I find I often talk about the 3-circle model in family business as though it were rote and every person who finds themselves working in a family business instantly understands what it is and what it might mean to them. During a recent peer group meeting however when I introduced this concept, few had heard of it and listened with great interest, their heads nodding and suddenly little light bulbs flickered within. The 3-circle model is a useful tool to help those in a family business understand the larger system in which they exist. Therefore, when I was asked to do a monthly tip series on for family business, I gravitated to the 3-circle model as a logical starting place for a general audience.
The introduction of systems approach to understanding family businesses began in the early 1960’s as the field of family business research was slowly developing. Early focus was on persistent issues in family business such as nepotism, conflict and succession. Ivan Lansberg determined that there were two fundamental circles of family business, family and business (1983). For those in family business, there were problem areas for those who tried to fulfill obligations in both circles, especially simultaneously. Success was determined by finding strategies or techniques that allowed individuals to understand and satisfy the needs that both systems required.
Tagiuri and Davis (1983) elaborated upon the two-circle system with the introduction of a third circle in the early 1980’s. They noticed an additional layer of ownership as separate and distinct from business or management. This 3-cricle model remains the foundation upon which most family business consultation and systems analysis is done today. The 3-circle model depicts three overlapping circles with seven distinct zones (Figure 1). It attempts to identify role, functions and responsibilities for those who find themselves in one or all seven areas. According to Gersick, et. al., “the reason the three-circle model has met with such wide spread acceptance is that it is both theoretically elegant and immediately applicable.” (1997, p. 7).
The three circles within this system are family, business, and ownership. Understanding roles and subsystems within the model helps the individual to comprehend the numerous pressures inflicted upon the person and the system from competing and often conflicting needs. For example, a member of a family who does not work in a business may have very different needs and perspectives of the business than from an individual who is a family member and works daily in the business. Equally, a person with an ownership stake in the business but with no family ties or formal position in the operation of the business will approach business decisions with less of an emotional connection than a family member who works in the business with an ownership stake that only comes from their relationship to their parents.
Source: Gersick, 1997, p. 6
Why is understanding the 3 circles of family business important?
- The three circles are connected yet also at times independent of each other.
- It provides a baseline for understanding complimentary and conflicting perspectives in a family owned business.
- Provides role clarity for employees in the business as well as family members not associated with the business.
How do families apply the 3 circle model?
- Establish internal policies that stipulate people attached to roles and how each circle will govern or meet.
- Provide for governance in each circle:
- Family – Family council
- Business – Management team, Board of Advisors
- Ownership – Board of Directors, shareholders meeting
What does it look like in action?
- Separate meetings with specific agendas:
- Family – mom & dad’s plans, estate planning
- Business – management succession, which child for which role
- Ownership – Open communication about owners intent to exit and how
- Employees are well informed on future plans, relives transition anxiety.
What if you are not a family business?
- Many of the same principals apply to any private ownership
- What is link between family and business.
- Are there successors in place from inside the family or not?
- Even corporate businesses need to address role clarity and succession.