Family Governance: Preserving Wealth Across Generations

Speaker 1 – 00:00
70% Of wealth is lost within families by the second generation and 90% is lost by the third generation.
Speaker 2 – 00:08
If we don’t educate the next generation, it’s going to be gone.
Speaker 1 – 00:11
A lot of times parents want to give their children the life that they didn’t have. That can be good if it’s done
correctly, but also can be really bad.
Speaker 2 – 00:17
The kids or grandkids really don’t have an idea of where the wealth came from or like what went into building.
Speaker 1 – 00:21
It, what strategies these families are doing to actually maintain and preserve wealth.
Speaker 2 – 00:25
I think where a lot of families and family businesses mess up is they focus on that with their business. Right. But
they don’t implement the same things that worked within their family structure.
Speaker 1 – 00:34
Money in a balance sheet is one thing, but it’s really like meaningless if there’s no utility and purpose behind it.
Money can just completely ruin somebody. Studies have found that if you have a wealthy family, the children have
grown up with everything they could ever imagine. If there’s no sense of gratitude, they’re never going to have any
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sense of what enough is.
Speaker 2 – 00:54
How do we empower the kids in the next generation instead of enabling them? Right. Because it’s every parent’s
worst nightmare.
Speaker 1 – 01:04
Statistics show that 70% of wealth is lost within families by the second generation and 90% is lost by the third
generation. A common metaphor for this is shirt sleeves to shirt sleeves in three generations. And so today we’re
going to talk about how wealthy families can successfully not be these statistics and pass wealth from second
generation, third generation and what strategies these families are doing to actually maintain and preserve wealth
so that they don’t end up losing it. So I’m joined by Tyler Houston today. And Tyler, actually, prior to joining ewa,
actually has some experience doing some of this family governance, family planning at his, one of his prior jobs.
So we’re going to take a deep dive into this. Ty, why don’t you kick us off? What have you seen? Give us some, an
overview of why. Let’s start here.
Speaker 1 – 02:03
Give us an overview of why these statistics are true and why families don’t successfully pass on wealth.
Speaker 2 – 02:10
Yeah, thanks for introducing me, Jameson. Happy to be here. Happy to be on board. You know, I think one of the
biggest reasons that the wealth is lost is, you know, the kids or grandkids really don’t have an idea of like where the
wealth came from or like what went into building it. So when you have that lack of clarity from G3, G2, the whole
way back to G1, you start to lose the purpose of why the wealth was built. So, for example, it’s really not bad
investing. Like once you build up this massive nest egg of assets, you know, it’s not really bad investment choices.
It’s not because a lack of intelligence. It’s really like a governance failure and like a communication failure between
the generations.
Speaker 1 – 02:56
Yeah, I think that’s something to highlight too. It’s not from what study shows, it’s not necessarily bad investments,
bad returns. It is literally decision making and not essentially not over allocating assets into certain things. So what
I mean by that is it’s really the decision making of not putting too much of your assets into something that is overly
risky, that can harm the wealth and making those sound decisions to preserve it. So one thing that we’re going to
hit on, which you alluded to, is family governance, balance sheet governance. Those are the type of things that
study shows what allows this wealth to successfully transfer. So what I want to highlight is a case study on the
Rockefeller family because they’ve kind of been the poster family of doing this and where a lot of this has come
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from.
Speaker 1 – 04:02
So how John Rockefeller did that is he was known for building structure instead of just wealth. So how he did that
was a family constitution, philanthropy for his family and having a structured plan around giving to charity, and
then a lot of discipline. So he was known for having his children track all of their expenses. They had structured
allowances and really teaching the kids that wealth was a responsibility and not a reward. So let’s start with that.
Tyler, anything to add there?
Speaker 2 – 04:32
Yeah, yeah, I think one of the smartest things he did was he actually built out a family constitution. That sounds
like a big scary legal document. Right. But really at the end of the day, it’s essentially a guiding principle for the
family how the wealth is going to be given. You know, what standards do we set the kids up to be? You know, what
are the rules for when in laws and marriages come into play? What stuff are we going to donate to? What
parameters have to be set to kind of let someone back into the family business? You know, and the Rockefellers
are pretty interesting because it started like family in business, and then it transitioned to a business family, and
then it became an entire family enterprise. One of the smartest things that Rockefellers did, and it clearly was
successful.
Speaker 2 – 05:18
Instead of kind of keeping everything within the main, I don’t want to call it household, but within his own brain,.
Speaker 1 – 05:23
Like close family, the wealth creator, the wealth.
Speaker 2 – 05:26
Right, right. Like it was him, it was only him. He was smart. He’s like, well, I need someone else to pass this wealth
onto someday. And if we don’t educate the next generation, kind of like Jameson had mentioned earlier, it’s going
to be gone. So, you know, 67% of family offices have like formal boards. You know, when you think of a board, you
think of like a board of a business. Right. You have like your CEO and you have like some other high ranking
officials that might help like guide the business forward. I think where a lot of families and family businesses mess
up is they focus on that with their business. Right. But they don’t implement the same things that worked within
their family structure. You know, when you put a board in place, it helps guide the families forward.
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Speaker 2 – 06:08
You know, decision making structures, there’s documents on why you vote certain ways. Is it, you know, is there a
leadership structure? And then. Yeah, and then there’s like a decision making process. Right. Are we voting? Are we
picking one person that’s the head of the household to make the decisions? And that’s all kind of built out into why
the Rockefellers succeeded.
Speaker 1 – 06:28
Yeah. So I would say studies show that if when you bring family into a business, so the Walton family is really well
known for this. They obviously were family started Walmart from day one. They essentially created the business
as a, like a family partnership. So all the kids were involved like immediately. And that is from what we’ve seen in
our experience, that’s probably one of the better ways to do it. Because if you have, let’s just think we’ll start with
like, let’s focus on first generation and this can apply to second, third generation wealth. Let’s focus on first
generation wealth here for a second.
Speaker 1 – 07:09
If you have, we’ll say parents that start something, some sort of business, have some sort of wealth creation path
and if, you know, they’ve probably put in, they’ve built these like, these values, these character traits, disciplines that
has allowed them to create that wealth. Especially if they’re in a business. Like that’s not, they have to go through a
lot of ups and downs to build a business into this kind of wealth that we’re talking about. But what is very hard is a
lot of times parents want to give their children the life that they didn’t have. So if the first generation didn’t come
from money or didn’t come from much of anything, they had to work really hard, had to go through a lot of hard
times to get there. They want to give their Kid, which is just probably human nature.
Speaker 1 – 07:57
You want to give the kid the opposite. You want to give your kid everything you didn’t have. And that can be good if
it’s done correctly, but also can be really bad. But if in another scenario where you bring the kids into the business
and show them what hard work looks like, what it took to grow and build the wealth, that’s what we found, a much
more healthy way to sustain it and instill those values and work ethic. And I would say one thing you hit on Tyler
that is like, really important is along the lines of these family constitutions and mission statements is having a why
behind the families. And what I mean by that is like, money in a balance sheet is one thing, but it’s really, like,
meaningless if there’s no utility and purpose behind it.
Speaker 1 – 08:43
And I think that’s where this can really go wrong is if you don’t attach this purpose and utility to the balance sheet
of what you want to use it for, then it can be, you know, money can just completely ruin somebody in the wrong.
You can go in the wrong direction really quickly. So one way to do that, obviously, you know, a mission statement, a
constitution, which we can dive into that in a second. But then having, like you said, the board of, like, the
governance you don’t need, you could have like a formal board. And why that becomes important is like, we’ll stick
with this Rockefeller example. You have John Rockefeller, that was like kind of the. The patriarch of the family, I
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guess, and then his next.
Speaker 1 – 09:19
The next Generation was like four people, and then the next generation was like 12 people, and then the next
Generation was like 200 people. So, like, very quickly those numbers start to grow. And if there’s no formal
governance decision making in place, like, it just can become chaotic, I would imagine.
Speaker 2 – 09:36
Yeah, absolutely.
Speaker 1 – 09:37
And so having, you know, let’s talking about like this board set up, whether you have, in that situation, if you’re
governing 200 people. Yeah, you probably should have a board. But not all families, you know, get that. That big. If
we’re talking like first, second generation.
Speaker 2 – 09:51
Right.
Speaker 1 – 09:52
What this, what this board or these decision makers would make up, you know, people like a financial adviser,
people like an accountant, people like an estate planning attorney, whoever. Oh, it could also be people that are in
the business. So if the family runs a, you know, a big business, and maybe they have an example key employee,
right? Yeah, key employee. So I was just say maybe the founder is the. Is the chair of the board at this point, and
there’s a CEO or maybe they’re the CEO and there’s a CEO, whoever else is key in this business that’s helped made
these decisions. You want to essentially create resources and people that your heirs can go to that you know, they
can help guide the kids through decision making and not rooting, ruining the money, right? Yeah. Anything, dad?
Speaker 2 – 10:36
Yeah, not a ton. I think you did a great job. I think the only thing I would add is that, you know, how do we, you know,
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you hear this, all these families we meet with, right? It’s like, how do we empower the kids in the next generation
instead of enabling them? Right? Because it’s every parent’s worst nightmare. It’s like, well, if I give this kid a million
dollars and he’s 21 years old, I don’t know what he’s going to do with it. I don’t know what they’re going to do with it.
So.
Speaker 1 – 10:56
So what? Studies have found that children that basically when you look at this whole dynamic, the one thing that
doesn’t enable kids is to have some sort of gratitude ritual. So essentially, if you have a wealthy family, the children
have grown up with like, you know, everything they could ever imagine. You know, they’ve, they’ve had nice things
their whole life, I guess is the best way to put it. If there’s no sense of gratitude, they’re never gonna have any sense
of what enough is. They’re never gonna be grateful for what they have. They’re never gonna appreciate what they
have. So that is the one thing from when I’ve studied this and read some studies and that’s the one takeaway is
kind of what people talk about is instilling that gratitude ritual really early on.
Speaker 1 – 11:45
And then as wealth continues to grow, it doesn’t matter how much there is in the family, everybody’s grateful and
appreciative for it. But let’s talk about like family governance is one thing, is like, let’s like come up with the values,
the decision making framework, voting rules, amendment procedures, stuff like that. Yeah. But let’s talk about like
the actual family constitution. So like if you wanted to actually like you can talk about this from a high level, but to
actually like formalize this and document it again. This is a non binding document. So you’d have your estate
planning documents that actually dictate trust rules, taxes, et cetera. But let’s talk about Tyler. If were to, if a family
wanted to implement this, what’s like what are some things they would want to think about? What’s like, how do we
get the gears turning to start.
Speaker 1 – 12:30
To start doing this?
Speaker 2 – 12:31
Yeah, that’s a. That’s a great point, Jameson. I think the first step, and it starts, you know, it starts very high level,
right? It usually starts with, you know, wherever the wealth had originated from, whether that’s mom, dad, uncle,
brother, whoever it might be, usually starts with them. And how we kind of help facilitate that processes. It might
be 10, 15, 20 meetings where it’s just like getting to know them, you know, what their background is, you know,
where they came from, like what was their relationship like with their parents. So you kind of start there and you
kind of find like, what are the parents or first generation’s values? Secondly, you’ll kind of get that into place and
then you kind of go through the.
Speaker 2 – 13:13
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Okay, well, like now we need to start talking to the kids about this and like, what’s valuable to them. So, you know,
like you had mentioned, at my previous job, the first meeting was. First couple meetings, I should say was G1,
right? Generation one, people who created the wealth. Then the second meetings were, let’s go right to the kids.
And they had a big family. It was like five or six kids. So then we started meeting with them where we’d ask them
all the same questions. We’d compile all of their answers. It would be like, hey, like 10 years from now, where do
you want to be? Where do you see the business being? And it was funny because some of the kids were pretty
young, like 12 to 14. And at that age, they really have no idea what’s going on. Right.
Speaker 2 – 13:52
They’re like, I don’t know. I know we’re pretty well off, right? We have a boat, stuff like that. But it’s kind of
interesting to like hear their answers and where you start to see overlap. Or like the parents had already done a
good job at establishing those values within them, and now it was just documenting it. So you go. So you kind of
go through the process. You meet with the kids, you start to compile these answers. And then you kind of do like a
group meeting where you kind of. Here’s what we saw across all of the meetings we have with you guys. Here’s
where I think the family document should start.
Speaker 1 – 14:20
Okay. Yeah, that’s a good. I think that’s a great approach. So things to include in that, you know, first I kind of have a
list here. First would be like mission and values. So why does this money exist? What are we optimizing for what
does the family stand for? You know, what’s important to them? Having a mission statement in there that’s going
to prevent, like, drift off of, you know, one thing could be important to the parents that created the wealth. And then
by the next generation, something totally different could be important. And once the first generation dies, if there’s
no way to, like, pass that on, it could just get lost. Second thing would be the government structure. So we hit on
this a little bit. What’s the, what are the voting rules? Who does the family council compose of?
Speaker 1 – 15:04
Who’s, you know, making these decisions? What happens if there’s a conflict? That’s probably the biggest thing.
Especially if you get into next generations where there’s, you know, up to 200 people, there’s going to be
disagreements. I always tell this to people, like if you’re, you know, dealing with a business partner, a spouse, a
family member, it’s like, it’s not if there’s going to be disagreements, it’s when there’s going to be disagreements.
And you got to have a way to govern that and figure that out. So those are important. And then third thing would be
the employment policy. So what’s the family’s philosophies around college degrees, Work outside of the family
business, work inside the family business. Do you have to go, you know, get a job out of college before you come
back and work for family?
Speaker 1 – 15:51
Whatever those philosophies are that can help prevent a culture of entitlement. And then the fourth thing would be
transfer of ownership. Ownership transfer rules. So who’s taking the business over? What’s the actual, like,
planning mechanisms as far as valuations and tax consequences and trusts, all of this stuff that’s really important
for, you know, these wealthy families, how you can actually structure this from a tactical standpoint. And then fifth
one would be just like, we’ll call it dividend policy. But dividend could be anything. A dividend could be like a profit
from a business. Dividend could be a profit like a dividend from an investment. But it’s really whatever is the
philosophy. Like, how are we going to take cash out of a business or an investment to live on and monetize it? And
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then next one will be philanthropy framework.
Speaker 1 – 16:43
So what’s our charitable giving philosophy? What’s our donating philosophy? Next one I kind of hit on this, but this
would be the last one would be a conflict resolution process. So I’d probably give that its own segment and things
like, what’s the structure Going to be around, you know, a third party mediator or who’s going to come help step in
to resolve this to prevent like the worst thing.
Speaker 2 – 17:08
You want is suing your cousins, brothers, sisters.
Speaker 1 – 17:12
Yeah, family suing each other. So you want to have like pretty detailed process to not allow that to happen.
Anything to add on documenting family constitution?
Speaker 2 – 17:23
No, no, I think that makes a lot of sense. Maybe the only thing I would add is where we see a lot of documents fall
apart is when you start talking about marriage too, right? When you start what are your policies around in laws and
like, are we going to let the husband, wives, spouses of, you know, the next generation be involved in the family
business? Or is that something we want to keep separate? So, you know, it’s, that’s kind of a more specific topic.
But I think that’s where we see a lot of pushback on things is when you start talking about the marriages and in
laws.
Speaker 1 – 17:54
Yeah, for sure. And I’ve had these conversations with families and they’re like, well, it’s like first generation wealth.
And they’re like, well, you know, we’ve done a good job with our children and we’re pretty, like, we’re pretty, we feel
pretty good about it. And I’m like, yeah, I agree, your children are great people, we’ve done a great job. But like your
kids are in college and where this is going to start to really come into play is like when they get married and there’s
spouses and there’s grandkids and like you bring other people into, you know, when it’s not just like five of you and
there’s 10, 10 of you, there’s more people here. But yeah, I’d say let’s boil this down to action items to sum it up,
how you get started. Number one, define the family’s purpose values.
Speaker 1 – 18:32
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Number two, conduct a government’s governance audit. So, you know, get that stuff documented that we talked
about. And then number three, and maybe you could actually do this as step one to formalize this but establish
some sort of family meeting cadence. Whether that’s, you know, I know some families that do like annual retreat,
some families do this quarterly. I think that would, you know, the more going on and the more wealth, the more
frequent is probably necessary. But I would say for, you know, starting like once a year a family retreat or a family
meeting and bringing your advisors in at that time to have those discussions and start to formalize this would be
how I would recommend getting started.
Speaker 2 – 19:13
Yeah. So if you’re listening to this and you don’t want to be another one of these statistics where it’s like 90% of
your wealth is gone by G3, you know, this is something we deal with regularly. We have several families that we do
this kind of work for. We’d love to be a research resource for you and kind of help you guide through this process.