Establishing good family government

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James Hughes’ Family Wealth is exceptionally practical. With Hughes’ book, I felt all the recommendations Williams and Preisser made took on real, actionable qualities. I sensed I knew what our family needed to do and how we could move forward positively for (literally) generations into the future.

In sum: the way a family can move forward positively for generations is to establish a family government.

Before I proceed, let me mention that Hughes is a sixth-generation attorney. His father, grandfather, great-grandfather, etc.–going back six generations–were all attorneys! He is amazingly well- and widely-read. He quotes all kinds of philosophers and historians from Plato and Aristotle to Hindu, Chinese, Native American and other sources. He strikes me as a real philosopher, a deep and original thinker.

Major insights from Hughes:

A. A family’s true wealth resides first in its human and intellectual assets, only secondarily in its financial assets. Put another way, a family’s true assets are its individual members.

B. Preservation of wealth long-term is a matter first and foremost of managing the family’s human and intellectual capital and only secondarily of managing its financial assets.

C. A family enterprise that knows what its assets and liabilities are and apportions its governance time appropriately will find it is successfully preserving all of its wealth.

NOTE: “Businesspeople know that for a business to be successful, 70 to 80 percent of management’s time must be spent on asset growth and 20 to 30 percent of its time on liabilities. My experience of almost every family is that they get this formula reversed. . . . Families who understand [how they should be apportioning their time and energy] spend 70 to 80 percent of their time growing their human assets. For example, they know that no matter how much they save in taxes, which are a cost or liability of doing business, those savings pale in comparison to the revenues lost through poorly educated family members.”

Hughes notes how often estate planning attorneys, CPAs and financial advisors focus on tax saving strategies and completely ignore huge issues related to development of a family’s multi-generational growth of human and intellectual resources. –More on this fundamental point later!

D. To successfully preserve its wealth, a family must form a social compact among its members reflecting its shared values, and each successive generation must reaffirm and readopt that social compact. This means, among other things:

We need to “discover” and remind ourselves regularly (Hughes urges us to do this at least annually!) “who [we] are, where [we] come from, and in what way [we] are ‘different’” from the people around us.

In earlier societies, . . . the recitation of the history of the society through stories was the glue that held the society together. It was through these stories that members of the society learned that they were different from other societies. It was through these stories that individuals learned who they were, and it was through their retelling of the stories that they reaffirmed their place in that society. [p. 20]
We need to create a dynamic family government that can (and must–if it is to survive) be re-energized in each successive generation.

In modern times, written constitutions have become the repository of social compacts. The United States Constitution reflects, in its preamble, the shared values of the peope who entered into its writing. These constitutional drafters understood that they were attempting to set up a system of governance that would reflect that set of values. Most importantly, they believed that the shared values expressed in the Constitution represented a compact among the American people upon which a government could be founded. . . .

Every family I have studied that is still thriving in its fifth and later generations has, either through frequent oral recitation or written documents, committed to the memories of its members the family’s shared values and the method of governance it uses to practice those values. Each of these families actively encourages each generation to reaffirm these values and practices. [pp. 20-21]

More specifically: Hughes actually urges us to study Aristotle’s The Politics and come to an agreement on whether we want an aristocracy, an oligarchy, a republic, a democracy (”in modern terms, an anarchy”) or a tyranny (”in modern terms, a dictatorship”). “Every family I know, after it makes its own independent study of this subject, decides that a republic is the best system of family governance,” he concludes. [Personally, I would expect our family to come to the same conclusion. And I applaud that conclusion.]

Okay.

So let’s assume Hughes is correct.

[T]he critical first step for a family beginning long-term wealth preservation is to found an excellent system for decision making, a system of governance.

The second step is adoption of a formal process for each successive generation to reaffirm its acceptance of the family’s system of governance. . . . In our American system, this process of revitalization occurs every two years with elections. The framers of the Constitution knew that the social compact represented in the document could not be sustained unless this compact was renewed frequently through elections. This same principle of renewal is just as critical to the success of a family system of governance.

The third step in achieving a successful system of family governance is the adoption of a process to amend its practices as the family evolves. . . .

The final step in achieving excellent family governance is the adoption of a formal set of checks and balances to ensure that family members control the process of governance.[pp. 26-29; emphases mine]

What kinds of “checks and balances” is he talking about? –Pretty much the same checks and balances the founders of the U.S. government attempted to create: a legislature (in general, a “committee of the whole” family; all adult members and/or children above a certain [mature] age); an executive (a smaller group of individuals, elected by the “legislature” to take care of “business” between the [relatively less frequent!] “legislative” sessions); a “judiciary” (consisting of what Hughes calls the “council of elders”–generally, the “first generation” parents/grandparents plus, as they see fit, any necessary additional members of the second-generation children/parents). [p. 29 and Chap. 18, pp. 173-179]

Interestingly, Hughes urges a very specific “mission” or “purpose” for the family government:

[T]he primary mission of governance at any level [must] be the enhancement of the pursuit of happiness of the governed. . . .

[A] second level to its mission: the enhancement of the whole that evolves naturally out of the enhancement of its parts. . . . A successful family system of governance enhances the family as a whole by enhancing the pursuit of happiness of each members.

The third level of the mission of a family governance system is to promote the long-term growth of the family’s wealth: its human, intellectual, and financial capital. [pp. 30-31]

From here on out, Hughes offers amazingly practical advice that, I believe, can help just about any family do what he has outlined: establish and maintain a workable and working family government, a government that will help enhance each member’s personal and individual ability to pursue his or her best happiness and that will enable the family to pursue the happiness of the family as a whole. (By the way: as Hughes notes, this kind of happiness does not refer to something silly or frivolous. It refers, instead, to something related to (what Jefferson was referring to when he wrote “the pursuit of happiness” into the American Declaration of Independence): virtue. “In [his Nichomachean Ethics], Aristotle explains that all lives of virtue are lived in the pursuit of an individual’s happiness. . . . Jefferson lifted his famous phrase from Aristotle.” –p. 30)

One more interesting point Hughes makes that I think bears repeating here.

In a chapter on “The Family Balance Sheet and Family Income Statement”–in which he notes that the family’s true wealth, involving “total human capital, including each family member’s intellectual capital” is to be accounted for–Hughes urges that, “in the family business of long-term wealth preservation,” “short term” is 20 years (one generation); “intermediate term” is 50 years (two generations); and “long term” is 100 years (three generations).

When you start thinking along these lines, as Hughes so ably demonstrates, your entire approach to investment, to tax mitigation, to estate planning . . . everything . . . changes dramatically.

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