Defining & Creating Ownership Groups in Family Businesses

Individual roles in family businesses are as complex as family relationships themselves. Individual family members can have many different roles, and it can be very confusing to delineate what role is relevant in a given circumstance. The Three-Circle Model¹ is a helpful tool to understand these roles better. This diagram was developed by Taguiri and Davis in 1982, and is still widely used today to help families understand the various roles they have within the family business system.

Looking at the Three-Circle Model, you can depict seven distinct interest groups (or stakeholders) with a connection to the family business:

1. Family members not involved in the business, but who are descendants or spouses/partners of owners
2. Family owners not employed in the business
3. Non-family owners who do not work in the business
4. Non-family owners who work in the business
5. Non-family employees
6. Family members who work in the business but are not owners
7. Family owners who work in the business

Our focus in this blog is on the ‘family owner’ roles that can be found in two segments of this diagram: family owners not employed in the business and family owners who work in the business. Family owners focus on the issues that impact the business and the family, and seek information to guide them for long-term decisions. One successful way to do this is by creating an Ownership Group that includes the family-member owners of the family business.

A Family Ownership Group serves as an excellent platform to bring family owner members together under a cohesive and constructive unit. The Family Ownership Group will develop shared knowledge of the business, the financial structure, and the business strategies. They collectively can assess risks and consider the long-term goals and viability of the business.

The Family Ownership Group creates a common language and starts to raise topics that are critical to family business success:

• Mission, Vision & Values
• Definition of Family
• Roles & Responsibilities of an Owner
• Code of Conduct
• Family Employment Policy
• Future Transfer of Stock
• Succession Planning

You can see by this bulleted list that this group of family individuals serves a very important role in determining the current and future direction of the business. Let’s take a look at an example of this in action:

We were contacted by a family business owner who wanted to discuss an opportunity to engage his family in discussion about the business and their roles – present and future. He talked about ownership and succession and his desire to educate his children more about the business.

It was important, first off, to help each of them understand the different roles that they each hold, in what ways are they similar (overlap in the Three-Circle Model) and in what ways is each of them unique, in order to help them communicate effectively. The members of the family included in the project included:

• Steven, Sr. is the CEO and owner. He is also the dad (family member) and family employee, in addition to being a family owner.
• Steve, Jr. is the oldest of 3 children and the Operations Manager. He is a family member and a family employee.
• Sarah is the middle child and is in a leadership role at a large corporation, so she is a family member not employed by the business.
• Susan is the youngest and is a Marketing Consultant in the business, she is a family member and family employee.

In addition to Stephen’s wish to educate his children about the business, he also wants to start to transfer some ownership of the business to his children in the next 6 months. After several discussions, we agreed to engage in work to form a Family Ownership Group. The primary mission of the Ownership Group is to provide a safe and structured environment to educate his children about the business and their future role as owners.

Ownership groups are effective to align family with the business mission and values. Some of the common topics and discussions we have with families can include any or all of the following:

Create common language – It’s important to create a shared understanding of the business structure, the ownership structure, and the family- or company-specific terminology. The discussion around vision and mission is critical for an ownership group to develop cohesion and work together effectively.

Establish role clarity – When family members have more than one role (employee, manager/leader, sibling/spouse, owner), the discussion focusing on expectations of the different roles is critical. An outcome of this is often a code of conduct that reinforces values and behaviors.

Culture –The family business culture is something that truly sets them apart from non-family businesses. Family ownership groups spend time affirming guiding principles, values, how people in the business are treated, and how they reflect ownership and family in the business.

Future – A key discussion is to determine if there is clarity and unity regarding the future of the business. This includes talking about owners’ goals and desires, the family legacy, and the role of future generations.

Education – Family members often need to learn more about the business including products, financials, sales, operations, markets, customers, competition and the supply chain.

Decision-making – Due to the many roles family members have, it’s critical to understand how decisions in the family and the business are made. Decision guidelines are tools to help delineate who has authority for specific decisions.

Conflict resolution – Conflict is inevitable. It’s essential to have an established process for communicating with one other. Establish guidelines for how to communicate, expected response time (if email or text), appropriate tone, how to manage disagreements (avoid personalizing, seek consensus), and what is appropriate behavior are all key components of a conflict resolution practice.

Policies – There are many policies that will provide valuable guidelines for family businesses. These range from how family members enter/exit the business to the transfer of stock, and can include performance management process, family compensation/benefits, and social media guidelines.

Let’s take a look back to our family client of Steve and his three children:

We set up a series of meetings to initiate the establishment of the Ownership Group and bring the four of them together in the discussion. Our first meeting included a review of the Three-Circle Model and the roles they have: those that they share and those roles that are unique. We moved to an exercise that allowed them to review the expectations of the various roles in the diagram. We reviewed Family Charters and agreed to start the work to develop one that meets their goals. Additionally, they prioritized the next topics they wanted to work on based on current personal and professional needs:

• Education and Common Language
• Future
• Policies

The nature of this work is really driven by planning, as well as by situational events. It’s very tailored to the needs of the family and the business. Our work with this family business is ongoing and the frequency of meetings is dependent on their appetite to meet combined with their availability to meet as a group.

Quad Group has brought an outside, objective viewpoint to their process which helps expedite positive progression toward the formation and structure of their Family Ownership Group. Because we are guiding the process and facilitating the discussions, all four family members can participate fully in the discussion, with no one hindered by having to manage the process.

We understand exactly what is involved in forming a Family Ownership Group because we come from family businesses ourselves, and have participated in this process from all perspectives. Now as family business consultants, we bring that experience and understanding of the nuances and challenges of creating ownership groups, family charters, and other guidelines necessary for business and family success to our work with clients.

¹ The Three-Circle Model of the Family Business System was developed at Harvard Business School by Renato Tagiuri and John Davis in 1978. Learn more.