A philanthropic focus

Head of Philanthropy Services, MeesPierson explains the secret behind organized philanthropy.

Many of us have heard of the proverb, "From rags to riches and back again in three generations." In fact, this Chinese proverb is used in almost every single country and language of the world. As a test, I presented this proverb to high net worth individuals in Hong Kong, Singapore and Jakarta to see if they were familiar with it. All of them knew the saying all too well. So the next question arose: can this proverb be broken?

When we take a look at family wealth, we notice that the first generation usually acts as the wealth builders. The second generation steps in and functions to retain that wealth but unfortunately, the third has become fairly notorious for spending it. It is crucial to understand the characteristics of all three generations so as to achieve a better understanding of the rapid slide between the second and third generation.

The first generation is called the Wealth Builders. This generation is usually self-taught because they were unable to afford the opportunity to go to school, resulting in a creative and entrepreneurial spirit. They possess strong work ethics and have lived a frugal lifestyle to become successful. A normal family life was just one of the many great sacrifices this generation had to make in order to build a successful business. The wealth builders acknowledge the need to provide their children with the best education, offering them the opportunity for a better future. They send their children from an early age to top quality schools and then to the best universities in North America, Europe and Australia.

The second generation, The Wealth Retainers traditionally return to work for the family business upon completing university. They enjoy a more prosperous life-style than their parents did at their age. This second generation is able to spend more time on leisure activities, their social lives often revolving around social clubs and charitable events.

In the family business, they work on fine-tuning the company. With the second generation, they bring new business approaches that are systematic and process driven. By doing so, they pay greater attention to issues like branding and public relations, making their business more successful. The focus for the second generation is wealth retention.

The third generation, The Wealth Spenders, is given every possible opportunity to succeed in life and position themselves in the new affluent and "club" society the family now belongs to. The focus, usually unintentionally, is now focused on showing the success of family wealth. This is also known as the "superlative" generation.

Traditionally, the third generation tends to go to the best private schools. They spend their weekends at the most exclusive clubs, wear the latest fashions, and travel the world with their friends. Without value succession, they are apt to depend on the family wealth to maintain their lifestyle. Very little time and effort is spent on growing the family wealth. Their focus is one of materialism. This generation is the wealth spenders of the family.

A Value Succession Plan

During the time that the third generation is enjoying their overseas education, the first generation will usually start thinking about their wealth succession plans. They are also aware of the gaps that exist within the family. They will hire the best lawyers, accountants, and bankers to help them develop a wealth succession plan. Many times, they develop complex structures that will protect the wealth and pass it on to the next generation. But what is almost always forgotten when developing the wealth succession plan is a value succession plan. A family can have the best structures in place, but if the family has no history of meeting together, communicating together, working together and trusting each other, these structures will likely fail. What the family needs is a common thread that connects them, a glue to bind them together.

No Values without Values

At MeesPierson, we believe "there is no values without values". We have found that philanthropy is one of the best tools in passing on values from one generation to another, when developing a family wealth succession plan.

The key objective when developing family values is to involve the whole family, which allows all generations to participate in a non-threatening environment. Organized philanthropy can make this happen.

The best way to start is to share and document the family history. Every family has a story to tell. Understanding where the family comes from, knowing the events that had a strong impact on the family, the sacrifices the first generation made to bring the family to where it stands today, the successes and the values that the second generation brought to the family at that point are all factors to consider.

These experiences will connect the family as a unit and drive the focus of the family philanthropy. Understanding these experiences allows the family to develop their philanthropic focus. Each generation has their own specific giving patterns. The first generation might want to give back to the home village. To build schools, hospitals, and community centres. The second generation might focus more on supporting organizations they are involved in. They might look at providing seed money to develop new programmes. The third generation might focus on environmental issues and support team building organizations.

Organizing Family Philanthropy

When organizing the family philanthropy, the family can use several vehicles - from a charitable purpose trust, to a family foundation, to a company limited by guarantee. The key is to involve the family members in the process and to develop a succession plan that keeps the family members actively involved in the process.

Often, an outside facilitator can assist in moving the process along. It is important for the family to develop a mission and vision for their foundation. It is essential for the family to decide together their philanthropic focus and the cashflow that is needed on an annual basis to support the efforts of the family.

Through organized philanthropy the family members learn about family governance, financial management, co-operative decision-making, and how to work together as a family. It is a great tool to prepare a family for wealth succession and the opportunity to learn in a non-threatening environment how to work together when a family sets up its family office.

As James E. Hughes, Jr., author of "Family Wealth: Keeping it in the Family", once told a group of high net-worth families in Hong Kong, "Paradoxically, families often learn more about long-term wealth preservation through the process of giving it away than through the process of learning to accumulate and spend."

The impact of organized philanthropy can be amazing. It is inspirational to see family members' lives change as they experience first hand, the joy of giving. To see the face of a child who has just received a new lease on life, a family that is given a place to live, or a student who is given a scholarship to be the first family member to attend a university - the process of giving away money has an incredible influence on the values of each member of the family.

Can the meaning of the Chinese proverb be changed? We believe the answer is yes. The secret is Organized Philanthropy.