By Kip Kolson, Special for USADT
Presidential candidates for the democrat party and many democrat senators and congressman are embracing socialism as the panacea for a better life for all. My experience in working with families around the financial and people components of the family, suggests families tend to fall into socialist or free-market forms of family governance. So how do these economic theories play out in families? My example assumes all the children and grandchildren are adults.
The family is composed of a dad and mom, five children and twelve grandchildren. Dad and mom have a net worth of $150 million dollars made up of a successful family business, ownership of income real estate, three residences, a substantial investment portfolio, and a variety of expensive toys. Two of the children and one grandchild work in the family business and another child manages the investment real estate.
Let’s start with definitions. “Socialism is an economic theory or system in which the means of production, distribution, and exchange are owned by the community collectively, usually through the state. It is characterized by production for use rather than profit, by equality of individual wealth by the absence of competitive economic activity, and usually by government determination of investment, prices and production levels.”[i]
Family S uses the socialist form of governance. The parents send their children to private schools, buy them new Mercedes and BMWs when they turn sixteen, and send them to the best and most expensive universities. Spring breaks are spent in party locations with dad and mom covering the tab. When the children marry, the weddings are massive and expensive parties followed by all-expense-paid honeymoons to foreign and exotic lands. All the children are gifted a significant amount to use as the down payment for their very expensive homes so they can justify the jumbo mortgages.
The children in the family businesses earn almost twice what they would be paid in the open market and have never worked for anyone else. One child not involved in the business or real estate is a teacher and the other an artist, who is the only child who never married. The parents subsidize her lifestyle.
Why do I consider this to be a socialist form of governance? Because the parents control all the capital and own everything. But you will say the children have title to their homes, cars, and toys. That is true, until the parents choose to stop the flow of money or cannot continue to do so for some reason. What if there is a major recession and the business goes into bankruptcy and the real estate investments into foreclosure? With the possible exception of the teacher, the other four children will see those unwarranted salaries and subsidies disappear, and their homes, cars, and toys with it. Additionally, what happens when there is a rift between the parents and one or more children? Dad and mom can easily terminate those cushy jobs and large incomes forcing disgruntled children to compete in the open market, a competition for which they are unprepared and untrained. The parents can use the wealth they control to manipulate. Do not comply with dad and mom’s wishes and the subsidies will go away. If you think I am suggesting an unreal condition I can assure it has happened throughout history and is in full swing in every corner of the world.
Family F: Same family with all the same circumstances, but this time the parents form a family office. Our firm prefers to call it the family enterprise holding company. A family office is a legal entity that retains all the family assets rather than passing them to the heirs. It is owned and managed by the entire family, along with key advisors, to benefit all family members in achieving the family and each individual’s God-given purpose. It is a true business operation intended to protect, preserve, invest and grow the family’s Time, Talent, Training, and Treasures to strengthen family relationships and bonding for multiple generations.
Family F’s family office establishes education, investment, compensation, loan, and family-fun committees, and a family foundation. The parents and children, and several key advisors, make up the board of directors and serve on various committees according to their individual passions. The management team may or may not include all the children. In fact, it is likely only one or two children may really want roles in management. The others are still considered stakeholders even though they pursue careers outside the family businesses.
All the children have worked in the family business and family office growing up, so they have real world training and experience. They were paid minimum wages so they could save for and buy things they wanted without dad and mom buying it for them. That includes their first cars. When a child is ready to work in a full-time career, they are required to be hired and work for a company or organization outside the family at least three years before they can apply for a position in the family businesses or family office. If an application is approved, the compensation committee will align the compensation according to factors for a similar role in the open market.
The education committee develops criteria for receiving and maintaining a scholarship or grant to the university of their choice. One condition is each child must pay some amount from their own resources toward their education. University is not a requirement, but they can still apply for a scholarship to a vocational school if that is more in line with their individual talents. If grades are not maintained or too many classes missed, the scholarship terminates.
When a child is ready to buy their first house, they can apply to the loan committee for assistance. Just a like a bank, there are specific requirements for obtaining a loan. If they will be unable to repay the loan, it may be declined. However, if the applicant is being prudent, like possibly the teacher, and buying a home with a mortgage and expenses he or she can afford and it is a good investment, the committee may choose to provide some amount as a gift.
What if one of the children or grandchildren wants to buy or start a business? Family S may gift the money with no strings attached only to see the business fail. Family F requires the applicant to provide a business plan, market research, cost breakdown and cash flow projections, and whatever else is required to ensure the family office investment will be repaid and earn a good return. They must demonstrate they have the training, experience, and expertise to operate successfully in a field or industry they know well.
While not a requirement, all family members are encouraged to participate in the family foundation. Obviously, it teaches generosity and selflessness, but, like the family business, a foundation is a business requiring financial experience, investment expertise, research, decision making, team building, and relationship skills. Even better is the family bonding and legacy when the entire family helps build a school, church, hospital, or orphanage in a foreign country, a trip arranged and coordinated by the family-fun committee; or participates in delivering medical supplies, food, clothing, and basic living supplies to regions struck by natural disasters.
So why is Family F a capitalistic free-market family? “Capitalism is an economic system based on private ownership of the means of production, distribution, and exchange, characterized by the freedom of capitalists to operate or manage their property for profit in competitive conditions.”[ii] Free market is a system of economics that minimizes government intervention and maximizes the role of the market. According to the theory of free market, rational economic actors acting in their own self-interest deal with information and price of goods and services the most efficiently. Government regulations, trade barriers, and labor laws are generally thought to distort the market.”[iii]
By default, the free market system requires every individual to take responsibility for themselves and their own wellbeing because it is based on PRIVATE ownership. In socialism, the definition says it is owned collectively, but in real-world socialism it means no one owns anything because everything is controlled by the government.
Some might suggest the family office structure is really a socialist format because everyone in the family has ownership in the family office. There is a crucial difference. Family S’s governance is centralized with the patriarch and matriarch. The children have no vote and technically no ownership in the family wealth. True, they may inherit that wealth when dad and mom pass away, but there is no guaranty they will receive anything, and they technically have no legal right to it. If they receive an inheritance, history and statistics tell us 70% of wealth will be lost when it passes to the next generation and gone by the end of the third generation.
Family F’s capitalist governance offers everyone voting and ownership in all the assets of the family office much like a shareholder of Google stock. All family members share in major decisions, especially after the patriarch and matriarch have passed away and ownership resides completely in the second and third generations. They have the right to sell their interest should they choose to exit the family office, albeit the sale is restricted to selling to other family members, or more likely back to the entity, at an agreed upon price, or a price determined by third-party valuation. Family S offers no such rights. The parents of Family S can donate 100% of the wealth to charities and disinherit the children completely.
Family F parents use wealth they created, not to control, manipulate, or entitle; but to create more capitalists who are free to have private ownership of what they earned for themselves with minimal help from the government (the parents) and self-determine how to use their means of production, distribution, and exchange to operate or manage their property outside of the family office for profit in competitive conditions. Their success or failure is in their hands. They have freedom to participate or not in the family office, realizing they will or will not enjoy the benefits, and they will not lose what they created themselves with the profits and resources they earned and reinvested if they choose not to participate at some point in the family office. However, the likelihood and more typical scenario, is most children never leave the family office because it ultimately produces substantially more wealth for them and their children and grandchildren into fourth, fifth, sixth generations and beyond.
Most families, especially wealthy families, adopt the socialist economic model simply because it is easy, and the parents are unwilling to give up control because they fear their children will squander their wealth. It becomes a self-fulling outcome in the destruction of the wealth and the family. The free-market family is more complex. It requires significant time, energy, commitment, and dedicated dollars to train and prepare future generations to steward the family office. There will still be economic and relational challenges, but a family committed to the prosperity and wellbeing of future generations and society will reap significant rewards and leave a legacy. That is a narrow road only a few will travel. So, will your family embrace socialism or will yours be a free-market family? Only you can decide.
“Tell it to your children, and let your children tell it to their children, and their children to the next generation” “Enter through the narrow gate. For wide is the gate and broad is the road that leads to destruction, and many enter through it. But small is the gate and narrow the road that leads to life, and only a few find it.”[iv]
Kip Kolson is the president of Family Wealth Leadership, a multi-family office and family coaching firm, and author of You Can Have It All; Wealth, Wisdom, and Purpose—Strategies for Creating a Lasting Legacy and Strong Family. You can order your copy at Amazon, the FWL website below, or email firstname.lastname@example.org Website: www.familywealthleadership.com
[i] Collins English Dictionary-Complete and Unabridged, 12th Edition 2014, Harper Collins Publishers
[ii] Collins English Dictionary-Complete and Unabridged, 12th Edition 2014, Harper Collins Publishers
[iii] Farlex Financial Dictionary, 2012 Farlex, Inc.
[iv] Joel 1:3; Matthew 7:13-14; New International Version, 2011, Biblica, Inc.