The Six Capitals of a Family: From Owning Wealth to Finding Happiness

When we speak of passing on family wealth, the proverb that most easily comes to mind is: wealth never survives three generations. And that proverb has accustomed us to equating family wealth with money — so that the goal the family leader and the family-office adviser set for themselves becomes this: to find a way to break the proverb, to make every possible effort to keep the family’s money within the family.

But this is plainly mistaken. The family that attends only to money is the one most apt to lose it.

We believe that complete family wealth should encompass two great categories: “qualitative wealth” and “quantitative wealth.” “Quantitative wealth” refers to wealth capital — the tool, the means, the resource — and it exists to serve “qualitative wealth.”

A family’s “qualitative wealth,” meanwhile, refers to human capital, legacy capital, family relationship capital, structural capital, and social capital. The importance of these forms of wealth is self-evident.

Wealth capital is a tool and a means, but this does not mean we regard wealth capital as unimportant. Wealth capital vastly enhances a family’s ability to cultivate its other forms of capital. It makes high-quality healthcare, education, and philanthropy possible; it gives family members the time and the occasion to come together and discuss how to build and sustain a shared dream. Wealth capital makes it far more possible, and far more likely to succeed, for a family to bring its other fine forms of capital to life.

One wise family member described her family this way: “Our family has always been wealthy; at times we have also had money.” I think she is someone who has truly grasped the essence of family wealth.

We call a family’s qualitative and quantitative wealth, taken together, the six capitals of a family. They are like the six dimensions that make up a wheel: only when every dimension is done well, and all the dimensions develop in balance, can the whole wheel turn — carrying the family forward on its run through the long river of time.

How the Six Capitals Are Defined

Human Capital

Healthy families are made up of healthy individuals. In many ways, human capital is the foundation of a family’s capital.

Human capital includes the physical, emotional, and spiritual health of individual family members, along with their capacity to learn, to grow, and to adapt.

Family members with strong human capital are able to govern their own choices, commit themselves to the work they have chosen, and be suitably challenged by the work they do. In life, they also balance work, relationships, learning, and living. And in the end, they know when to give up an unhelpful behavior or belief.

Legacy Capital

Legacy capital consists of the family’s core values and its shared sense of purpose. It is the “family brand” that sets the family apart and gives family members a shared sense of identity. Legacy capital depends in part on family members’ pride in the family, on the family’s stories, and on the family’s culture; and in part on each member’s clarity about his or her own values, vision, and goals, out of which the family then defines a shared vision and lays out a strategic plan to realize it.

Legacy capital reflects not only what the family has gained in the past, but also its shared hopes for the future — the hope of passing its wealth of quality on to the generations to come.

Family Relationship Capital

Effective communication is at the heart of every successful family. The capacity of family members to communicate across generations is especially important. This capacity to build strong relationships within the family is family relationship capital.

This capital reflects family members’ ability to discuss difficult questions together and to collaborate on complex undertakings. More fundamentally, it reflects whether there exists a family culture of trust, respect, and fairness.

Family relationship capital includes how the family brings together the different voices of spouses, parents, and new-generation members.

Wealth Capital

Wealth capital includes both industrial capital and financial capital.

Industrial capital — that is, the operating business — is the single most important component of an ultra-high-net-worth family’s wealth.

Financial capital consists chiefly of the liquid and illiquid financial assets the family holds, which derive mainly from dividends on the equity of its operating companies, or from the partial reduction or complete sale of that equity into cash.

Structural Capital

A family or family business that holds substantial wealth generally operates within a structure or network made up of family trusts, partnerships, contractual documents, financial investments, and other legal, tax, or commercial relationships. Structural capital includes the understanding of this network and the ability to navigate it effectively.

The key elements of structural capital include effective family meetings, capable family leadership, and a thoughtful handover of family leadership.

Social Capital

A family is shaped by the community and society in which it lives, and in turn shapes the community and society around it.

Social capital represents the family’s relationship with the outside world — the sum of the social relationships, the networks of connection, and the reputation and credibility the family possesses.

Families in China are gradually beginning to attach importance to philanthropy and to take a greater part in it. In helping others and fulfilling their social responsibility, they build a vessel that carries the family’s spirit, the accumulation of its social capital, and its legacy capital.

How to Optimize the Six Capitals

What might a family do to optimize these six capitals? What follows lists only a portion, offered for reference:

Human Capital

1. Foster the personal development of each member.
2. Ensure that the basic needs of each family member — food, clothing, shelter, and the rest — are met; and for members who encounter hardship in life, that these needs are met to a degree sufficient to restore their capacity to pursue personal happiness.
3. Emphasize the importance of work to an individual’s sense of self-worth, and help each family member find the work that best strengthens their sense of personal well-being and meaning. Whatever the financial return of such work, its value to the growth of the family’s human capital is equal.
4. Encourage all family members, and especially those of the new generation, to cultivate a strong sense of personal identity and to attain financial success independent of the family.
5. Promote the family’s geographic diversity. To meet the global challenges of today, a family must have global vision and a global footprint in its human capital.

Legacy Capital

1. Help each family member clarify their own values. Discuss what matters most and what each person in the family cares about most, identify the “greatest common denominator” of shared values, and seek common ground while allowing for difference.
2. Share the history of this family, and the history of every generation before. Tell the stories of successes and of failures. Sometimes the struggle and achievement that follow a failure make the most powerful story of all.
3. Honor family traditions — whether on holidays, birthdays, and anniversaries, or at the important milestones in the life of the family or a family member. Discuss which traditions the family longs to preserve and celebrate, and which traditions some or all family members may be ready to let go.

Family Relationship Capital

1. Consider beginning, or continuing, to hold regular family meetings, carefully designed and prepared, to discuss the topics that matter to the whole family.
2. Set aside time within family meetings to work at strengthening effective communication among family members. This may require understanding each person’s particular communication style, seeing how different styles complement or clash with one another, and devising strategies to resolve points of friction.
3. Talk about the reasons for including family members’ spouses or other close relations in important family discussions. What are the fears or challenges of doing so? What benefits do family members see in it?
4. If trust, respect, or fairness among family members has been damaged, decide what resources and methods to use to ensure the negotiation among members that will resolve these conflicts.

Structural Capital

1. Provide all family members with clear information about matters of family governance, at a level everyone can understand.
2. Invite the family adviser or other advisers to design engaging educational programs that help family members understand the structure, function, and purpose of their wealth, along with the roles and responsibilities that come with these structures.
3. Develop a leadership-development plan for the roles within the family’s structure — one that takes into account the family’s future needs, the evolution of its wealth or business structures, family members’ genuine interest in taking on leadership positions, and their need to develop the skills and knowledge that will let them serve the family more effectively.

Social Capital

1. Talk about the ways all family members — whatever their age or stage of development — give back to others, and the ways they find joy in giving.
2. Consider establishing or commissioning a charitable body that lets individual family members choose how philanthropic resources are deployed.
3. Through service in the family business or in philanthropy, give new-generation family members the chance to connect with the larger world of relationships beyond the family.
4. Consider closing every family gathering with a brief exercise of gratitude, in which members picture a family member they wish to thank and identify a way to express that gratitude.

Wealth Capital

Many family members who have inherited wealth capital do not know how hard it is to create it. They may stand in awe of the wealth creator and define success as the creation of vast wealth capital. Defining success in terms of money can leave a person feeling that they are not good enough. Moreover, they often cannot feel the passion, the effort, and the fearless drive that moved the family’s wealth creator in the act of creating — which weakens the sustainability of the family’s wealth. If such a family expects every member to become a successful entrepreneur, that expectation may prove counterproductive. Only by striving to discover and support each family member’s own talents and dreams can a family hope to see the free creative spirit take root — which in turn helps the family’s wealth capital grow all the better.

How to Measure the Six Capitals

Many families record their finances and investments every year, or even every quarter or every month. Careful management of the balance sheet and the income statement is essential to managing a family’s wealth capital.

Unfortunately, these efforts often do not extend to the family’s qualitative capital. Without an assessment of qualitative capital, a family’s and an individual’s balance sheet is incomplete, and cannot measure the full extent of a family’s growth in wealth.

So how can we better help a family manage its six capitals well?

First, we have designed a qualitative and quantitative family-wealth questionnaire. Each core family member needs, the first time, to spend one to two hours filling it out with focus and care. The questionnaire reveals the family’s goals, its present situation, and its gaps across human, legacy, family relationship, structural, wealth, and social capital.

Second, we compile the answers of all family members to create a qualitative and quantitative family-wealth analysis report. The report analyzes the family’s strengths and weaknesses across the six capitals. Drawing on the findings of the family survey, we set out in the report relevant and actionable recommendations for each family member and for the family as a whole.

Third, we meet with the family to walk through the six-capitals analysis report. We help the family discuss and formulate an action plan for both its qualitative and its quantitative capital.

Fourth, we organize family members to carry out the action plan for qualitative and quantitative capital alongside the appropriate outside experts. These may include family-office staff, lawyers, trust companies, insurance companies, asset-management teams, or specialists in structure and governance.

Fifth, in accordance with the family’s situation and needs, we reconvene the family meeting, regularly or as needed, to assess progress toward the goals and to make whatever adjustments the six-capitals action plan requires.

The whole process is not an easy thing accomplished at a single stroke. In our past cases and experience, it takes ten years, or even longer, to grow this “tree of family legacy.”

But for the family, the time and effort spent are entirely worthwhile. For it can carry a family and its members from owning wealth to finding happiness.