The Three Circles Model: Family, Business and Ownership

The three circles model is the single most useful framework for understanding family business disputes. Developed in the 1980s by Renato Tagiuri and John Davis at Harvard, it shows that every family business is really three overlapping systems at once. There is the family, the business, and the ownership. Crucially, each of these has its own logic, its own rules, and its own definition of fairness. When the three pull in different directions, disputes follow. As a result, the three circles model is the starting point for almost every conversation about family business governance and conflict.

This page explains what the three circles model is, where it came from, and why it matters for anyone trying to understand or prevent a family business dispute.

What the three circles model says

In short, the three circles model represents a family business as three overlapping circles. Specifically, the circles stand for the family, the business and the ownership of the business. Importantly, these three systems are not the same. Each operates by different rules.

The family circle is built on unconditional belonging. Specifically, you do not earn your way into a family. You are born into one or you marry into one. As a result, the family expects love, loyalty and lifelong inclusion. Notably, members of a family are equal in the family even when they are not equal in any other sense.

By contrast, the business circle is built on performance. Typically, people are hired for what they can do, paid for the value they add, and let go when they cannot deliver. Importantly, fairness in the business circle means rewarding contribution. By extension, hiring decisions, promotions and pay differences are expected to reflect what people bring to the work.

Finally, the ownership circle is built on capital and risk. Specifically, owners contribute money or have inherited it. In return, they are entitled to a share of the profits and a say in major decisions. Crucially, ownership rights flow from legal documents rather than from family relationships or from work performance.

When the three circles overlap, every individual in the family business sits in one or more of them. As a result, the same person may be a child in the family, an employee in the business, and a shareholder in the ownership system all at once. Each role comes with different expectations. Often, those expectations conflict.

The seven positions in the three circles model

Within the three circles model, there are seven distinct positions a person can occupy. Specifically, each position is defined by which of the three circles they are inside.

• First, family members who are neither employees nor owners. For example, a child too young to work, or an adult sibling who has chosen a different career.
• Second, owners who are neither family nor employees. Typically, an outside investor or an institutional shareholder.
• Third, employees who are neither family nor owners. Specifically, the non-family staff who run the day-to-day business.
• Fourth, family members who are also owners but not employees. For example, a sister who inherited shares but has never worked in the business.
• Fifth, family members who work in the business but do not own shares. For instance, a son working in the business while his father retains ownership.
• Sixth, owners who work in the business but are not family. Typically, a non-family managing director with an equity stake.
• Seventh, family members who are both owners and employees. Specifically, the people most often at the centre of a family business dispute.

Importantly, each of these positions has a different perspective on the business. As a result, what looks fair from one position can look deeply unfair from another. This is the central insight of the three circles model.

Why each circle has its own definition of fairness

One of the most powerful ideas in the three circles model is that fairness means different things in each circle. Specifically, the family, the business and the ownership system each operate by different rules of fairness. As a result, conflicts in family businesses are often not about facts. Instead, they are about which definition of fairness should apply.

Fairness in the family circle

In the family, fairness usually means equal treatment. Typically, parents do not give one child more than another simply because they have contributed more. Likewise, they do not pay one child for a job around the house and not the other. As a result, family fairness leans towards equal shares, equal opportunities and equal respect regardless of merit.

Fairness in the business circle

By contrast, in the business, fairness means reward for contribution. Specifically, the person who runs the company should be paid more than the person who answers the phone. Likewise, the person who brings in the major contracts should be promoted ahead of the person who does not. Crucially, equal pay for unequal contribution is not fair in business terms. Often, it is the opposite of fair.

Fairness in the ownership circle

Finally, in the ownership system, fairness means return on capital and protection of rights. Specifically, owners expect dividends in proportion to their shareholdings. Similarly, they expect a say in major decisions in proportion to their ownership. Importantly, ownership fairness flows from the cap table, not from who works hardest or who needs the money most.

Consequently, in a family business, all three definitions of fairness apply at the same time. For example, a son who works in the family business expects family fairness from his parents, business fairness from his pay packet, and ownership fairness from his dividends. Crucially, these can pull in different directions. When they do, the disagreement that follows is rarely about facts. Rather, it is about which kind of fairness should win.

How the three circles model helps explain family business disputes

Once you understand the three circles model, many family business disputes become easier to read. Specifically, you can see which circle each party is arguing from. Often, both parties think they are arguing about the same thing. In reality, they are applying different definitions of fairness drawn from different circles.

For example, consider a daughter who has worked in the family business for fifteen years and now wants to be made managing director ahead of her brother. From the business circle, this is fair. Specifically, her performance is stronger. By contrast, her brother is arguing from the family circle. Crucially, he believes the eldest son has always been expected to lead the business. As a result, neither is being unreasonable. Each is simply applying a different rule of fairness.

Similarly, consider a sister who owns 25% of the family business but has never worked in it. From the ownership circle, she is entitled to her share of dividends and her vote at general meetings. By contrast, her brother who runs the business may feel she is taking out what he is putting in. As a result, he is arguing from the business circle. She is arguing from the ownership circle. Both definitions of fairness are valid. Neither will resolve the disagreement alone.

For more detail on the patterns family business disputes follow, see the common causes of family business disputes.

The three circles model and the next generation

Importantly, the three circles model becomes more complex with every generation. Specifically, the founder generation usually sits in all three circles at once. They are the family, they run the business, and they own the shares. As a result, the three circles look like one.

In the second generation, the circles begin to separate. For example, the founder’s children may all be in the family circle but only some may work in the business. Likewise, the shareholdings may be divided unequally. As a result, family members start to find themselves in different positions in the model, with different perspectives on what is fair.

By the third generation, the circles can be widely separated. Specifically, cousins who barely know each other may share ownership of a business none of them work in. Meanwhile, others in the same generation may run the business but own no shares. Consequently, the three circles model becomes essential to understanding what is going on. By contrast, families that ignore the model often find themselves in disputes that nobody saw coming.

For more on succession dynamics, see the page on the next generation in family business disputes.

How the three circles model is used in practice

The three circles model is not a piece of academic theory. In practice, it is used in three main ways by advisers, mediators and family businesses themselves.

As a diagnostic tool

First, the model is used to diagnose what is really going on in a dispute. For example, in mediation it is often helpful to draw out the three circles and place each family member in their correct position. Crucially, this immediately exposes the structural sources of conflict. As a result, conversations that were stuck on personalities can be redirected to the underlying systemic issue.

As a governance tool

Second, the model is used to design family business governance. Specifically, well-run family businesses have separate forums for the three circles. For example, a family council deals with family issues. A board deals with business issues. A shareholders’ agreement deals with ownership issues. Importantly, the right issues are taken to the right forum. As a result, family conversations are not derailed by board-level questions and vice versa.

For more on this, see the page on family constitutions and family forums.

As a conversation starter

Third, the model is used as a way to begin difficult conversations. Specifically, family businesses often find it easier to talk about the three circles than about the personalities involved. For example, asking “which circle does this decision belong in?” depersonalises a conversation that would otherwise become heated. As a result, the family can discuss the structure rather than each other.

Common ways the three circles model breaks down

Even with the three circles model in mind, family businesses run into trouble. Typically, the breakdown happens in one of a few ways.

First, decisions get taken in the wrong circle. For example, business decisions get taken around the kitchen table without proper board discussion. As a result, important commercial considerations get lost in family dynamics. Conversely, family issues get taken to the board and turn what should have been a commercial meeting into a family argument.

Second, fairness from one circle is applied to another. For example, a founder gives equal shares to all children regardless of their contribution to the business. Crucially, this applies family fairness to the ownership circle. Often, it stores up resentment from the children who work harder than the others. The reverse can also happen. Specifically, a parent treats their children differently because of their commercial performance, applying business fairness to the family circle. As a result, the children who do less feel rejected as family members.

Third, some people are denied a place in the circles they should occupy. For example, a daughter-in-law who works in the business is treated as an employee for business purposes but excluded from family conversations about the business. Similarly, a non-family managing director with significant responsibility is excluded from ownership decisions that affect everyone. Importantly, denying people their proper place in the circles is one of the most common causes of bitterness in family businesses.

For more on these patterns, see the early warning signs of a family business dispute.

The limits of the three circles model

Importantly, the three circles model is a powerful tool, but it is not the whole story. Specifically, it explains the structural sources of conflict in family businesses. However, it does not explain the personal, psychological and historical dynamics that drive many disputes. As a result, the model needs to be used alongside an understanding of family psychology, succession dynamics and the specific history of each family.

For example, the model can show that a father and son are arguing because the father is in all three circles and the son is only in two. By contrast, it cannot explain why the father is unable to let go, or why the son feels betrayed by his father’s refusal to retire. Those questions require a different kind of analysis. For more on this, see the page on the founder problem in family business disputes.

Frequently asked questions

Who created the three circles model?

In short, the three circles model was developed by Renato Tagiuri and John Davis at Harvard Business School in the early 1980s. Specifically, Tagiuri was a professor of organisational behaviour and Davis was a graduate student at the time. Importantly, the model was originally presented in academic papers in the 1980s and has since become the most widely used framework in family business research and consulting worldwide.

What are the three circles?

Specifically, the three circles are family, business and ownership. Each represents a different system with its own rules. Importantly, the family is built on belonging and equality. By contrast, the business is built on contribution and performance. Finally, the ownership system is built on capital, rights and returns. Crucially, every member of a family business sits in one or more of the three circles, depending on their role.

Why is the three circles model useful in family business disputes?

In short, the three circles model helps explain why family business disputes are so hard to resolve. Specifically, the parties are often applying different definitions of fairness drawn from different circles. As a result, both parties can be acting reasonably according to their own logic, while still disagreeing fundamentally. Importantly, understanding which circle each party is arguing from is often the first step to a resolution.

Does the three circles model work for very small family businesses?

Yes. Specifically, the three circles model applies to every family business, however small. In a very small family business, the three circles may overlap almost completely. For example, the founder is the family, the business and the owner. However, the model still helps because it shows where the circles will separate as the family grows and the next generation joins. Importantly, the earlier the model is understood, the easier it is to design governance that anticipates the separation of the circles.

How does the three circles model relate to family governance?

In practice, the three circles model is the foundation of family business governance. Specifically, good governance gives each circle its own forum. For example, a board of directors deals with business decisions. A shareholders’ agreement deals with ownership decisions. A family council or family constitution deals with family decisions. Importantly, separating the forums prevents the wrong issues from being decided in the wrong place. For more on this, see family constitutions and family forums.

Further reading on this site

• Family Business Disputes (main page)
• What Makes Family Business Disputes Different
• The Common Causes of Family Business Disputes
• The Founder Problem
• The Next Generation
• The Passive Shareholder
• The Have and Have-Not Pattern
• Family Constitutions and Family Forums
• Preventing Family Business Disputes: The Governance Checklist
• Commercial Mediator

Get advice on your situation

If you are involved in a family business and you can see the three circles pulling in different directions, early advice can save you years of conflict. Specifically, I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. In addition, my book Winning in Family Business Disputes (forthcoming) covers the three circles model and the patterns that arise from it in detail, alongside my published works on shareholder disputes and commercial mediation.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.