleeves in three generations” but acknowledges the myriad reasons why families fail to preserve wealth over an extended period of time. He claims this failure is unnecessary, postulates his theory regarding wealth preservation, and broadly proposes a solution to the problem. Hughes’s theory is based upon six tenets: (i) preservation of inter-generational family wealth is a question of human behavior; (ii) wealth preservation requires collective effort and vigilant governance; (iii) the assets of a family are its individual members; (iv) family wealth consists of its members’ human and intellectual capital – financial capital merely supports the other two; (v) families must adopt and continually ratify social contracts that reflect their shared values; and (vi) families must establish and continually reaffirm their commitment to a form of representative governance that is aligned with the objectives and values defined in the social contract. Of particular note is Hughes’s insistence that family members subjugate the desire for short-term gratification for long-term stability. He bemoans that far too many families “fail to understand that the preservation of wealth over a long period of time is unbelievably hard work, with a tremendous risk of failure balanced by a magnificent but distant reward.” In an uncharacteristically illustrative diversion, Hughes introduces the story of Marshal Lyautey, one of Napoleon’s greatest generals and the proud architect of the “most beautiful [home] garden in France.” One day, while surveying the estate with his head gardener, Lyautey complained that it did not include a copper beach tree – an unusually beautiful and rare species. His gardener replied that such a tree would take one hundred and fifty years to grow. Lyautey, without hesitation, exclaimed: “Then we must plant today – we have no time to waste.” Best Practices Hughes believes that the construction of a well-developed, universally-acceptable mission statement is essential to the preservation of the family business. He argues that this document must outline the purpose, vision, values and goals of the enterprise (family and business). It must also result in the codification of a governance system which includes ratified meeting protocols and provides for unambiguous communication channels. Only after the family has defined who it is and where it wants to go can it decide how best to get there. Hughes believes that this process begins early and insists that families who “recognize with ritual the important passages in their members’ lives seem to fare better at overcoming the shirtsleeves proverb.” These rituals are essentially protocols designed to facilitate major family events (i.e. marriages, introduction of new members, “coming of age”, etc.). After these protocols are established, the family must decide how to sustain and grow their enterprise. Hughes contends that those families that preserve wealth over the long-term vigilantly monitor and evaluate themselves. He advocates for the creation of family balance sheets and income statements – mechanisms for measuring human, intellectual and financial capital. However, Hughes warns that these documents should be viewed with an eye toward considerably longer “investment” horizons. Hughes spends the rest of this section discussing the importance of communication within the family. He recounts the Ernest Doud and Lee Hausner story of a father and son who were in business together. The father was the successful company founder and the son was the incompetent fool cloaked in a veil of entitlement. When an opportunity arose within the senior ranks, the son assumed he would receive the promotion. When his father called him into his office, the son noticed two hats arranged on the desk – on one was written “Boss” and on the other “Dad.” The father put on the hat labeled “Boss” and informed his son that he was fired. He then took off the first hat, put on the hat labeled “Dad”, placed an arm around his son’s shoulder and told him everything would be alright. Hughes believes that families must spend the time to diagram the disparate, interwoven relationships between family members. As the “Hat” parable shows, often one family member has multiple relationships with another member. Roles and Responsibilities Under the presumption that the mission statement has been established and best practices implemented, Hughes delves into the responsibilities associated with the judicious stewardship of a family business. He considers the concept of “control without ownership” the essence of being a great steward. He uses the term to explain the concept of transferring assets, defining it as exercising control over one’s financial destiny while not placing the family’s assets at the risk of the liabilities that grow from one’s direct ownership of those same assets. He then discusses the roles and responsibilities born by both beneficiaries and trustees. Hughes places particular emphasis on the need for beneficiaries to take an active role in understanding and monitoring their interests. If the beneficiary does not develop this understanding, he may ultimately undermine his relationship with the trustee. Hughes claims that “without educated beneficiaries, there is a high probability of the relationship’s evolving into anarchy at best and into tyranny at worst, even though the tyrant may be a highly benevolent despot.” Finally, Hughes gives his thoughts on regenerating talent within the younger generations. He writes about the need for constant feedback in the form of family mentors – typically elders whose broad experiences will be marginalized at the family’s peril. Families must spend the time to foster the future generations and ignore the temptation to focus narrowly on the present. Hughes’s refrain throughout the book is that families must view most investments as long-term initiatives and, according to the author, there is no more important family business investment than the one it makes in its human capital. Conclusion Ultimately, Hughes touches on many of the key points we have discussed in class and provides some innovative ‘best practice’ recommendations. Although I found the book a useful tool for understanding the myriad issues confronting family businesses, I felt Hughes often hid behind his frequently inserted disclaimed that all family businesses are distinct and that he could only write in partial generalities. Although I certainly agree with parts of his claim, I believe Hughes could have included more substance when he began to describe his “best practices.” Instead, he seemed to include many vague suggestions without any offering any empirical data or detailed experiences.