Revisiting the Three Circle Model of Family Business to Strengthen Governance Structures

How to Assess Governance Maturity and Improve Family Business Strategy Using the Three Circle Model

Even after 40 years, the Three Circle Model of Family Business is still an effective tool for dealing with the challenges of running a family business.

To be an effective advisor to a family business, you need to assess the governance maturity of each circle and adapt to the current state. Governance maturity is measured by how evolved the critical structures are within each circle.

A Quick Refresher On the Highlights of the Three Circle Model

Family Circle

The Family Circle encompasses issues of the family, separate from their ownership and management duties. It includes the children and in-laws who do not have ownership and are not involved in the business. They may lack ownership, but they still have interests to consider. The Family Council and Family Assembly are the structures used to manage the Family Circle issues.

Ownership Circle

Shareholder meetings and Boards of Directors speak for ownership. The Family needs to give direction to the business through the annual shareholder meeting and the Board. The Board is the critical bridge between the business and the individuals in the family.

Business Circle

The Business Circle includes the strategic plan, management succession and contingency planning for the business. It is almost always the most evolved of the three circles.

The overlap between the Family and Ownership circles are the estate plans of the individual owners. The overlap between the Ownership and Business Circle includes the strategic plans of the business. Finally, the overlap between the Business and the Family are the continuity plans to assure the survival of the business. The interconnectedness and evolving nature of each circle creates layers of complexity to manage.

States of Governance Maturity

Typically, the structures within the Business circle are the most evolved, ever increasing as the business grows in size and complexity. The structures within the Family circle are typically the least evolved, since developing a Family Council and Assembly touches on the most sensitive issues, including succession planning and estate planning. With small businesses, management succession plans and business continuity plans may also be lacking.

Many family businesses have some sort of owner-centric board, whether it be consultative, advisory or a true fiduciary board.

What I have observed from 30 years of working with family businesses is that families with more mature governance processes tend to have a more informed, deliberative decision-making process, and are more likely to make consensual decisions. A recent study from KPMG provides the data to confirm this observation.

It has long been said that family businesses have two difficulties compared to public companies: raising capital and attracting the best talent. But family businesses have the opportunity to fine-tune their governance processes to their precise needs. They should take advantage of the opportunity.

How to Assess the Governance Maturity of a Family Business

In order to compare and balance the governance maturity of each structure, you need to start by diagramming the three circles: Family, Ownership and Business. Then ask yourself:

Are the 3 circles well-defined or muddled?
Is there accountability in each of the circles?
Who makes decisions within each circle, and how do they do so?
Is conflict identified, discussed and managed? Or is it ignored?

The answers to these questions are co-dependent. If the circles are muddled, then there is likely unclear accountability. If accountability is lacking, then decision-making processes become more variable. If decision-making is variable, then conflict is more likely to arise.

You’ve Assessed the Three Circle Model of Family Business, Now What?

Basic problem solving says start by defining what you do know, and what can’t be known. Diagram the situation and find out where decision-makers agree. From there, flush out the issues that need to be addressed. Tackle the easy issues first and take them off the table. Assess which issues are resolvable and go after them next. The issues most likely to be “deal-breakers” should be held aside until there is a better framework for addressing them. They are likely to be emotionally charged matters.

Like a bowl of spaghetti, the issues are tangled up. It takes time to work through it. But when you measure time in generations-not quarters-you realize there is always enough time to make changes if there is the desire and commitment to achieve change. This usually starts with education; helping the owners to understand why they need to develop the governance structures today, so that they can protect the business and the family for future generations. One of the easiest ways to begin this process is by using the Three Circle Model of Family Business.

[ Editor’s Note: To learn more about this and related topics, you may want to attend the following webinar series: Board of Directors Boot Camp.]

Originally published at https://www.financialpoise.com on February 10, 2021.