The Complexity of Family Businesses
Family businesses think in generations rather than quarters — and run with a complexity that no other corporate form has to manage. Building on the Three-Circle Model developed by Renato Tagiuri and John Davis at Harvard, Bernhard Kerres introduces the Family Business Circles: a four-circle framework that splits Business into Governance and Management, sharpening the diagnostic tool for advisors and family principals.
Published 2021-10-28 by Bernhard Kerres
Our economy was started, and is still driven, by family businesses. From the baker around the corner to the global conglomerate. Family businesses have a strong impact on society because they think in generations rather than quarters. At the same time, they are some of the most complex companies to run, because family ties and emotions mix with business decisions and rationality.
I have had the joy of working for and with many family companies around the world. Based on that work, I developed a framework I call the Family Business Circles — an extension of the canonical Three-Circle Model.
Building on Tagiuri & Davis
Anyone serious about family business work knows the Three-Circle Model developed by Renato Tagiuri and John A. Davis at Harvard Business School, circulated in working papers from 1978 and first formally published in 1982. The original model identifies three overlapping spheres — Family, Ownership, and Business — each with its own logic, its own membership, and its own legitimate interests. The genius of the model is that it shows why family businesses are so often misunderstood: most participants stand in more than one circle simultaneously, and each circle imposes a different set of rules on them at the same time.
What I have observed in practice — particularly with mid- and large-cap family businesses — is that the Business circle in Tagiuri and Davis's original model contains two distinct sets of issues that behave very differently. Governance (boards, oversight, strategic direction) and Management (operational leadership and day-to-day execution) are governed by different rules, attract different family dynamics, and often need to be addressed separately to avoid one set of issues contaminating the other. So in my own work I split the Business circle into two — Governance and Management — and treat them as distinct overlapping spheres rather than a single domain.
That gives four circles instead of three: Family, Ownership, Governance, Management.
The four areas
Family. The family itself is at the core of the business. But even there, it is often unclear who is part of the family and who is not. Are spouses and partners part of the family? Ex-partners? Are all children part of the family, or only the "legitimate" ones?
Ownership. Being a family member does not automatically entail having shares in the family business. Who owns the business and holds its shares? Do all family members have the right to become owners? At what age do they get their first shares? How is ownership divided between family members? How can ownership be passed on?
Governance. Bigger businesses require governance, often legally so. Is governance exercised only by family members? Who appoints outside directors? Are family and non-family members equal on boards?
Management. Family members are often found in executive positions. They sometimes work across generations and with outside managers. Are family members automatically entitled to management roles? How are they compensated for their work? How are they assessed against non-family management? Are family members in management allowed to hold shares in the company?
Addressing each area raises many questions. I have listed only some. As soon as you go into the overlapping zones, the number of questions and their complexity increases exponentially.
Start with values, not with answers
In my experience, it is advisable first to create a shared understanding of the values that hold the family and its companies together, before attempting to answer any of these questions. Families, like other groups and teams, are fast at jotting down a long list of values. The real work starts by agreeing on a few fundamental ones and then filling them with life. What does family actually mean to this family? How can we experience it? How can the next generation experience it?
Even the best value statements are living documents that will change over time. Because of that, they require everyone involved to take them out regularly, reaffirm them, share examples of how they are being lived, and adapt them where needed.
The four circles are also embedded in society. What role does the family want to play in society? This question quickly leads to very different viewpoints, often along generational lines. But a shared view on the family's role in society is vital before answering most of the questions raised by the four circles.
Practical advice
I have raised more questions than answers in this piece. The answers are unique to each family. My advice is to establish a regular process of working through these questions, and to hold events that keep the four areas — family, ownership, governance, management — separate.
There is nothing worse than a family member's birthday being misused as an impromptu board meeting. Just think of the signal such behavior sends to a younger generation. Similarly, the logistics of an upcoming holiday celebration have no place in a board meeting.
Lastly, an objective and independent outside view is not only helpful but probably crucial. As individuals, we have only a limited perspective on issues. The same is true for any group. The psychologists Joseph Luft and Harrington Ingham captured this elegantly with their Johari Window. Personally, I am always humbled to see the impact of different views on the same issue in my coaching work. It often helps clients — individually and in groups — come to a breakthrough on their paths. This is even more true for very complex issues such as family businesses.
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If the Family Business Circles framework is something you would like to apply to your own family business — across generations, across geographies, across an evolving ownership structure — I work with families on exactly this. Reach me at bernhardkerres.com (https://book.bernhardkerres.com/meetings/).
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About the author
Bernhard Kerres trained as an opera singer before joining Booz Allen Hamilton as a strategy consultant, then moved into CFO and CEO roles at two listed European technology companies, and served from 2007 to 2013 as CEO and Artistic Director (Intendant) of the Wiener Konzerthaus. Today he works as a leadership coach, executive advisor, and keynote speaker. He is a PCC-certified ICF coach, holds an MBA from London Business School, and was awarded the Austrian Cross of Honor for Science and Art. He is the founder of RolePlays.ai, an AI platform for practicing high-stakes leadership conversations.
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References
Tagiuri, R., & Davis, J. A. (1982). Bivalent Attributes of the Family Firm. Working Paper, Harvard Business School. Reprinted in Family Business Review, 1996, 9(2), 199–208.
Luft, J., & Ingham, H. (1955). The Johari window, a graphic model of interpersonal awareness. Proceedings of the Western Training Laboratory in Group Development, UCLA.