“Energy can neither be created nor destroyed; rather, it can only be transformed or transferred from one form to another,” states the first law of thermodynamics. You may wonder what this has to do with family capital. After all, family capital is something that is regularly created and destroyed.
What they do have in common is the idea of transforming — changing family capital from one form to another.
Jay Hughes popularized the concept of five forms of family capital:
- Human capital: The physical and emotional well-being of family members.
- Intellectual capital: The knowledge held by the family system, individually and collectively.
- Social capital: The relationships within the family and with their communities and the ability of family members to work together toward shared goals.
- Spiritual capital: The shared purpose or vision of the family — its “North Star.”
- Financial capital: The financial assets of the family
This broader understanding of family capital can help families of significant wealth (a) recognize that it’s not all about the money and (b) develop a plan for the family to thrive by placing suitable focus on the nonfinancial capital.
The relationship between the quantitative and qualitative forms of family capital is important. This is where the idea of transformation of family capital — inspired by thermodynamics — can be useful.
Here are a few basic examples:
- Instead of thinking about spending money on the health of family members, what we are actually doing is transforming financial capital into human capital.
- If the family pays for someone’s university degree, financial capital is being transformed into intellectual capital.
- Family philanthropy transforms financial capital into social capital.
- Money spent toward implementing the family’s shared goals is a transformation of financial capital into spiritual capital.
Unlike energy, which is neither created nor destroyed, family capital — both quantitative and qualitative — can grow. While investment activity is the primary focus of many family offices, it’s important to put it in context. Growing the family’s financial capital should not be viewed as a goal in and of itself but, rather, a way to provide fuel for current and future generations and thus perpetuate the cycle of transformation into qualitative forms of family capital.
While traditionally, the term “investing” is applied to financial capital, with the broader view of multiple forms of family capital, we can apply the term both within each form of capital and between them. Educating family members doesn’t just increase intellectual capital, but that additional knowledge within the family system can be used to generate new ideas for growing further and for growing other forms of family capital. Instead of thinking about education as “spending” or “depleting” financial capital, it is actually a form of “investing.”
Family vacations — often a big-ticket item — are one of the best ways to grow social capital: to build strong bonds between family members through positive shared experiences, and for the family to work together planning the vacation and activities. That ability to work together on a shared goal readily translates to other contexts: sitting together on committees or boards that may have an operating business or philanthropy focus.
While financial capital is quantitative and the other forms of capital are qualitative, families can develop and use a “family balance sheet” that measures all of them as a broad-based “health check” of the family, like the concept of a balanced scorecard.
What’s the point of financial capital being massively in surplus when family members are not living their best lives (a human capital deficit) or when family members are in conflict (a social capital deficit)? Is there any amount of money that can balance out poor health? A bitter family dispute? After all, what’s the money for?
By taking a holistic view of family capital and reframing spending as transforming financial capital into forms of nonfinancial capital, the family can invest to make itself thrive.