From generation to generation: Secrets to sustaining family wealth
IN the late 19th century, John D Rockefeller established himself as a titan of industry, founding Standard Oil and amassing a fortune that made him the world’s first billionaire. But more impressive than his creation of wealth was his family’s ability to sustain and grow it across generations, a feat seldom matched in history. John D. Rockefeller’s success was monumental but he knew wealth alone wouldn’t guarantee the prosperity of future Rockefellers.
Unfortunately, the typical path of wealth generated from family owned businesses and activities often follows a predictable pattern through generations: the first generation creates wealth, the next generation holds onto it, and the final generation spends it. This cycle is frequently attributed to various challenges, such as wealth dilution among increasing numbers of family members, a growing disinterest in continuing the family business, and a lack of robust financial literacy and planning. Therefore, a solid family governance system like that of the Rockefellers is essential to combat these issues and ensure the long-term growth and preservation of family wealth.
At its core, family governance acts as the foundational pillar upon which family wealth is not only built but also meticulously maintained over time. This process begins with a collective effort to define the family’s core values, mission, and overarching vision. These elements are then integrated into the family’s operational framework through a mixture of legal documents and family agreements which may range from binding contracts to informal, yet respected, understandings. Governance also involves fostering open and effective communication within the family. This includes a significant emphasis on educating younger generations about wealth management principles, ensuring they are well-equipped to handle future financial responsibilities.
However, the emphasis on educating younger generations about wealth management principles goes beyond mere financial literacy to include a holistic approach that encompasses coaching, mentoring, and inculcating life skills. This education is tailored to prepare the younger generations for leadership roles, ensuring the sustainability of the family’s wealth and legacy across generations. It integrates practical financial knowledge with broader lessons in responsibility, stewardship, and effective communication within the family structure.
John D Rockefeller believed in instilling values of hard work, philanthropy, and stewardship in his children. His son, John D Rockefeller Jr, was raised under these principles, shaping his approach to both wealth and family. John D Jr took these teachings to heart. He was more than just a guardian of wealth — he was a visionary who understood the importance of adapting to changing times while maintaining core family values. He established family offices and trusts, ensuring professional management of the family’s assets.
Under John D Jr’s guidance the Rockefellers diversified their interests. They ventured into real estate, developing notable landmarks like Rockefeller Center in New York City. The family’s philanthropic efforts also expanded, establishing foundations that continue to influence global issues, providing critical social capital.
A well-designed family governance system also takes into account other forms of capital, such as human capital which recognises and nurtures the unique skills, talents, and income-earning potential within the family. Intellectual capital is the cumulative knowledge, experiences, and educational background of the family members. As the Rockefeller family grew, so did the need for structured governance. The Rockefellers established family councils, scheduling regular meetings where members discussed the family’s businesses, philanthropic activities, and strategies for wealth preservation. These councils were not mere formalities; they were integral in decision-making and maintaining family unity.
Establishing and adhering to legal structures and formal agreements is vital for the longevity and effectiveness of family governance practices. As family businesses mature the formation of a board of directors (BOD) also becomes pivotal. This board typically comprises family members actively involved in the business, as well as external experts. Initially functioning as an advisory body, the BOD is instrumental in providing a balanced perspective — especially in countering any overconfidence biases that might exist within the founding members; its primary responsibilities include setting strategic business objectives and making decisions that align with the best interests of all family shareholders.
In addition to the BOD, a family council is often established, serving as a crucial liaison between the broader family and the BOD as outlined in the family constitution. This constitution is developed collaboratively with input from all family members, ensuring that everyone’s voice is heard and considered in the decision-making process.
It is also often best practice to schedule a family assembly. This is typically an annual or more frequent gathering of all family members. Its main objective is to foster transparency and minimise internal conflicts. It provides a platform for reviewing the strategic direction of the family business, discussing important issues and reinforcing the sense of unity and shared purpose among family members.
In summary, family governance stands as a critical strategy for families aiming to preserve and enhance their wealth across multiple generations; it offers a comprehensive framework for managing both tangible and intangible family assets. Through family governance the wealth that one generation has worked hard to create can become a lasting legacy, benefiting many generations to come.
The Rockefeller story is a powerful example of how a family can effectively sustain and grow its wealth across generations. Through a combination of strong family governance, education of future generations, and a commitment to social responsibility they have managed to maintain their legacy for over a century, setting a benchmark for other families aspiring to do the same.
The strategic engagement of wealth management firms, such as VM Wealth Management Ltd, can also assist in serving multigenerational family businesses. These investment management firms can bring their creative approach and financial solutions to offer tailored services like family wealth coaching, conflict resolution strategies, and customised investment advice that aligns with the family’s values and long-term goals.
Their external perspective can be invaluable in facilitating difficult conversations about wealth succession, philanthropy, and the distribution of assets. By acting as impartial advisors these firms can help navigate the complex emotional landscapes that often accompany family wealth discussions, ensuring decisions are made objectively and in the best interest of the family’s legacy.
Marlon Rhoden is a research analyst at VM Wealth Management Limited with a passion for seeing clients build their wealth. His particular focus is on the equities and bond market.