It’s Too Darn Hard: The Need for Effective Family Governance
By Randy Kaufman, with research assistance from Dustin Lowman
“Shirtsleeves-to-Shirtsleeves”
The proverb “shirtsleeves-to-shirtsleeves” refers to a toxic pattern in family wealth, in which the resources accumulated by one generation are exhausted by a later one. Shirtsleeves to shirtsleeves in three generations is an American translation of a Lancashire proverb: “There's nobbut three generations atween a clog and clog.” Some say that Andrew Carnegie, the famed 1800s industrialist from Scotland, brought the proverb's message to the New World.
Here’s what it means. The first generation, which by definition grows up without wealth, lacks resources, and devotes itself to cultivating wealth. The second generation benefits as scarcity becomes plenitude, and typically, they appreciate the need to maintain and develop the wealth. The third generation, growing up with abundance and often left in the dark about financial affairs, has no impetus to develop a work ethic, and fritters away the resources accumulated by its forebears. The enterprising first generation goes to work in shirtsleeves. The enterprising second generation goes to work in jacket-and-tie. The third generation consumes the family wealth, causing the fourth to go to work in shirtsleeves again.
That the “shirtsleeves-to-shirtsleeves” proverb exists across world cultures — “clogs-to-clogs,” “rice paddies-to-rice paddies,” “stalls-to-stalls” — speaks to the phenomenon’s underlying truth. Someone who doesn’t know what it’s like to need will respond to life differently than someone who only knows what it’s like to need.
“It’s a Bird!” “It’s a Plane!” “No, it’s…Family Governance!”
Clients often come to me and/or their lawyers hoping we will sprinkle magic fairy dust on this pernicious issue and make it go away — if only my lawyer would construct the “right” legal structures, my legacy would survive; if only my trustee were better, this issue would go away; if only Randy would teach my children and grandchildren to appreciate all I have given them...you get the picture.
However, studies show that of the major causes for a family’s failure in sustaining their assets, errors in financial planning and tax decisions are only responsible 5% of the time. Not preparing heirs accounts for 25% of the causes. The true, more stealthy killer is “lack of communication and trust within the family.” That gets a whopping 60%.
Once you know the cause of a problem, you can cease to engage in magical thinking and undertake to find a cure. Common though the phenomenon may be, it can often be avoided through effective family governance practices. However, like many family issues, governance isn’t easy — for many, just too darn hard.
But, as Louis D. Brandeis said: “If you would only recognize that life is hard, things would be so much easier for you.” Governance touches upon all the difficulty inherent to family dynamics, plus the difficulties inherent to money dynamics. Wealthy parents in particular worry about the effects discussing money will have on their children, which often stops discussions before they begin. But for many parents, an abundance of love, high-priced advisors, and well-meaning isn’t going to solve this issue, nor will fear make it go away. Acknowledgement of root causes, listening to experts, and hard work at least give families a fighting chance.
Because each family’s size, composition, and underlying financial circumstances vary, each family will need to develop its own unique governance model. This process includes steps such as:
Identifying family values
Developing deep listening skills
Expressing empathy across the generations
Developing honest and unemotional communication styles
Agreeing on which family members will fill which roles in the business
Deciding whether or not a family council is necessary
Creating a family constitution
This work, ironically termed “soft” by industry professionals, is neither soft nor easy. It’s hard; it’s very hard. But, as Picasso wisely said: “Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.”
While all situations differ, some principles can be applied universally, principles no different than those most of us use on a day-to-day basis: Consensus is crucial. Differing viewpoints are inevitable and should be embraced. Good governance requires clear intentions, patience, and flexibility. Transparency must be maintained between all adult family members. Respect among partners is, as ever, essential.
Accentuate the Positive
Perhaps, rather than avoiding negative outcomes, a better way to frame family governance is that it cultivates positive ones. Developing wealth takes vision and values; having wealth means having the ability to manifest those values in the world — in other words, creating a legacy. As family businesses pass between generations, instituting healthy governance practices raises the odds that your legacy will align with your values.
Having long worked with families of all sizes and dynamics, I know how hard it can be, how essential it is, and how valuable an experienced third party is in developing models. “Shirtsleeves-to-shirtsleeves” happens when family wealth goes unchecked. Values-driven legacies happen when families prioritize respect and care.
As always, I’m eager to hear your thoughts. Feel free to reach out if anything in this article piqued your interest, or to hear how Aker Advisors can add value in this space.
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