Family Business Framework – The Three Circle Model
The Three Circle Model is generally accepted as the standard model for family businesses and includes family, business and ownership as the three main components (Gersick et al).
The acknowledgment that there are three separate circles is a significant accomplishment for a family business. Too often, the circles are constantly intertwined. This results in poor communication, resentment and a lack of commitment to the future – the very things the business family is trying to prevent.
Each circle has a governance structure and a plan.
A family council would govern the family and prepare a family plan.
A management team would lead the business and prepare a management development plan for succession and a business plan.
A board of directors would govern the owners or shareholders and would be responsible for the strategic plan, continuity plan, contingency plan and the succession plan.
Within the three circles, there are seven potential positions that intersect and overlap and that various individuals can hold (see list in Appendix C). These positions can be the source of future successors for managers and owners. People normally change their positions over their lifetimes as they enter and exit the business or ownership. However, their family membership remains constant although their role in the family will evolve as they move from childhood to adulthood.
Each circle contains various stages of development and each individual within the family, business or ownership circle can be at various stages of development. Therefore, consulting to family businesses is complex and requires the determination of the various stages of development for both the business and the key individuals and family members that are involved. The stages of development for each of the three circles are as follows:
|Stage of Development
|1.1 Young Business Family
1.2 Entering the Business
1.3 Working Together
1.4 Passing the Baton
|3.1 Controlling Owner
3.2 Sibling Partnership
3.3 Cousin Consortium
As mentioned earlier, the majority of Canadian businesses are owned by the founder and this would put their business stage at expansion/formalization or maturity and put the ownership stage at controlling owner. These two stages are the main focus of this paper. The family stage depends on whether the next generation is working in the business or interested in working in the business, but this paper assumes that the family is at the passing the baton stage.
The paper will now analyze the governance and planning processes and make recommendations from the perspective of the three circles.
The governance model for the family circle is the family council. A family council can involve all adult family members and their spouses. One of its purposes is identifying potential issues and discussing them before they become issues (Aronoff and Ward).
Specifically, a family council is designed to educate the family about responsibilities that come with management and ownership. It helps to clarify boundaries between family and business and gives family members who do not work in the business a chance to be heard. A significant point in family harmony and balance is that it provides a communication process so that important business matters do not dominate informal family gatherings and holidays. Finally, it enables the family to create a family plan that is built on a shared vision and a ‘code of understanding’ (Gersick et al).
Although business owners frequently use accountants and lawyers to prepare tax and estate plans, the ‘soft’ issues such as selecting successors or processes for resolving conflicts often remain unresolved (CFIB). The family council is a powerful forum for addressing these ‘soft’ issues.
The family plan is an integrated document that looks at the family’s past and the future. It typically includes “a family history, a vision of the future, a family mission statement, and an action plan” (Gersick et al). The family plan would also include policies for family members working in the business, educational policies, and schedule fun family events so that business does not dominate all family get-togethers (Aranoff and Ward).
Organizations such as the Canadian Association of Family Enterprises (CAFÉ) have developed binders and processes for families to prepare their family plan.
- The family develop a family council that focuses on the needs of the family.
- The family develop a family plan together.
- An external facilitator for the family council will allow all family members to participate without having to be the chair. They will help the family to deal with conflict and follow standard procedures. This is a key starting point as a family meeting can help people to raise important issues so they can be addressed and reduce the likelihood that conflict will paralyze the group or stall the process.
The governance structure for business is the management team. The management team would consist of key managers in the business including family and non-family. If non-family managers are excluded from important information and decisions, they may leave and reduce the quality of management. The specific task is “planning the development for key managerial roles in the future, with special attention to family members” (Gersick et al). The team should include the controlling owner and the top human resources manager and any non-family board members who then identify and groom potential successors (ibid).
According to a Deloitte & Touche study, only 40% of businesses surveyed have a business plan and 57% of those compared actual results to the plan on a monthly basis. Although actual results will vary from plans and many controlling owners are reluctant to plan because of this, planning helps to increase accountability and learning. This, in turns, leads to increased performance (Miller and Cardinal). As a result, planning makes the management team smarter and helps make the business perform better and become more valuable.
Planning for business includes business plans, strategic plans for the approval of the board of directors, human resource and performance management plans (including performance appraisals to support evaluation of management successors), and contingency plans.
- The management development team develop a business plan, budget, strategic plan and contingency plan, often for the approval of the board or under the direction of the board.
- The management development team evaluate potential successors for management, including family and non-family members.
- Management promotion and succession avoid nepotism and promote the most qualified candidate.
- The human resources systems and management processes reduce the potential for favouritism of family employees.
The governance model for ownership is the board of directors. This is a major deficiency of SMEs and a major opportunity for strengthening ownership as a board can add a needed perspective to support the controlling owner. Thirty-five percent of Deloitte & Touche’s survey respondents have a formal board or advisory board with non-family members. Of those, approximately half rated the board’s performance as above average.
The board monitors company performance, advises the chief executive officer and makes decisions regarding dividends and reinvestment of profits. Most importantly, the board can prevent unhappy shareholders and keep family members informed about business performance (Aranoff and Ward). Other standard board functions include approving major transactions, electing directors, selecting auditors and modifying the corporate charter (ibid).
The board oversees succession planning, sets the strategic direction of the business by developing or approving the strategic plan, and develops leadership continuity plans and contingency plans (Gersick et al).
A team of advisors would be required to assist the board in preparing a succession plan (CFIB). These advisors would include a lawyer, accountant, financial planner, insurance broker, banker, and a succession planning consultant who could lead and coordinate the team on behalf of the business family. Other people to include in succession planning, but who are often not consulted, are the key management team and the designated successor (CFIB).
- Identify the board’s role and responsibilities.
- Develop the structure and frequency of meetings.
- Recruit outside family members for people who are experienced, independent, have a strong track record and have no conflicts of interest with the business or family (Gersick et al).
- The board develops or approves the strategic plan, participates in the management development plan, and prepares the leadership continuity plan and the contingency plan (ibid).
- The board works with a professional team of advisors to prepare the succession plan.
- The professional team is led by a succession planning consultant to ensure that the board receives a balance of professional services and that does not include any advisors.