Investing in Possibility: An IPS for Human Capital

Investing in Possibility: An IPS for Human Capital

by | 'Jun 22, 2017' | How-To | 0 comments

Investment Policy Statements. Asset allocation. Portfolio reviews. Investors have developed sophisticated systems that enable them to choose among investment options and manage and track the performance of their Financial Capital. These systems enable investors to create detailed plans, identify opportunities and weaknesses, and monitor performance.

For example, an Investment Policy Statement (IPS) is an agreement between the account holder and the investment professional, setting forth: the purpose and objectives for the investment, the time horizon, risk tolerance, basic asset allocation, and liquidity requirements. The IPS ensures the account holder and the investment advisor work together and remain focused on the same end goals, even in the face of unexpected market changes.

But, what about Human Capital?

What would it look like if business-owning families developed systems to invest in their Human Capital that are as sophisticated as the systems they use to invest their Financial Capital? After all, for family businesses, Human Capital is the driver of long-term success.

Why not consider an Investment Policy Statement for Human Capital? Created by the family, for the family, it would keep the family’s collective eye on developing individuals’ Human Capital in service of the family’s Shared Purpose and Vision for the future. Put another way: it would set forth how a family would invest its Core Capital (Financial Capital, Enterprise Capital, and Human Capital) to support and grow its Human Capital.

Outline of an Investment Policy Statement for Human Capital

A Human Capital Investment Policy Statement might begin with some basics:

  • Parties to the IPS: all the members of the family
  • Definition of the Human Capital—the sum total of the family’s individual and collective human potential:
    1. Skills, abilities, and talents
    2. The family’s values and moral code
    3. Drive, perseverance, grit, and determination
    4. Education and training, as well as formal and informal experiences
    5. Social capital: relationships and connections, contacts and influence, reputation
  • Purpose for the investment: to identify, sustain, and grow the family’s Human Capital in service of its individual and collective Shared Purpose, values, and Vision.
  • Goals and objectives for the investment:
    1. To ensure the family has the Human Capital it will need to steward and grow all its Core Capital, including the family and its enterprises.
    2. To strengthen family relationships over generations, as the family grows.
    3. To develop the communications and decision-making skills necessary to sustain the family and its Core Capital.
    4. To encourage and assist each person in the family to achieve their individual purpose and goals.
    5. To ensure that existing Human Capital is passed between generations, through mentoring and shared experience.
    6. To understand the talents and interests of family members so that everyone in the family can help each talent find its highest and best use, and make each other aware of the opportunities in which to put it to use (whether business, professional, philanthropic, artistic, athletic, or social).
    7. To provide education opportunities that will improve the family’s collective skill set.

Key Roles

While business-owning families understandably may encourage next-generation family members to develop the skills needed for success in management roles within the business, over the long term, sustaining and growing the Core Capital requires many different kinds of skills and talents, in many different spheres of influence: business, investments, education, community-building, entrepreneurism, philanthropy, politics.

The Human Capital IPS could lay out both the important roles that family members will need to occupy if the family is to achieve its Shared Purpose as present and future owners of the Core Capital, and the skills required for success in such roles:

  • Employees, managers, and directors of the business and other enterprises
  • Members and leaders of the Owners Council and Family Assembly
  • Trustees, protectors, and beneficiaries of family trusts
  • Trustees and leaders of the family’s philanthropic activities
  • Community leaders
  • Teachers, trainers, coaches, and mentors

Including roles in the IPS reminds family members of the broad array of responsibilities needed to sustain the Core Capital. Both the number of roles and the skills required to execute them tend to increase over time, as the family and its Core Capital grow and become more complex. Preparation matters: if the roles and responsibilities aren’t clear, odds are there won’t be skilled and capable individuals to fill them.

Time Horizon

While a typical financial IPS might be intended to remain in place for a period of years, an IPS for Human Capital is necessarily inter-generational. Certainly, the IPS will be modified from time to time to adapt to changing familial, enterprise, and cultural circumstances, but at its heart, it is a document of very long duration.

Capital Invested

While investing Financial Capital requires cash (by definition), investing in Human Capital is comparatively inexpensive—at least from a financial standpoint. Some Financial Capital may be required—for example, if the family wishes to fund its members’ formal education at private schools or universities. But in the main, the Human Capital IPS is about investing Human Capital to generate more Human Capital. The point of creating the IPS is to engage the family in thinking about what Human Capital the family and its enterprises will need over the coming decades and generations, and how it might best be uncovered, created, recognized, encouraged, and nurtured.

For the senior generations, the Human Capital IPS serves as a reminder of the investment they must make as leaders and mentors to sustain and steward the Core Capital. For the rising generations, the Human Capital IPS serves as both an invitation and a reminder that participation can’t just be left up to chance; rather, long-term success depends on building the right collection of skills, talents, focus, and drive, all driven by a common purpose, vision, and values.

Isn’t a Human Capital IPS a Family Constitution in new clothes?

A Family Constitution is more foundational and, often, more spiritual in nature than a Human Capital IPS. A Constitution is a central governing document, whereas an IPS is one of a number of policy documents that an enterprising family might create. Certainly, a Human Capital IPS is aspirational, but its primary role is to provide focus and lay out pathways for building the Human Capital required for long-term success of the family.

Creating a Human Capital IPS

A Human Capital IPS can be a useful and energizing project for a Family Assembly to undertake, especially for a family with many young people in college or just embarking on their adult lives. Creating a Human Capital IPS provides an opportunity for the group to look closely at the family’s Human Capital and help the entire family see its collective potential. Doing the work of creating a Human Capital IPS helps the entire family dig deeper and see more clearly the strengths and opportunities of its Human Capital.