Leading the Family Office with Human Capital
Scott serves as President of Chai Trust Company, LLC, the private company that administers trusts established for the benefit of members of Sam Zell’s family and that serves as the Zell family office. Equity Group Investments (EGI), a division of Chai Trust Company, LLC, provides investment management services on behalf of the Chai Trust.
He was a Professor of Law at the University of Colorado from 2000-2018, where he focused on bargaining and dispute resolution, transactional law, and the complexities of multigenerational family enterprises. Scott is a regular speaker about family offices, private trust companies, and intergenerational leadership. He maintains an active website about such issues at www.scottpeppet.com.
Kirby Rosplock
Welcome to the Tamarind Learning Podcast. I'm your host, Dr. Kirby Rosplock and today we're speaking with Scott Peppet. He's the president at Chai Trust, and he runs a single-family office. So we're thrilled to have you here today, Scott.
Scott Peppet
Thanks. It's great to be here.
Kirby Rosplock
So we're talking more about the human and the family capital, and specifically around family and the family office and what that focus looks like. Tell me more about what you focus on, Scott, and why it's so important to you to keep family in the focus of the family office.
Scott Peppet
Yeah, so, I mean, I think there are a couple of levels I can answer that. One is that just personally, I'm a person who's been focused on human development and human learning for a really long time. So I was a law professor for a long time, and I taught conflict resolution and various other skills-oriented things that are really about how people can do better in the world and figure their way through things and solve problems. And so when I found myself in this family office, family wealth, family business space, that was a natural evolution for me to be looking at the people and saying, okay, but what happens to them and how do they work, and what are the issues for them? The other answer, of course, is I married, 22 years ago, someone whose family had a large family enterprise. And so I was a young law professor again, doing this kind of work, doing conflict interventions with businesses all over the world and various kinds of entities. And I immediately found myself in this system and was trying to understand how it worked. And so as I did work with other families over that 20 years, really trying to prepare myself to understand all this better, that was just my natural focus.
Scott Peppet
These are my family members. These are my kids, ultimately, and nieces and nephews, et cetera, that I work on behalf of now. I transitioned from being a law professor to helping to run our trust company and family office about five years ago. That was a slow evolution, but I brought with me that focus on human capital.
Kirby Rosplock
Well, I think it's so fascinating because the family office is there to enable, empower, and help facilitate a very complicated life for so many family members. It's also a business, right? So there's this tension of operational risk management, compliance, all the different technical expertise. So I can see why so many family offices may not be super family focused. Talk to me a little bit more, what a really good office that is family focused? What are they doing right?
Scott Peppet
Yeah, it's a great question. You're right. One of the things I learned immediately when I stepped inside, I've been working with other family offices and families for 15 years at that point, and it's a lot easier on the outside in than it is on the inside out in one of these family offices because there is so much technical work to do. I always say when we're interviewing people, people often say to me, oh, you know, your team seems so collaborative and it's really great. And I say, yeah, you have to be collaborative because the problems we work on are so hard that anyone who thinks they have the right answer, we kind of look at funny, right? Because almost all of it is at the edge of what lawyers and accountants and tax people and whatever investment people really know, right? That's why it's fun, that's why it's complicated. So there is so much technical work that has to be done, and done well, in a complex family system like this that it's really easy for the human capital for the family to kind of drift to the side. I mean, I've met family office professionals who haven't met most of their family members that they work with or who barely really know the person that they're really responsible for.
Scott Peppet
And I think the reason is often that they fundamentally assume that what they're doing is stewarding financial capital. Stewarding financial capital and managing legal risk, right? That's essentially what people assume they're doing and that's what they've been trained to do, whether they're on the accounting investing side or the legal side or whatever. And if you say to them, well, wait a minute, a family office is really stewarding human beings. Yeah, there's a lot of financial capital tied to those human beings, but you're really here to help shepherd a group of human beings. You can get some pretty blank stares sometimes of people. I don't know how to do that right. I don't take that class in graduate school. And that's because that class didn't exist. It barely exists now. I think the good ones to answer the question a little more pointedly, one of the litmus tests for me is just how well do the professionals and the family members know each other in both directions? So do they know each other's names? Do they know each other's kids names? Do they know the issues? Have they actually had a meal together besides a huge thing with 50 people in it?
Scott Peppet
That's a small test, but it's a pretty good test because often it's one direction or the other. The professionals may have a CRM that tells them all that information, but the family members don't care or know anything about the professionals. That's dangerous. That's a sign for me. So that's one litmus test. But in general, you're looking for self-awareness on both sides of, these issues are real and they're important and we have to be focused on them somehow.
Kirby Rosplock
I love how you connected that. We're stewarding family beings, not just stewarding family wealth. And I'm thinking about some of the families I've had a chance to work with over the years. One in particular where the concept of stewarding wealth has been historically really a powerful motivator for the legacy. And now we have some boomers to zoomers, right? So we have that sort of whole continuum where they're thinking about refining that legacy and they're saying, well, maybe we don't want to steward it in the same way we have to build a lot of wealth, but maybe we want to depart or move away from some of that legacy. Thinking I think so much about how the family office, if they don't know who they're serving and what they're trying to accomplish, could very much stick to that mandate of make as much money as possible with the money that we are managing, right? When the beings might say, yeah, I'll take a haircut on return if I feel like I can do something ESG focused, or I'll take a haircut on how much I pass on to my heirs if I can invest in some social cause that I think is going to make their lives ultimately better, that capital might not make their lives better, but if we work on social justice, I'll just pick on that.
Kirby Rosplock
Since we're all thinking about a lot of that these days, maybe that will make their lives and that generation's lives better. I don't know. How do you respond to sort of that issue?
Scott Peppet
I think that's right. Family members don't just inherit financial capital. They inherit an architecture. They inherit a set of assumptions and a culture in the family office or in the family system, however it's organized. And that architecture and those assumptions are often invisible to them. Right. So for example, our goal is to minimize taxes, okay? I bet if you went through 1000 family offices, 990, something of them have that as an embedded assumption, which is fine. I mean, you know, as long as you're not doing something illegal, if you want to do good tax planning, that's fine. But that's an inherited assumption that some of the family members may not agree with. They may say what you just said, which is, hey, I'd actually give less to my heirs. Okay, fine. How are you going to have that conversation if it's all invisible, right? If it's all subterranean, if it's all just the wallpaper and no one's paying attention? I was with a family doing some work, and I was trying to make this point about inherited architecture. And I said, you know, this morning before you all got here, someone came in and put all these flowers on the tables and they're beautiful flower arrangements.
Scott Peppet
And I said, they were here for an hour making these flower arrangements. I said, how many of you did any of you decide that you wanted $2,000 worth of flowers or whatever it was? Was there a decision at some point that that was part of this meeting? And they all said, no, I have no idea who decided that. Right? Like somebody somewhere decided that. And one of the women said, you know what's actually scarier than that is I didn't even notice the flowers. Right. I didn't notice. I'm so used to the context now that I didn't even notice they were there. I said, right? So that's the invisible thing. The part that's tricky is I actually think if a family says, keep making as much money as possible and keep doing all the good tax planning and keep doing all that, but meanwhile, can we talk about can somebody help me with not screwing up my marriage or my kids or I don't know how to have friends. Like, I've just discovered that I don't have friends because I have two people I trust, and I don't let other people in. Those are human capital things, regardless of what your financial capital strategy is, regardless of your legal planning, that people are struggling with.
Scott Peppet
And there's a lot of family offices out there that aren't doing much to help them with those things that are the human capital things they're really dealing with close to home every day. So there's a lot you've heard me say this. I think I say to families that ask me about this, here's the thought exercise I want you to do. Imagine spending the next year of family meetings, whatever your family meeting cadence is or whatever, and not talking about financial capital at all. You're not going to look at the balance sheet. You're just not going to look at it for a year. It's going to be fine, right? Let's assume you have good investment vessels and the money is going to be okay. What would you talk about? And often the pushback is like, either that's crazy, or we can't do that. It's irresponsible. Okay, fine. We'll delegate the responsibility somehow, so that it's. Okay, what would you talk about? And then the next response is, I have no idea. Right. And then finally somebody says, well, gee, we probably talk about the fact that John is getting divorced, and it's really a disaster for everybody.
Scott Peppet
And you go, right. There is a set of human capital issues that you're not getting to because the financial and the legal issues are just ever present.
Kirby Rosplock
Yeah. So it's interesting to think about the hierarchy of topics and what gets demoted right. And how sort of that human capital and family capital component. Oftentimes it's not that it's not important, but it's not as important as saving on taxes, or it's not as important as risk management, making sure everyone's assets are protected.
Scott Peppet
That's right. And this is where a family office and its culture really matters because I said *it's* culture, not the family's culture, right? The family office's culture really matters because if you have a technical problem, let's say we've got a tax problem and we don't know how to solve it, we know what to do. We go find the best tax people we can find who know how to solve that problem and we hire them and they help us. Right? But if you said take those demoted family issues like, gee, our divorce rate is really high in this family, and it's because we keep running the in laws out of town because they don't like it once they read whatever. And nobody ever talks about that. Well, the family office could help with that. There's probably nobody in the family office that knows the answer. But they could go find the best three people in the world who know how to talk about that, and they could bring them in, and they could learn from them, and then they could help the family learn from them, and they could convene conversations, and they could do all the things that they know how to do.
Scott Peppet
If the demoted issue gets undemoted right, and gets taken as, hey, here's. It and corporations. I mean, you know, this corporations have gone through this exact same cycle over the last 25 years where they suddenly figured out 25 years ago, our human beings are our primary assets. We have to invest in our human beings systematically the same way we upgrade our machines and our computers and all the other assets that we have. How do we do that? Well, families need to do that too, right? And family offices need to do that too.
Kirby Rosplock
Well, that's kind of a good segue because I love that you are so focused on tools and things to help families start to unpack and uncover and explore and just have an opportunity to step into conversations, into areas that feel a little foreign, maybe a little unfriendly, but to begin to be empowered to do this self work themselves. And so I'm thinking about your five capitals assessment. I'm thinking about different tools and podcasts and videos that you've created. Talk to us a little bit more about how family members can start to empower themselves or how their family office can start to empower family members to learn up and be prepared.
Scott Peppet
Yeah, well, thanks. I try to put stuff out there just to find like minded people and to try to be helpful. So it's nice that you've found some of it helpful. Look, I think the first thing that family members have to do is self awareness and try to surface that architecture, what I said before, right? So, I mean, look at your family meeting agendas. Have they been nothing but financial capital for the last ten years? Are you bored stiff? Is everyone around you board stiff? Have people stopped coming? Do an actual assessment of how that's going. And be honest, if you hate the meetings, there's probably a reason. You hate the meetings. If you feel condescended to and talked down to, there's probably a reason. Right? So that doesn't mean I'm giving license to just be, gee, it's all about me. And if I don't like it, I shouldn't have to go. Some of the work you're going to have to go to and you're going to have to do, because some of this is hard and it may not be comfortable, and there is financial information you're going to need to absorb. But I do think it's worth stepping back as a first step and just saying, what's the system around me?
Scott Peppet
And how is it behaving? Right? Number one, the second thing I would do is look around and say, do we have anybody in the system or anybody's in the system who have a human capital? Focus, understanding, background awareness, whatever. They know something about psychology. They know something about learning. They know something about family systems, or they at least care about that stuff. They're reading about that stuff. They're going into family gatherings or family office meetings and conferences, and they're learning about that stuff. Do we have any of those resources, whether they're family members or staff? If the answer is no, well, that's a problem, right? It's like having a group where whatever your favorite psychological assessment is, it's like having a group that's all one type and not the other. When you look around at some of these systems, you're like, wow, there's a lot of financial and legal people, and there's just nobody else. So put a person on your board, right? Go find a really great person who's the rabbi, right? The learning person, the whatever, and put them on your board or put them on a committee or do something to start injecting that other perspective, it's easy for me because I'm a family member and I'm in the staff and I'm on the board.
Scott Peppet
I'm wearing a lot of hats. So it's easier for me in some ways as what others have called a family champion to do some of that. But it doesn't have to be a family person. You can bring in those resources. And we've done that quite a bit, trying to find people who we can bring in and add voices to the mix. And then the third thing is honest self assessment, like, how are you doing, really? And the Five Capitals thing that you mentioned, I did this Five Capitals assessment tool that was in large part because the Five Capitals model has been out there for a long time. Jay Hughes and Wise Council Research and others have put out various versions of this and books and such and talked about there's financial capital, but there's also human capital, social capital, different intellectual capital, depends on the words people use. Question I often get from family members is like, yeah, but I still don't really get what they're talking. What does that look like? What do you mean when you talk about that? And so I was trying to show a really detailed list of do you have a dentist?
Scott Peppet
Let's talk about human capital. How is your health, how is your health care? How is your mental and emotional well being? How is your spiritual health do you have some honest awareness of how you're doing on that front? A 30 year old may not have been to the dentist in four or five years because they stopped going to mom and Dad's dentist, and now they're living in a new city, and it just is slipping to the bottom of the list. Those are really practical. Do you understand how your health insurance works? Do you have renters insurance if you're renting an apartment? I know some very basic questions like that that just aren't getting asked. And so I was trying to just show, like, here's the categories here's, what these mean, and can you do some self assessment to see how you're really doing on those fronts?
Kirby Rosplock
I'm just taking them to your website right now where you get the great overview about your five capitals framework, human learning, social legacy, and financial. I love that you made this available to everybody. It's free to access. The condition is that no one pays you to use your tool. So that's just a gift, right, to all of us. And I love that you cover from the spiritual to the physical, and you got fun in there, which, by the way, is one of the things that I think should always be looked at for just joy. And then you have the relationships and the social emotional, just self care. I love that you fit in social family governance under social personal growth. By the way, I've had one of my clients go through this. They loved it. It was such a helpful tool for them to sort of gain more introspection. And I love that it generates this kind of cool output that can help give you, oh, okay, this is sort of what my wheel looks like. This is where I'm strong. This is where I'm weak or need more development.
Scott Peppet
Well, again, thank you for that. I should say this borrows again from a lot of folks in our field that both the Five Capitals model, obviously, but also some of the questions. There you go. I put some thanks there for people where I took questions and added them in. And my hope with something like this is that families will develop their own list of questions. I mean, I don't think that's an exhaustive list. I think even some of the folks that you and I know in the field have said to me, oh, well, what about this question? Or what about that question? And I'm like, yeah, that's a great question. I'm guessing that families will have their own questions, but something right. Start somewhere with how are we doing? And if the answer is one of the things that's tricky, I mean, you know, this with everyone on the planet, whether they have a lot of financial capital or not, is things that they're ashamed of, right? Things that they don't want to talk about. And that demotion. I love your word demoted. The issues that get demoted are conveniently demoted often because they may feel icky.
Scott Peppet
Right. I don't want to talk about the fact that my marriage is in trouble or I don't want to talk about the fact that one of my kids is really not doing so great or whatever, a mental health issue. And so part of it for a family is I've really had my eyes open in the last year or so to the phenomenon of wealthy families or wealthy family members, particularly younger ones, particularly women, I actually think as well feeling like everything has to be fine. I'm so blessed. I have so much in financial resources I've never wanted for anything. It's not okay for me to be not okay. I have to always be happy and healthy and everything's great, which is not a good prescription for actually getting through life. Right. That's a real challenge. That is part of this self assessment of it's okay to not be a five on everything. Right. That's okay. And we can probably help you if you're a one on a bunch of things, but it requires honesty first.
Kirby Rosplock
Yeah. And I think that's a really powerful takeaway from just any of the work that's getting done in family offices is just how much transparency, how much honesty on both sides, the family and the family office. Because the family office has usually its own quirks and own kinds of issues that it's facing, and then the family has its own issues. And so if there isn't that transparency to the key family that need to know about, like, hey, we need to fine tune these things over here. Or I also think about families who are going through a major transition. And need to think about. Oh, my gosh. We need to look at that invisible infrastructure. We need to account for it, we need to figure out what we're going to not continue. And what we need to continue. And so there's so much around honesty having honest conversations to do the work, to build better and stronger.
Scott Peppet
Yeah, I couldn't agree with you more. I mean, I think that's a huge part of this. And again, the thing I'm amazed with now that I'm inside a family office is a lot of time can go by dealing with the obvious issues that need to be dealt with. Right. Investing the capital, managing it, doing all a decade can go by and suddenly you kind of wake up and remember we haven't dealt with any of these other kinds of issues, or gee, the family is really drifting, or gee, the family is really not engaging or whatever. And so I just think that family offices really do have to try hard to put this stuff into the center of their attention year over year and chip away at how do we do this? I had a conversation with a family member from another family recently, and she said it's really funny reading some of the stuff you've put up, because ten years ago, we were introduced to the Five Capitals idea, and we got really into it, and we were really committed. I was going to be great. And she said, and when I look at our agendas as a family for the last ten years, the only thing we've talked about is financial capital.
Scott Peppet
She's like, we didn't change one thing about our agendas or the time we spend together, because every time we'd set an agenda, there was something pressing that had to be dealt with. And so we dealt with it, and we defaulted to the balance sheet and as a financial balance sheet. And she's like, I'd really like to take another crack at it, but I just realized we missed a decade. And I said, well, right, that's what happens. That's what happens. But it's not easy to do, and it's definitely not easy for family office professionals either.
Kirby Rosplock
Well, I always like to end any podcast on the up notes, and I think one thing families might benefit from is figuring out what gives urgency to those family issues. And sometimes we triage, right? We're like, oh, my gosh, so and so is having this, oh, we got to do this. He's moving to this jurisdiction. That's very tax austere. So we end up prioritizing, right? We demote some of those family-focused areas. Maybe there's an opportunity to say, what are the things that positively on the family that we want to emphasize or lean into? Gosh, we have so and so and so and so graduating from college, or they just completed a Master's, or maybe they actually want to go back and finish their degree. I mean, right? We can have family that are off the rails or in different places and committing emphasis to where family are moving and leveraging that momentum. And so I guess one question I have for you is what have you seen work in the family you work with or with other families where putting family back into the emphasis or the focus of the family office is really working well?
Scott Peppet
This is where I think the genius of the Five Capitals idea, and again, whether you have five or you have six, you have three, and whether they're what you call them, I really don't care. But the genius of that idea for me is that, number one, it obviously gets people to focus on something other than financial capital. That's good. But what it also does is it says to the family members, there's multiple kinds of wealth, there's multiple kinds of capital, and you as a family member, are contributing to the family's capital when you go get that master's degree, right? When you build stronger relationships, when you do some therapy, when you get a coach and you figure out what you want to do with your career, when you're honest about your marriage and you get help. And those are all contributing. They're contributing to social capital. They're contributing to legacy capital or doing philanthropy. They're contributing to human capital. Those are all contributions to the family's wealth. That's a really good thing for a lot of family members to hear who feel like, I'm not going to go make a financial fortune. I don't really want to do that.
Scott Peppet
I'm a different person than my grandfather or my grandmother who made the fortune originally or whatever. Not my thing. So I guess I'm kind of marginal my cousin. He's the one who's on the investment committee, and I just kind of have to let him do the thing. And I don't really have that much to add. Well, when you reframe what the family is actually trying to do, which is shepherd all of these kinds of intangible capital and tangible capital forward into the future, then everybody can contribute, right? And that's meaningful to people. I mean, one of the things that I keep finding is family members who I think we have the trope in our head of irresponsible bad trust funders. Yeah, there are irresponsible folks and there's people who have all kinds of issues. But the majority of family members that I meet in different families are pretty responsible, trying to do a good job. Maybe they're a little lost, maybe they're this, maybe they're that. But what they want to know is what's expected of me and how can I be a responsible family member? But if the answer is you've got to go get an MBA, 90% of the people, that's not their life path, right?
Scott Peppet
They have to be able to contribute some other way. And so that's why I love the five Capitals thing, because it's a little more inclusive, honestly, of the diversity of what people bring to a family.
Kirby Rosplock
Yeah. And I think it also connotes value where we don't put enough value. Right. We don't attribute a financial dollar to social capital or we don't think about what kind of benefits it has to have people that are compassionate or empathetic or good communicators or strong at relationships or intuition or good at caring about the broader world.
Scott Peppet
What's hilarious is when you ask family members, so let's say there was a wealth, first generation, kind of wealth creator, grandmother or whoever, and you say, what, let her create all that financial capital. The answer is always, she was a great communicator. She was a great people person. She was so smart. Sure, she probably was a very good business person, but usually there's a ton of intangible capital things, social capital, that she was really good at or he was really good at. And so the funny part is it's like we forget that, and we just boil down to like, well, they were a financial genius. Well, sometimes they were, but often they were a people genius just as much. Right? They had EQ and IQ most of the time. And so again, it's like, well, wait, that's not what we're trying to protect we're trying to protect all these kinds of capital so that the family can thrive over a long time.
Kirby Rosplock
I love it. It's so powerful, so exciting. Scott, I feel like I could talk to you for days and days and days. I hope you'll come back to the Tamarind Learning podcast. You're illuminating. You have great insights and tremendous wisdom from working with your family and obviously the other families that you interact with. So I am so grateful for your time your sharing. We're going to share more about your tools, your articles. You write voluminously, which I love. It's great for me to get inspired by your work. So, again, thank you so much for being here today.
Scott Peppet
Well, thanks for having me and I'd love chatting with you anytime, so thank you.
Check out the Five Capitals Assessment below and view more tools and resources on Scott's website www.scottpeppet.com
