Antifragile Foundations

In the last newsletter, we touched on antifragility and that families can be antifragile too. That is all great, but what exactly do we want to be antifragile? Are we looking at each individual person in the family? That can’t be right, because for a system or group to be antifragile, it requires individual fragility. Right, so we need to get a bit more abstract. Something that a family can work on together, something that has a connection to each individual, yet something that concerns the family. What is the foundation of every family? Or in other words, how can we try to model the foundation of a family? A model with which we can simplify a family, so that we can work with it. All models are flawed but useful.

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A model that works well in this regard is to look at a family’s capital. Most who read this will immediately think about financial capital. And yes, this is one type of capital, but not all. In fact, there are four more. Mind you, you can slice and dice these to your own preference. Two of the earlier models in this respect are the Stonehage Fleming Four Pillars of Capital and the Fice Capitals by James E. Hughs.

Before going into detail on the two models and their similarities and differences, let’s look at the theory of the capital idea. In Macro- and Micro- economics we try to grasp a company’s or country’s assets. We look at materialistic and immaterialistic assets. A company’s cash is materialistic, its real estate is materialistic, etc. But there are other assets of a less tangible kind, for example,e the intellectual property they own, or the value of their workforce (particularly experts), or the company culture. Basically we try to see which types of capital give an institution an edge over others. This theory can be applied to a family. And not just families of wealth, to any family. Basically the Family Capitals encapsulate a family’s legacy. The capital is transferred from one generation to the next and within each generation the capital changes. It might be grown, or it might be decreased or even destroyed. However, rarely we lose all capitals at the same time.

The model I like to work with is that like in the Hughs model, there are five types of capital (CFISH). However, I prefer to use the Term “Cultural Capital” (from Stonehage Fleming) instead of “Spiritual Capital”.

Cultural Capital is a term that was introduced by Pierre Bourdieu symbols, ideas, tastes, and preferences that can be strategically used as resources in social action. Cultural capital essentially describes the habitus of your family. How family members interact, how the family acts as a whole, how the family thinks or deals with conflict and emotions. The family culture has a direct impact on the business’ culture. Again some habits of the family have more positive effects and others can have negative effects. A family’s values fall under this here

Financial Capital is your family’s monetary capital, assets such as your business, real estate, etc. There really is not all too much to say here. Your financial capital is a means to an end, it is what will make you be able to do certain things, or buy things. With money often comes power in our society. And with power, you can do good and bad.

Intellectual Capital is similar to human capital, however, it is not based on the individual but on the family as a whole. This is knowledge that may be passed down through generations. A classic would be a secret recipe or other knowledge that is crucial to the family’s success. It describes the intangible assets of your family, that give it a competitive advantage.

Social Capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively" (Oxford Dictionary). Your family’s reputation and network fall within this place. In many cases, your surname can be an asset. You will have opportunities based on which family you were born into. A good reputation is arguably more important than financial capital. Based upon your relationships and reputation people will decide to work with you or not.

Human Capital encapsulates the people in the family, so the family members. However, any long-standing employee is part of your human capital. No matter what a family member does in their life, they have a certain skill set, they have a specific character and their personal motivations. Some of these traits will add positively to your human capital, while others might have negative additions to it. Human capital is used by economists to give “a value to personal attributes considered useful in production processes”. So in our case essential personal attributes for the activities a family engages in. In families, another thing that falls into the human capital bracket is family genetics. This is a capital that is given from one generation to the next. Strengths and weaknesses both.

As we are talking about a family becoming antifragile, let’s think about why the capitals are essential. In theory, the better structured a family is in each capital, the stronger their foundation. Also the more balanced and diversified a family is in their capitals the stronger their foundation. I do want to stress that balance is more important than growth. Particularly if the growth happens in only one or two of the capitals. A typical downfall of a family is growth in one capital, while the others stay stagnant. A classic example is hyper-growth in the financial capital and no growth in the others. This will create a disbalance in the foundation of a family and will lead to dysfunctions. Similar cases are when the social capital grows a lot, but the others do not. This again will lead to dysfunction in the family.

Family dysfunction is the dominant risk for a family and the main reason for a family’s downfall. Now this is often seen through the lens of the family’s financial capital. However, losing relationships in the family is a much bigger loss. A loss that is deeply painful, almost tragic and a loss that often cannot be regained. Once relationships are damaged, they are often damaged for good, no coming back. And repairing if possible at all, is an adorous process that will eat a lot of energy and time.

Arguably the financial capital is the one capital that is the easiest to gain. The other types are harder to create, but they can help your family build financial capital. Investing in your family’s knowledge, family culture, building a good reputation and network and building strong individual character.

I hope this gives you a good overview of the foundation for antifragility.

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