The Three-Circle Model of the Family Enterprise

A “family” holds within it love, strength, support, and bonds of a special kind, and it runs on these, softening the latent frictions and conflicts that may exist among its members. A “family business,” by contrast, operates on the wisdom and will of the controlling family—the head of the house above all—yet it is also subject to the oversight of other shareholders and to the constraints of legal frameworks and institutions. The interests of a family and of its business are not always aligned. As both grow larger, the tensions and conflicts between them surface ever more clearly, and the mechanisms that once balanced everyone’s interests may no longer provide enough cohesion. Family members, the family, and the family business differ in their goals, their values, and their needs. If a family is to remain in lasting harmony, if the enterprise is to pass from one generation to the next, and if the family business is to endure, the family’s core members must renew their understanding, deepen their wisdom, and put in the effort.

The many difficulties and problems that arise trace back, in large part, to one key factor: unclear role definition. A family business is not, as we might casually assume, merely the distinction and interweaving of two roles—family and enterprise—as shown below.

These two overlapping circles reveal the mutually influencing relationship between family and enterprise. But if we analyze the problems of a family business within this model alone, we find it too simple; it can scarcely solve any real problem.

The organizational structures of family businesses are intricate and endlessly varied. There are husband-and-wife co-founders; father-and-son companies; siblings who are partners; large families with several blood-related branches; professional managers actively running the business; shareholders who take no part in operations, along with their spouses; young children who have not yet inherited ownership; a handful of employees granted equity—and so on. Each of these roles has its own goals, ideas, and worries, and some of them are in conflict with one another. If these conflicts cannot be resolved well, they will both obstruct the development of the family business and sow hidden dangers for the family’s harmony and succession.

The Three-Circle Model of the Family Enterprise

Is there a better analytical framework? We find that beyond family and enterprise there is another very important role—that of the owner. Bringing it in gives us a three-circle structure, as shown below:

This is the Three-Circle Model of the family business, proposed in the 1970s by John Davis and Renato Tagiuri of Harvard Business School.

If we break the roles of the Three-Circle Model down further, we arrive at the seven roles shown in the figure:

1. Outside investors who hold equity in the family business but are neither its employees nor family members.
2. Employees and managers of the family business who are not family members.
3. Non-family members who work in the family business and hold equity.
4. Family members who hold equity in the family business but are not its employees.
5. Family members who hold no equity and are not employees of the family business.
6. Family members who work in the family business but hold no equity.
7. Family members who both hold equity in the family business and work in it.

Every one of these roles has its own viewpoint, goals, interests, and standpoint. Placing the roles within the model, we find that each standpoint is reasonable and worthy of respect. No one viewpoint is more valid than another, yet the differing viewpoints must be integrated to serve the goals of the family and the family business as a whole. The long-term success of both depends on the mutual support and cooperation of every role.

The Effects of Overlapping Roles

A family member who works in the family business may play three roles at once: family member, business manager, and shareholder.

As a family member, they care above all about the welfare and unity of the family. As a shareholder, they care about return on investment and the viability of the company. As a manager, they strive to improve the company’s operating efficiency.

The ties of blood and the sense of shared identity among family members mean that, whatever role they occupy, they remain loyal to one another and to the enterprise. This loyalty includes supporting one another’s decisions and making personal contributions for one another, for the family, and for the company. It can reduce internal struggles over power, produce good cooperation and trust, build a forgiving understanding of one another’s shortcomings, and foster appreciation and pride in one another’s strengths.

When one person plays several important roles at once—father, shareholder, and president all together—decision-making becomes concentrated. The advantage is that the efficiency, effectiveness, and privacy of the decision-making process all improve. The decision-maker can act swiftly and prudently in the best interests of both business and family. When the goals of family, enterprise, and ownership align, the head of the family can act decisively, giving the company powerful competitiveness and maximizing the family’s interests.

But there may be negative effects as well. Generally speaking, the norms of business conduct and the norms of family conduct stand opposed. A family traditionally seeks harmony and unity, trying to suppress or soften competition among its members, whereas a business often works to sustain a healthy level of internal competition. The overlapping of roles may allow family factors to influence business decisions, or conversely, a business discussion may turn into a heated argument and standoff over family matters. The company may suffer from the absence of an objective market mechanism and from poor business discipline, while family members may feel they are sacrificing themselves for the good of the company.

Because of the multiplicity of roles, in a conflict a person will often retreat into the role that serves them best. For instance, the father-plus-shareholder-plus-president may retreat into his role as father, treating his subordinates like children in order to preserve his decision or his authority. A non-family business is far less likely to see this retreat into a non-business role and is more likely to handle business decisions objectively.

Thus, on the question of overlapping roles, the strengths and weaknesses of a family business are both quite pronounced. Where roles are not clearly distinguished, understood, and defined, the negative effects may be greater still.

A Shared Sense of Identity

Family members who work together share a common sense of identity. Because the identities of company employee and family member are interwoven in the family business, each person’s conduct carries both business and family implications and meaning; it affects the reputations of other family members and, in turn, the reputation of the family business.

For this reason a family will tend to monitor its members’ conduct fairly strictly, to ensure that their behavior toward the friends, clients, suppliers, and employees of family members is appropriate. This attention to word and deed, and the oversight that follows, greatly helps to raise the recognition, protection, and cherishing of the family’s reputation, and helps family members to unite and stay loyal to one another.

Yet such strict management may leave some family members feeling suffocated, smothering greater creativity and possibility. Family members may feel they are being watched both inside and outside the company, and may come to resent the loss of freedom this brings.

A shared sense of identity is often the foundation of the family spirit and a source of greater unity in the family business. But too much of a good thing becomes a fault, and how to eliminate the negative effects of that shared identity is itself an important subject.

Interwoven Life Journeys

The way family members interact when they work together is often shaped by the life experiences they have shared. They may have lived together from birth, knowing one another’s strengths and weaknesses—and that knowledge can bring constructive or destructive results to their cooperation. They may, for instance, draw out one another’s strengths as fully as possible and offset one another’s weaknesses. But they may also exploit the other’s flaws or blemishes to stir up trouble, aiming to weaken the other’s position in the company.

The life journeys that family members have shared contain both joy and disappointment, and these experiences largely determine each person’s expectations of working with the other. A good relationship prompts two people to cross adversity together and to keep faith and loyalty toward each other. A relationship marked by disappointment and resentment lowers the trust between kin and complicates their working interactions.

Moreover, the relationships among blood relatives are usually formed through the accumulation of enough time and enough events; many of their impressions of one another are unconscious, deeply rooted, and very hard to change.

For this reason, when the founding generation of a family attends from the outset to the building of the family’s human capital and relational capital—using a positive family culture and values to forge good relationships among the members of every generation—it is vital not only to the lasting prosperity of the family business but also the cornerstone of the family’s ability to carry on.

In Summary

When we set out to solve a problem, we must first identify its key factors—such as the different roles and standpoints discussed in this article. At the same time, we can place the problem within a framework, such as the Three-Circle Model. And, of course, only when we can finally distill the solution into a principle (Aristotle’s first principles, say, or Thomas Kuhn’s paradigm) can we say that we have a clear grasp of the problem and are able to meet its changes.

This article, then, is an introduction to the Three-Circle Model, or a beginning. In the future we will “dig” further into this model and elaborate on it.