Ownership: The Forgotten Circle of Family Business
On the back of my business card, I’ve got a colourful depiction of the Three-Circle-Model that I often use to initiate introductory discussions about the kind of work I do.
Not that it takes long to draw the Venn diagram on a napkin, pad, or placemat, but since I was struck by its simplicity when I was first exposed to it, I now enjoy sharing the insights it can bring.
Harvard’s Renato Tagiuri and John A. Davis came up with the model in the 1980’s when they realized that the old “Two-Circle” version was incomplete.
It was always clear that the Family and the Business overlapped, but it was the addition of the Ownership circle that added an “A-Ha” factor.
In Flux Versus Static
Interestingly, while the Family and the Business are both pretty much in constant daily flux, the Ownership is usually static or fixed for decades at a time.
But when the time does come to make changes to the ownership of a family business (and it will), those changes usually affect pretty much everything and everybody.
So the term “forgotten” in the title of this blog, is meant to make the point that we don’t usually give it much thought.
But maybe we should.
Imagine a family where the senior generation still owns the business while the rising generation members have solidified their place in the day-to-day operations.
At first they will likely patiently bide their time and accept the situation and “obey” the owners’ directives. But as the years become decades, this situation can become much less palatable.
The issues that arise in this type of situation are often framed in terms of “family dynamics”, which isn’t necessarily wrong, but the best solution to the “problem” may actually come from a change to the ownership.
Sometimes families realize that ownership should transfer to the rising generation relatively early on, which often occurs at the behest of an outside expert who suggests some beneficial tax-planning strategies for making these changes.
But often the parents can’t resist the temptation to create complex share structures that allow them to maintain control.
Having ownership without control adds a complicating factor to the Three-Circle-Model.
I’m not exactly sure how to do it, but somehow a modified version of the model might be needed to illustrate those situations where ownership doesn’t include control.
But all I’m trying to do here is to illustrate ways that the ownership circle often affects many of the day-to-day family business issues, even if we don’t give it enough thought.
Life Events as a Catalyst
Important life events can sometimes be a catalyst to changing the ownership structure. It’s much more fun when these involve a birth or marriage than a death or divorce.
Unexpected deaths sometimes catch families by surprise and hopefully these cases serve as a poignant reminder to others to get their affairs in order “just in case”.
When there’s a long illness that precedes a death, it’s sometimes a blessing, because important moves and discussions can then take place.
Of course in some cases, family relationships are such that even when the writing is on the wall and death is imminent, the family just can’t come together and have a productive discussion and agree on how the future ownership should be structured.
Preparing Owners to be Owners
Luckily, for every situation where families are “stuck”, we now hear more and more about families who are working to get out in front of these situations.
Enlightened families are looking into outside coaches and/or education programs that help prepare future owners to become good owners.
While it’s true that no special training is required to own shares in a company, the people who work in the business can tell you that the ownership of the business, and how they interact with and guide the company, has a huge effect on performance.
It Starts at the Top
When things begin to go poorly in a business, the roots of the demise can usually be traced back to the top, and that’s the ownership.
If you’re working with a business family and there are some issues that you’re trying to put your finger on as to their source, don’t forget to ask about the current ownership structure.
There’ll often be some good clues there.
Photo credit: Richard Legler