Family Office — Social Capital
/As outlined in our 2017 ‘Intro to Family Offices’, we highlighted the intentionality of structure which families bring to develop their Capital. In particular we shared that a family’s wealth, and thereby risk management, should be viewed across a wide array of Capital considerations and approached with respective thoughtfulness:
Human Capital; the role each individual plays in the family and the respective development of their unique talents,
Intellectual Capital; what each person knows and how they contribute to the decision making process within the family,
Social Capital; what the family views as their role in society, what lasting difference (legacy) they will make and which organizations they will engage and support for the betterment of society,
Financial Capital; the legal property ownership of the family … financial assets, business interests, real estate holdings, farmland, intellectual property, mineral rights, etc.
We know the Family Office, whether it be a Single Family Office (SFO), or services provided through a Multi-Family Office (MFO) / Registered Investment Advisor (RIA), provides a legal and tax framework; however, it does not define fulfillment mechanisms, tools, processes or disciplines which can only be adopted by family leadership.
We previously outlined considerations for a Family Business Board and specifically noted that, “...one must consider the Philanthropic / Social Capital aspirations as a business unto itself and have a separate board of governance with its own charter. The charter for such philanthropic objectives contributes significantly toward the families’ Social Capital vision and is independent of the legal/tax/financial tools (e.g. Private Foundations, Donor Advised Funds, or Charitable Trusts).”
We’re often asked ‘where to start with family governance?’, and our reply is typically to begin with Social Capital. Anyone can write a check to charity, but building a legacy is a comprehensive endeavor which integrates the various forms of Capital. We admit, it may sound counter-intuitive to initiate family office governance through charitable giving, but upon reflection it becomes a very logical starting point.
Susan V. Bosak, Legacy Project, says “Legacy is fundamental to what it is to be human. Research shows that without a sense of working to create a legacy, adults lose meaning in their life. Exploring the idea of legacy offers a glimpse not only into human relationships and building strong communities, but also the human spirit. The idea of legacy may remind us of death, but it's not about death. Being reminded of death is actually a good thing, because death informs life. It gives you a perspective on what's important.”
One’s lasting difference is not limited to the tax status of a legal entity (for profit / not-for-profit), but encapsulates the totality of one’s existence. Therefore, in pursuit of a grander legacy vision, we encourage beginning with Social Capital questions as a clarifying first step; including consideration of:
Why give? Giving is a very personal decision with motivations running as deep and unique as the giver … so one must ask, why give? What are my motivations? What is your families’ aspirational role in society?
Where to give? Do you know how the finances are being managed and by whom—are they good stewards of what you’ve entrusted to them? Is the organization a strategic fit toward achieving your life story?
Does the recipient organization reflect shared personal/family values?
Are you spread too thin? ‘Good giving’ is a challenge and being focused is important. Linking one’s time and involvement to the cause, before deploying financial resources, may be advised.
How do you monitor the organization to assess if they have drifted in their mission?
(Side note, I recommend the book Mission Drift by Peter Greer & Chris Horst on this subject.)
How is the next generation engaged and what role are they playing (Human & Intellectual Capital)?
The last question is the cornerstone of why we believe starting with Social Capital is a great learning ground for the development of family governance.
To give something of value and not receive anything in return is a selfless act. If subsequent generations (adult children / grand-children) are engaged in the giving discernment process, they are forced to reconcile their personal beliefs and families’ values in the context of society. This leads to understanding of the uniqueness of the each individual and brings clarity of joint purpose within the family.
At this point we’re asked which tool is better, a Charitable Trust, Private Foundation, Donor Advised Fund, or otherwise. Again, we encourage not focusing on the mechanism at the start, but on the process and governance structure from which the operating dynamics will emerge and guide the appropriate tool application. In other words, don’t let the legal / tax tail wag the strategy dog.
The strategy is to bring families closer together, transmit family values through the next generation and teach valuable skills. In the book Managing Foundations and Charitable Trusts, Silk & Lintott dedicate an entire chapter to these tenants of giving and next generation engagement. A few skills they highlight being developed in the next generation:
Foundation Board Meeting: preparedness, accountability, formality in structure and decision making,
Strategic Alignment: assessing a recipient organization’s strategy, ability to execute the mission, sustainability, and alignment to family values,
Financial Matters: strategic gifts into the foundation (or DAF, Trust, etc), timeliness of grants out to end recipients, investment management, budgeting, tax reporting & compliance,
Communication: in person and in writing, among family members and with potential grant recipients.
Grant making to charitable recipients is simply a form of outsourcing. The family is deciding to outsource work best accomplished by the organization of choice to make a greater impact than the family could do on their own. The efficient allocation of financial capital toward non-profit institutions is no less meaningful than the work of the family business itself. Therefore, it is imperative that the family take a disciplined approach in allocating Social Capital and developing a legacy through the next generation.
John W. Sleeting
Partner
P.S. During December I, along with several of our Clearwater Capital team, will be performing due diligence in New York City with investment management firms BlackRock & WisdomTree. These visits will be instrumental in the refinement of our 2019 Outlook and underlying strategies.
