The Importance Of The Three-Circle Model In Family Business Governance

Paul Andrews - Founder & CEO, Family Business United
6 hours ago
4 min read

Family businesses are often described as complex—and for good reason. Unlike other commercial entities, family firms operate not just at the intersection of ownership and management, but also within a rich web of personal relationships, emotions, and shared history. What makes these businesses so resilient can also make them uniquely vulnerable.

Enter the Three-Circle Model: a conceptual framework developed in 1982 by John Davis and Renato Tagiuri at Harvard Business School. Though simple in appearance, this model has had profound influence on how family firms are understood, governed, and sustained across generations.

More than four decades later, the Three-Circle Model remains a cornerstone of family business theory—and a practical tool for navigating the intricate dynamics that arise when family, business, and ownership collide, and a conversation starter for many advisers when explaining the relationships that make family businesses unique.

Understanding the Three-Circle Model

At its core, the model identifies three overlapping systems that coexist in a family business:

Family – Those related by blood or marriage, regardless of whether they work in or own the business.
Ownership – Those who hold equity in the business, whether family or non-family.
Business – Those actively involved in managing or working in the enterprise.

Each individual involved with a family firm can fall into one or more of these circles, and each position comes with different rights, responsibilities, and perspectives.

For example:

A founder typically sits in all three circles.
A non-family manager is in the Business circle only.
A family shareholder not involved in day-to-day operations occupies the Family and Ownership circles.

There are seven possible segments formed by the overlap of these circles, and each segment can present its own interests and challenges. This simple visual representation helps clarify how complex family businesses really are.

Why the Three-Circle Model Matters

1. It Clarifies Roles and Expectations

Family businesses often suffer from ambiguous roles. Is a sibling a shareholder, a manager, or simply a family member? Confusion over roles leads to misaligned expectations, miscommunication, and conflict.

The Three-Circle Model offers a shared language to discuss:

Who makes decisions?
Who gets paid, and for what?
Who has a say in the future direction of the business?

This clarity is especially important as businesses grow, involve more family members, or begin transferring ownership across generations.

2. It Highlights Potential Sources of Conflict

Each circle represents different goals:

Family members may prioritise harmony, legacy, and employment for relatives.
Owners are focused on returns, risk, and preserving value.
Business leaders are concerned with operational performance, talent, and innovation.

When these goals align, the business thrives. When they don’t, the result can be tension—or breakdown.

The Three-Circle Model doesn’t eliminate conflict, but it helps identify its root cause, making it easier to address constructively.

3. It Supports Governance Design

Governance in family businesses is not just about boardrooms and bylaws. It must address all three systems—each with its own structures and needs.

Using the model, families can design:

Business governance (e.g. executive teams, boards, strategic plans)
Ownership governance (e.g. shareholder agreements, owner councils)
Family governance (e.g. family charters, family councils, education programmes)

Strong governance structures based on this model help families manage complexity, preserve relationships, and support continuity over generations.

4. It Evolves With the Business

As a family business matures, the composition of the circles changes. Founders give way to sibling partnerships. Siblings give way to cousin consortiums. Ownership becomes more dispersed. Not all family members work in the business, and not all want to.

This diversification can create distance and disconnect unless managed deliberately. The Three-Circle Model provides a map to guide families through these transitions and helps ensure that each group continues to feel informed, respected, and engaged.

Practical Applications: How Family Businesses Use the Model

In practice, the Three-Circle Model is often used in:

Strategic planning: Aligning the goals of family, owners, and management.
Succession planning: Clarifying roles for future leaders and shareholders.
Conflict resolution: Understanding why different stakeholders see issues differently.
Education: Helping rising generations understand their role and responsibilities.

Many advisers now begin family business engagements by mapping the family into the Three-Circle Model, identifying who sits where, and where communication or decision-making gaps may lie.

The Model’s Enduring Relevance

In an era where many organisations chase short-term gains and rapid growth, family businesses offer an alternative narrative—one of long-term thinking, intergenerational stewardship, and deeply held values.

But these very qualities demand careful navigation of overlapping interests, power dynamics, and family complexity. The Three-Circle Model remains relevant because it provides a simple framework for a complex reality—a way to step back and see the bigger picture.

As family enterprises deal with modern challenges—digital disruption, sustainability, generational shifts—the need for clear structure, inclusive dialogue, and shared understanding is greater than ever.

Three Circles, One Purpose

The success of a family business isn’t determined only by profit or growth, but by its ability to manage relationships, transitions, and identity. The Three-Circle Model helps families do just that.

It’s not a solution in itself, but a powerful diagnostic tool—one that promotes understanding, guides governance, and prepares families for the long-term responsibility of ownership and leadership.