While they might seem innocuous, ‘rich lists’ tend to be quite limited in gauging wealth. When it comes to good governance, family offices should rather look at the concept of family capital, a broader concept encompassing family well-being, decisions, knowledge, and health.
What you need to know
- Despite their purported acclaim, ‘rich lists’ present a number of limitations in accurately ranking individuals based on wealth.
- Along with other various issues, there is an oversight of important factors such as debt and liquidity in measuring wealth.
- For family offices looking to address dynamics amongst generations, centring a conversation around “family capital” might be useful, emphasising non-financial aspects of well-being that contribute to overall prosperity.
At face value, it might be the dream of some to be included in a ‘rich list’, however, these lists not only fall short in a number of ways, but they can also be incredibly damaging to the families they highlight. Seeing this first-hand, as my family featured on local lists as I was growing up, and the comments and attitudes of others weighed heavily on me – from being teased at school to being treated like a wallet by non-profits, to the small observations here and there. Every year, these lists continue to be a trigger for snide assumptions about individuals and families and are oftentimes incorrect. There’s more to family wealth than just net financial worth and when it comes to good family governance, family capital should count for more than just what’s in the bank (and portfolio).
Family offices and advisors will recognise the issues these lists can cause and while there is little one can do to change society’s attitude to the wealthy, there are ways to manage this within a family context. This starts with educating them and discussing these issues more openly, which starts with the realisation that lists like these are bad for several reasons.
Firstly, they are plain wrong. Financial wealth is difficult to measure at the best of times. Almost anyone of significant wealth will be carrying some form of debt. This varies depending on the source of wealth. Operating businesses usually borrow to fund a mix of working capital, growth, and acquisitions. Property developers and investors almost always take on debt, to varying degrees. The big question is: how much debt? Warren Buffett famously said about debt “Only when the tide goes out do you learn who has been swimming naked.” When interest rates rise and asset prices consequently fall, investors who are highly geared can quickly tip from a net positive asset position to a deficit, which can quickly spiral down to asset sales at “fire sale” prices. Debt is a very important part of anyone’s financial position.
What assumptions do rich lists make about debt? Unlike some asset values, debt is rarely disclosed and therefore harder to quantify. They take a very simplistic approach and assume zero debt. While I find this approach bizarre (particularly given they use the term “net wealth”), I can understand that they would rather assume zero debt than assume incorrectly. So you can immediately discount almost all numbers by a significant and unknown number!
The second issue with quantifying wealth is that it ignores liquidity. Balmoral Castle, now owned by King Charles, has been valued at 80 million euros. However, given it’s an asset that he’s very unlikely to ever sell, what exactly is its contribution to his financial position? A similar situation can apply to wealth based on large holdings in listed companies. Microsoft CEO Satya Nadella’s shares are worth (as of the time of writing) some $448 million, but he couldn’t sell them tomorrow (he did sell a chunk in 2021). The ability to liquidate a large holding in a listed company depends on the company, the percentage of the company it represents, any escrow provisions, and the identity of the beneficial owner. While as an asset class, listed shares have “daily liquidity”, that doesn’t work at scale. It’s even more difficult if the company is not yet listed. A large founder holding in a startup company that hasn’t yet gone public is valued based on the most recent capital raise for that company. That valuation represents what new investors paid at a point in time when the last capital was raised. We’ve seen some venture capital funds write down the value of such holdings as market conditions have changed. While the owners could sell some or all of their holdings through the secondary market, it would be at a significant discount to the most recent valuation.
Now, such holdings (even before IPO) can be leveraged to gain access to actual liquidity (see point one above), and plenty of founders and shareholders do that. It’s not as if the wealth can’t be accessed in some form. But that source of wealth is not the same as cash in the bank or holdings in secure government bonds.
Let’s say we could develop some formula that adjusted wealth for debt and liquidity. Then what?
That leads to the final problem with rich lists – they perpetuate a myth that some number is a reasonable measure of wealth. While the quote “What gets measured gets managed” is attributed Peter Drucker, Lord Kelvin actually wrote in 1883 “When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind”. This adage works for temperature, distance, weight, and even management. It doesn’t work for wealth.
Indeed, the original meaning of the word “wealth” was well-being and prosperity. Jay Hughes identified five forms of family capital: aside from the financial, there is the ability of families to make decisions together and impact the world around them, their collective knowledge, the health and wellbeing of individual family members, and their shared purpose.
Measuring those other forms of family capital things is quite difficult, and especially hard to put a number on any of them. The country of Bhutan pioneered measuring Gross National Happiness as an alternative to economic measures.
Rich lists rank people’s wealth like one would sportspeople or teams: “[insert name of high profile wealthy person] moved up two spots on the ladder in the last quarter”. What does that even mean? Was this the result of anything they did or didn’t do? Are their lives any different as a result?
Rich lists are sensationalist and lazy journalism. They measure the simplest and most crude thing possible about people and do even that very poorly. If you even bother reading them, please do so with a generous amount of salt.
This was also posted at [andsimple.co].
