FB News

Leveraging human and social capital in family businesses

KPMG's Tom McGinness.
By Tom McGinness

As family businesses look at new ways of maintaining and building their capital, the notion of human capital is very much on the rise. Human capital encompasses the knowledge, skills, experience and social qualities of family members and employees, and their ability to generate value.

In this context, the family itself is one of the largest and most influential human capital assets because it represents the socioemotional wealth that is associated with being part of a family… in business. It also contributes directly to the preservation of the family’s entrepreneurial spirit and the founder’s legacy.

Transferring knowledge and value between the generations
Making a conscious effort to transfer the invaluable knowledge, skills, experience and values of the current generation to every succeeding generation is an excellent allocation of the family’s human capital, as is deploying the diverse talents and skills of the company’s employees and next-generation family members in new ways.

Often, these efforts to explore the talents and interests of next-generation family members include:

·       Multi-generational workshops

·       Formal family meetings to help younger members understand how they can contribute

·       Family constitutions and other governance mechanisms such as Family Councils and Next-Generation Committees

·       ‘Family rules of engagement’ that restrict younger members from working in the family for at least four years following graduation

The purpose of the “four-year rule” is to provide younger family members with enough time to learn from others and get to know themselves, their own sense of purpose and how they may be able to contribute to the future of the business.

Next-generation contributions
As Millennial and Gen Z family members enter the workforce, it’s possible that the family business may not be the right fit. However, there are still many ways in which they can contribute. Rather than ‘handcuffing’ them to the family business, upcoming generations can continue to add value as potential sounding boards, as Board members in companies in which the family business invests or as bellwethers on emerging social and environmental (or indeed, new digital economy) opportunities that the family and the business can address. Even if they work outside the family business, they may still have a voice in how all the different forms of capital are allocated.

There is more than enough potential for continuing to grow the family’s human capital by encouraging next-generation innovations and enabling family members to become entrepreneurs in their own right. This can be a highly effective way of leveraging the family’s financial capital while also growing its human capital by funding next-generation innovations and new ventures.

Two-way street: diversifying the family’s skills and experience
In many multi-generational family businesses, decision-making is still in the hands of the current generation, though that situation is beginning to shift. The upcoming generation is typically well-educated, has had early exposure to the world, is comfortable with technology and is ready to gain decision-making rights.

So, to diversify and leverage the totality of the family’s human capital, it’s important for current-generation leaders to recognise the leadership abilities and competencies of their upcoming family members and begin carefully delegating decisions – especially as they relate to ESG opportunities and new technologies. Millennial and Gen Z generations, in particular, are keen to embrace both of these opportunities. They understand the potential, they’re energised by it and they have a great deal to contribute.

On the flip side, the suggestion to next-generation family members is that they should take the time to learn from the current generation and gain an understanding of their long-term goals and concerns. By finding ways to engage with them in a meaningful and respectful way, the younger generations can not only benefit from their wisdom and experience, but they can also show their leadership capabilities by initiating the first steps in building a transitional generational bridge for continuing to grow the family’s human capital.

Social capital and ESG
Then there is social capital – which is closely tied to the ESG agenda as well as broad notions of values, purpose, ethics and integrity. Again, there is significant cross-over here with the next generation, as ESG is often an area they care passionately about.

Family businesses understand that they have a social responsibility and a public presence. They can be important players in local communities. They also need to manage their reputations, recognising the potential damage to their brand if customers and other stakeholders begin to view them in a negative light. Sound ethics, good employment practices, philanthropic and community support, paying a fair share of tax – all of these are essential to maintaining strong social capital.

Many long-term financial, social and human capital investment strategies are strongly related to ESG issues – all of which are important factors in the reputation of businesses and their families. As good corporate citizens, family businesses have the opportunity to achieve an above-average rate of return on all their long-term investments by integrating their philanthropic and business activities in an overall review of how they are allocating their financial, social and human capital.

One way this is manifesting itself is in increasing numbers of family businesses pursuing B Corp certification. This fortifies their reputations, underlines their status as the company of choice for customers and employees – and can also expand their access to financial capital, particularly green capital. Green capital tends to favour companies with a very clear ESG strategy – and higher credit levels may also be offered as a result.

So, if you are part of a family business, are you harnessing both the human and social capital that resides within your enterprise effectively and shaping it for the demands and changes of the future?

This is the second in a series of three articles on Redefining Wealth in Family Businesses. In the next article, “Redefining wealth as succession comes to the fore in family businesses”, I’ll explore the changes and challenges succession brings. Read the first article in the series, “Family capital diversification – protecting the family’s financial assets”, for my thoughts on ways to de-risk and diversify capital strategies.

Top Stories