Preservation as a Question
of Family Governance
Family wealth is not self-perpetuating. Without careful planning
and stewardship, a hard-earned fortune can easily be dissipated
within a generation or two. The phenomenon of the fleeting
family fortune is so well-recognized that it inspired a proverb:
"Shirtsleeves to shirtsleeves in three generations." Vanishing wealth
is not unique to the United States, and variations of this proverb
are found around the world, from Asia to Ireland. The Irish variant-"Clogs
to clogs in three generations"-depicts things in the
following way. The first generation starts out wearing work clogs
while digging in a potato field, receives no formal education, and,
through very hard work, creates a fortune while maintaining a frugal
lifestyle. The second generation attends university, wears fashionable
clothes, has a mansion in town and an estate in the country,
and eventually enters high society. The third generation's numerous
members grow up in luxury, do little or no work, spend the money,
and fate the fourth generation to find itself back in the potato field,
doing manual labor. It is a classic three-stage process: first, a period
of creativity; second, a period of stasis or maintenance of the status
quo; and third, a period of dissipation.
Is this rags-to-riches-to-rags cycle inevitable? I believe it is not,
and in this chapter, I outline my philosophy, describing why most
families fail to preserve wealth over a long period of time; explaining
why this failure is unnecessary; and proposing a theory and method
to practice successful wealth preservation. Below are the question,
problem, theory, solution, and practice for how a family can preserve
its wealth over a long period of time.
I. The Question
Can a family successfully preserve its wealth for more than one hundred
years or for at least four generations?
Allow me to summarize how I came to the discoveries and
insights I am sharing with you. In 1967, I started my legal career in
the trusts and estates department of Coudert Brothers. My father
had then already been at Coudert Brothers for thirty-two years, specializing
in corporate law. He continued to practice law at Coudert
for another eighteen years. I had the good fortune to practice law
with him during all those years and, most importantly, to be his
student. His great interest was the succession issues of private and
public businesses. He taught me that when businesses fail, it is most
often due to poor long-term succession planning.
One of his favorite lessons came from his experience as a member
of several boards of directors. When a new chief executive officer
had been elected, my father said, "I would go up and shake the
new CEO's hand and offer congratulations. He or she was naturally
excited and feeling hugely successful since, in most cases, election
as CEO represented the most significant event of the CEO's life and
the culmination of years of very hard work. I would then immediately
ask, 'Who is your successor?' There would be a look of surprise,
and then, in the cases of the great CEOs, deflation, humility, and
comprehension took the place of elation on their faces. After all, the
most important role in the management of an enterprise is arranging
for orderly succession."
My father's teaching has stayed with me. In every business with
which I have been associated, whether public, private, philanthropic,
or trust, the issue of succession has been critical to the long-term
viability of that business.
My experience with families is exactly the same. A family's ability
to remain in business over a long period of time always comes down
to excellent long-term succession planning, regardless of how successful
the family is financially.
Families attempting long-term wealth preservation often don't
understand that they are businesses and that the techniques of
long-term succession planning practiced by all other businesses are
available to them as well. A family that starts its long-term wealth
preservation planning by adopting the metaphor that it is a business
will begin with a wonderful psychological tool. If a family thinks it
is in business to enhance the lives of its individual family members,
it discovers the most powerful form of preservation thinking it can
do. The business metaphor further brings into a family's planning
efforts all of the tools businesses use to be successful. As with all
metaphors, one set of ideas created for a specific purpose cannot be
perfectly suited to another purpose. The ideas can, however, offer a
starting point for learning and for adaptation to the new set of issues
Throughout this book, I will use the following terms.
Family: Two or more individuals who, either because of bonds
of affinity or because of genetic or emotional linkage, think of themselves
as related to each other.
Wealth: The human, intellectual, and financial capital of a
Preserve: A dynamic effort requiring active employment of all
elements of a family's human, intellectual, and financial capital in
order to maintain the family.
Long-term: A period of more than one hundred years, or four
generations of the family.
II. The Problem
The history of long-term wealth preservation in families is a catalog
of failures epitomized by the proverb "Shirtsleeves to shirtsleeves in
In 1974, I was asked by the sons of an enormously successful
businessman in Singapore to come see their father. I was naturally
curious about why I, a still very wet-behind-the-ears private-client
attorney, was being invited to travel halfway round the world at substantial
cost to the family when there must be excellent legal counsel
available in Singapore. I suggested that I refer the businessman to
someone local, but he was insistent, and so I accepted.
When the day of the meeting came, I still had no idea why I had
been invited. After entering his enormous office and solving, over
tea, all of the macroeconomic problems of the world, I was still wondering.
Finally this worldly wise, enormously successful man said,
"Mr. Hughes, you are probably wondering why I invited you here.
We Chinese have a proverb, 'Rice paddy to rice paddy in three generations.'
I don't want that to happen to my family. Can you help us
using the techniques of families in America to solve this problem?"
I was happy to discover that I could help him.
Through the years since 1974, as I have traveled to meet with
families around the world, I have heard the same idea is expressed
in varying ways. The shirtsleeves proverb turns out to be culturally
universal, capturing a great truth about wealth and human behavior.
Unfortunately, it describes only failure.
The shirtsleeves proverb describes a three-stage process: creation,
stasis, and dissipation. Interestingly, this parallels the behavior
of energy. As described by the laws of physics, energy comes
together to form a new creation, undergoes a period of stasis or
balance, and then moves by way of entropy or decay toward disorder.
The energy, however, never disappears; it ultimately becomes
part of a new creation, and the process begins again. Apparently all
forms of life, which can be seen as organized forms of energy, must
go through this cycle. The issue for families is whether they can
extend the period of creativity through many generations, and thus
postpone the periods of stasis and chaos for as long as possible.
A way I love to teach this lesson is to remind every generation
of a family that it is the first generation. It has the same power of
creativity as whichever generation was biologically the first. It is only
when a family fails to perceive itself as the first generation that it
begins to risk resembling the status quo of a second generation or
the decay of a third.
What are some of the reasons this universal cultural proverb
remains as true today as in the past?
First: In all cultures wealth preservation has meant, and continues
to mean today, the accumulation of wealth measured as financial
capital. Very few families have understood that their wealth consists
of three forms of capital: human, intellectual, and financial. Even
fewer families have understood that without active stewardship
of their human and intellectual capital they cannot preserve their
financial capital. In my opinion, the issue most critical to the failure
of a family to preserve its wealth is concentration on the family's
financial capital to the exclusion of its human and intellectual capital.
A family's failure to understand what its wealth is and to manage
that wealth successfully dooms that family to fulfill the shirtsleeves
proverb. In fact, this concentration on financial capital may even
cause it to go out of business in just one generation.
Second: Families fail to understand that wealth preservation is a
dynamic, not a static, process and that each generation of the family
must be a first generation-a wealth-creating generation.
Many family members who have inherited financial wealth have
no concept of how difficult it is to create, and often their experience
of the wealth creator was negative. These later-generation family
members are rarely motivated by the same emotions that fueled the
productivity of the originator of the initial family wealth. A family
that imagines or, worse, assumes that every member of the family
will be a wealth creator, or even that in every generation someone
will have the creative instinct to be a great financial wealth creator,
is fooling itself. Such a family is in entropy and will swiftly go out of
For a family to preserve wealth, it has to increase its wealth. How
can it do this?
It can give greater thought to the preservation of the family's
human and intellectual capital. It can understand its principal role as
a dynamic one of creating new human and intellectual capital, while
exercising excellence in its stewardship of the financial capital brought
into being by the financial wealth creator. It is through such an understanding
of each generation's principal role that every generation can,
in practice, function as a new first generation of wealth creators.
Third: Families often fail to apply the appropriate time frames
for successful wealth preservation. The result is that planning for
the use of the family's human and intellectual capital is far too short-term
and individual, and family goals for achievement are set far too
low. Time should be measured by the generation. Otherwise, how
can a family address whether it will still be in business in the fourth
generation? Short-term for a family is twenty years, intermediate-term
is fifty years, and long-term is one hundred years. With increasing
life expectancy, I'm tempted to lengthen these periods, but for
now they offer reasonable measuring sticks.
Almost every family I encounter is trying desperately to ensure
that every year brings an increase to the bottom line of the financial
balance sheet. I applaud this as an exercise in good financial stewardship.
Unfortunately, though, if looked at over the twenty years
of a short-term financial plan, these annual results simply become
footnotes. In a fifty-year plan, they do not reach footnote status; they
just appear on a bar graph. In a one-hundred-year plan, they are
interesting only to the family historians.
An emphasis on short-term results is usually found cloaked
in the mantra, "We are long-term investors." This unrealistic
self-assessment frequently masks the fact that the risks necessary
to achieve these annual goals-goals that even in a twenty-year
cycle are extraordinarily short-term-are far too high in terms of
the family's one-hundred-year financial wealth preservation plan.
When the twenty-, fifty-, and one-hundred-year terms of measurement
are imposed on the family's investment strategy, the discipline
of patience, which highlights the success of great investors like
Philip Carret and Warren Buffett, shines forth. Patience is a virtue
in everything a family does. For families setting their long-term
strategies for preserving financial wealth, time is a friend in a way it
is not for most investors. Equally, failure to take advantage of time is
a waste of a valuable family asset.
When we move beyond the financial sphere and the family is
measuring the preservation of its human and intellectual capital, its
failure to understand the proper time frame for measuring success is
even more profound. Some years ago, I was discussing the purchase
of personal life insurance. I took the opportunity to ask my insurance
agent about my life expectancy. I was delighted to hear him confirm
that most of us are living longer than our grandparents or parents.
He told me that, barring a first heart attack or cancer before the age
of fifty-five and assuming we do not smoke, the actuarial expectation
for the large majority of us is that we will live well into our eighties
and our children will live into their nineties.
For families in the wealth preservation business, this demographic
information is fabulous news. Instead of losing individual
family assets in their sixties, the family will get an extra twenty-five
years' benefit out of the human and intellectual capital of the majority
of its members. Any business that could extend the useful lives
of its assets by twenty-five years would be in line for substantially
increased profits. Every business knows that the cost of purchase of
new assets is high, and keeping existing assets in excellent repair is
critical to financial success.
In families, exactly the same business metaphor applies. When
a family measures the useful lives of its members and plans for the
maximum use of each member's human and intellectual capital
over that member's lifetime, it defies the onset of the energy-depleting
stages of status quo and entropy that are the greatest
liabilities on its balance sheet. Failure to include the expected contribution
and participation of each family member in the twenty-,
fifty-, and one-hundred-year plan of a family is to have no plan
for the management of the critical human and intellectual components
of the family's wealth. Failing to measure properly fails to
bring the newest members of the family into the family plan early
enough to maximize their lifetime contributions. A business would
never squander thirty years of the useful life of an asset. Failure
to educate younger family members to a level at which they can
participate and contribute to the family balance sheet is as much
a waste of family assets as misjudging the useful lives of the oldest
members of the family.
Excerpted from "Family Wealth-Keeping It in the Family: How Family Members and Their Advisers Preserve Human, Intellectual, and Financial Assets for Generations" by James E. Hughes Jr.. Copyright © 2004 by James E. Hughes Jr.. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.