This article is written by Gayathri, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Zigishu Singh (Associate, LawSikho).
Table of Contents
The Three Circle Approach is a worldwide recognised standard model for successfully conducting family businesses. This is made up of three primary components: family, company, and ownership, and it is the foundation of any family firm. Strong communication and long-term commitment are seen in the business. Each circle; family, business management, and ownership has its own governance structure and developmental stages. Renato Tagiuri and John Davis are said to have created the model in 1978 at Harvard Business School.
However, to know the title “Understanding the Three Circle Model for Family Business and it is relevance in today’s time”, especially when compared to the Indian context can be cleared by knowing – Birth of 3 circle Model, How 2 circle model becomes 3 circle model, Understanding 3 circle model, Time Tested, Indian Family Business– Understanding, Business main communities, Present day times, Financial Performance, Conflicts and Legal entanglements, Contribution to India’s GDP, Conclusions and Recommendations.
Birth of 3 circle model
The Three Circle Model is a globally accepted standard model for operating family businesses successfully. This has Family, Business and Ownership as its main components and these form the pillar of any family business. These circles are exclusively inter-dependent and resultant of all. This results in strong communication and commitment for the future. Each circle – Family, Business management and Ownership, has its own governance structure and has its own stages of development. Each member of the family contributes to different stages of development. It is claimed that the model was first developed at Harvard Business School by Renato Tagiuri and John Davis in 1978.
How did the 2 circle model become the 3 circle model?
The Two-Circle Model recognised the interdependence of family and business, as well as the need for family and company goals and interests to be aligned. This approach also made it easier to comprehend the uncertainty that individuals and the system might experience because of the clashing of family and corporate norms. The two circles fell short of capturing the interactions and tensions they observed in the family business systems which ranged from a fledgling retail operation owned and run by its husband-and-wife founders to a late-generation manufacturing empire owned by cousins with a large number of non-family executives. Examination of various family business situations revealed whether the three circles can appropriately characterise these systems. The Three-Circle Model not only fits non-family employees who were awarded minority shares, but also helped anonymous public owners of listed family companies understand their perspectives, aims, and concerns. With the advent of the third circle- ownership- additional attention could be given to topics that were not expressly addressed by the previous two circles. The term “success” referred to the process of transmitting leadership and ownership from one generation to the next. Owner buyouts have helped to resolve certain difficult situations. Bringing in outside investors to help a family business grow was sometimes necessary. The family business system, which is the integration of all three subsystems, has now been fully defined by connecting the family, company, and ownership circles.
These three rings have been sketched for forty years by academics, business families, and their advisors to get insight into the inner workings of their family businesses and business family connections. The three circles can be used to describe all family business systems, and each family business system can be described uniquely using this framework.
This design (along with the addition of the ownership circle) also served as the basis for Tagiuri and Davis’ definition of family businesses: “A family business is one whose ownership is controlled by a single family and in which two or more family members, through their managerial positions, ownership rights, or family duties, have substantial influence over the company’s direction and policies”.
A three-circle perspective was required to arrive at this definition. The model of ‘3 Circle Model for Family Business Management’ is depicted in Figure 1.
Understanding 3 circle model
The Family Business System’s Three-Circle Model depicts three interrelated and overlapping groups: family, ownership, and business Management.
In a family business system, an individual is assigned to one of the seven sectors formed by these three overlapping rings. Within the top circle, only an owner (partner or shareholder) will sit. The left-hand circle will be occupied by family members, while the right-hand circle will be occupied by employees of the family business. You will only be in one circle if you only have one of these roles. If you have two jobs, though, you will be in an overlapping sector, sitting in two circles at the same time.
You’re in the bottom-centre sector if you’re a family member who works in the firm but has no ownership position. You will sit in the centre of the three overlapping circles if you are a family member who works in the business and is an owner.
“Think about different responsibilities that family members have: being a family owner, or a family employee,” Davis continues, “and think about where critical people are placed in the system.” Role overlaps and potential role confusion are shown by these overlap areas in the Model.”
Each of the Model’s seven interest groups has its own set of opinions, aims, concerns, and dynamics. The Model reminds us that each sector’s viewpoints are valid and should be acknowledged. No one point of view is more valid than another, but the various points of view must be combined in order to determine the future path of the family business system. The functioning and reciprocal support of each of these groups are critical to the long-term survival of family business systems.
Seven separate interest groups (or stakeholders) with a connection to the family business can be depicted using the Three-Circle Model:
- Family members who are not active in the business but are descendants or spouses/partners of the proprietors but are not employees.
- Family members that are not employed in the company.
- Non-family business owners who don’t work in the company.
- Non-family business owners that work in the company.
- Employees who are not related to you.
- Members of the family who work in the company but are not proprietors.
- Business owners who are members of their family.
How can a 40-year-old model still assist us in understanding and managing difficulties in today’s family business systems, when so much in business, technology, wealth, family, and society has changed?
Part of the reason why the Model has endured the test of time and remains relevant today is that it is adaptable in its original form. The Model provides for this as society’s notion of “family” evolves. In-laws, blended families, divorcees, adoptions, domestic partners, and whomever the family refers to as a member of the “business family” due to ownership ties — all these positions are consistent with the Model.
Similarly, the ownership circle can allow a wide range of possibilities. The Model enables changes in ownership when a family firm goes public or invites a private equity partner. The Model considers if the corporation issues several classes of stock (voting and non-voting) and holds some of the shares in a trust. The Model accommodates joint ventures, mergers, acquisitions, and other sources of money that affect the ownership circle today since families have many different financial options.
Many businesses have changed dramatically during the last 40 years, but the Model’s business circle is adaptable: it can represent one or numerous enterprises, holding companies, joint ventures, and more. It can also refer to a circumstance in which a family firm has sold its operating company and is now managing its financial assets as a separate corporation. The family may be in a new line of work, but it is still their line of work. The “company” circle can be renamed the “family office,” and the paradigm remains valid.
The changing environment will continue to shape enterprises, ownership groups, and families as the pace of change, globalisation, technology breakthroughs as disruption increases around the world. The Three-Circle Model will continue to adapt to this change.
Indian family business
Recorded business evolution and growth activities are seen with the exchange of goods from around 5000 B.C. exchange of goods for goods are known as the barter system. The barter system is not called business as no purpose of making profits is seen. People were satisfying the requirements of each other. The beginning of a business is seen from the time of the Indus Valley Civilization.
The period of Indus valley civilization was 3300 BC to 1700 BC. The first known civilization from where the roots of business started. Agriculture was the main occupation of the people. They used uniform weights and measures and traded with other cities. Besides farmers, other classes of people such as barbers, carpenters, Ayurveda doctors, goldsmiths and weavers existed. The business happened from generation to generation. Family businesses were seen during the Maurya Empire (321 to 185 BCE) and during the Islamic period (1206- 1750). Hence the family business seems to have existed in India for ages. It is a known fact that many communities in India are called by the profession’s name and families have even tagged the initials which they have acquired from generations.
Main business communities in India
Sindhis have a long business history, dating back to the Indus valley civilizations of Mohen Jo Dharo and Harappa. Trading coins were discovered alongside antiquities and modern architectural prototypes, giving Sindhis the identity of a peace-loving and money-making community. Sindhis are from Sindh, which is located on the banks of the Indus River in modern-day Pakistan. In fact, the term Indus is an anglicised version of Sindhu, from whence the phrases Hindu, Hindustan, and India were derived. As a result, when India was partitioned in 1947, most Sindhis came to India and were identified as Hindu Sindhis.
The sinking roots of a group of Bania/Jain merchant castes from Rajasthan’s Marwar (Jodhpur), Bikaner, and Shekhawati desert tracts into the economic environment embracing nearly the entire country is a remarkable event. The Agarwals, Oswals, Maheshwaris, and Khandelwals of this area – loosely grouped under the term ‘Marwari’ – were confined to their homeland as local shopkeepers and moneylenders, if not army food suppliers and financiers for various Rajput princely regimes, until approximately the 16th century.
The latter function was critical in extending their reach to new regions. They sometimes accompanied Rajput forces connected to Mughal armies as ration suppliers and paymasters, which opened up possibilities for setting up shop all throughout the Gangetic plains and the Deccan. Even the several independent, but cash-strapped, princes that sprang from the ruins of the Mughal Empire were financed by Marwari bankers as early as the 18th century. As a result, the Jagat Seths became treasurers to the Nawab of Bengal, just like the Gopaldas Manohardas financed the Kingdom of Benares and the Ganeriwala and Pittie families cultivated a relationship with the Nizam of Hyderabad. They usually lent against the security of ijara, which are land revenue-farming rights allocated to a certain region.
Gujaratis’ creamy layer accounts for 9.34 per cent of the country’s total. Gujaratis appear to be one of the most powerful communities in terms of wealth creation. Gujarati is a business language. They enjoy doing business and want to take it to new heights. Why are Gujaratis so successful in business? One can find evidence of Gujarati merchants trading with the Mediterranean and Arab nations or empires if you go back 2000 years. Ahmedabad, in Gujarat, is known as the “Millionaire Capital of the World.”
Gujaratis are interested in business management. They adhere to the first and most fundamental business guideline, which is to “never allow emotions to govern money-related decisions.” Every year, you can hear cheery corporate messaging about how these Gujarati brands are promising and rising swiftly. Gujarat’s industry has reason to celebrate, as eight Gujarat-based companies have been named category leaders in attractiveness on India’s most Attractive Brands list for 2015.
Bania comes from the Sanskrit word banijya, which means “to trade.” It’s something the community has done for centuries. A few things have, of course, changed. As employees, some Banias have achieved international acclaim: Anshu Jain is the CEO of Deutsche Bank, while Ajit Jain is Warren Buffett’s personal favourite at Berkshire Hathaway. Nitin Nohria is the Dean of Harvard Business School, whereas Dipak Jain is the CEO of Insead. Vanias are also known as Banias or Mahajans. Vania is derived from the Sanskrit term ‘Vaniji,’ which means ‘merchant.’ Agarwal, Dasora, Dishawal, Kapol, Nagori, Vagada, Modh, and Nagar are among the Vania gotras (clans). Many of these names are derived from the names of the places from whence they originate. The Agrawal get their name from Agar Town, despite the fact that they are mostly found in North Gujarat. The Jharola are from Rajasthan and Maharashtra, and they inhabit eastern Gujarat. Vania’s titles include Shah, Shroff, Parikkh, Chokshi, Seth, and Gandhi.
“Among the commercial community of North India, there are three main groups—Agarwals, Oswals (who are Jains), and Maheshwaris,” writes K.K. Birla in his autobiography Brushes with History. The Agarwals and Oswals are large families; the Maheshwaris are smaller but more closely knit.”The Agarwal community is divided into 18 gotras (or 17 and a half, according to some). Bansal, Goel, Garg, Jindal, Kansal, Mittal, Singhal, and other surnames will be familiar to most Indians because they are a tremendously prosperous community. If the BJP wanted to attack Kejriwal’s gotra or family lineage, they should have targeted Bansals rather than Agarwals. This is also not very clever, because, as we will discover later, the Bansals are brutally adept at business and are hardly troublemakers. Outside of firsthand experience, I learned most of what I know about the Agarwals through Bhartendu Harishchandra’s Agarwalon Ki Utpatti (Origin Of Agarwals) and the Anthropological Survey of India’s People Of India series. The Agarwals are the only community that appear in at least five volumes, demonstrating their extensive presence.
The Agarwals are “the highest and most important sub-division of Banias,” according to the work on Uttar Pradesh (Volume 42, Part 1) “. The Marwaris are a branch of the community that migrated to Rajasthan. The others spread east to Uttar Pradesh, Bihar, and other states. According to this volume, Agarwals’ written script is “Perso-Arabic.” “. According to the book, their name was derived from the aromatic wood of the Agar (agallochum, which is used to make incense), which they traded-in. Another suggestion is that the name Agarwal comes from Agroha, a historical town in Haryana’s Hisar district. The Agarwals claim genealogy from the 18 sons of Agra Sen, a Scythian ruler who may have also been the name’s origin.
The Agarwals are “ranked lower than the Brahmans, the Kayastha, and the Vaishyas,” according to Volume 16, Part 1 (on Bihar) of the Anthropological Survey of India”. “The majority of the Agarwals subscribe to the Vaishnava school of Hinduism”, according to the report, however “a substantial number follow the teachings of the Digambar sect of Jains.” It concludes by stating that the Agarwals are “one of the country’s most respected and enterprising mercantile communities.” According to the Rajasthan volume (Volume 38, Part 1), the Jain Agarwals were converted by a man named Lohacharya, and Agarwals “write in Devanagari script.” This volume says that the “largest section professes Jainism,” which I find difficult to believe unless it exclusively applies to Rajasthan’s Agarwals. The Bania caste and the Agarwal community are conflated in Volume 23, which is about Haryana, with the remark that “Banias are also called Agarwals and Gupta.” The king’s name is spelt Ugar Sain, and he is said to have had 17 sons. According to this volume, a few Agarwals also practise Sikhism.
Maheshwaris origin starts from Raja Khandelsen, the monarch of Khandela in Rajasthan, and his two queens, Rani Suryakuvar and Indrakuvar are the heroes of the legend. The king had no offspring, thus there was no one to carry his name or country, and the queens were unable to conceive despite performing innumerable pujas (prayer rituals), yagnas (fire rituals), and charitable gifts. After sharing his grief with Maharishi Yagyavalk, he discovered that his current circumstances were the result of a curse he had received in a past incarnation.
Such is a history of Maheswaris who turned into a powerful trading community, many of them turned into a family-run businesses and contributing to India’s GDP
Present day times
The family business after India’s independence is run as Hindu Undivided Family (HUF). In India, major names like Rahejas, Hiranandanis, Virwanis have reformed the real estate sector. In the field of education, Mumbai’s top colleges are run by the HSNC board. Major names in Bollywood film financing are also Sindhis like the Bhagnanis, The Taurani’s of Tips Industries, Karan Johar and his mother Hiro Johar.
If you are into wearing denim jeans, there is a 45% possibility that it was made in a factory owned by Sindhi possibly, in the Sindhi majoritarian township of Ulhasnagar.
In recent times, the family business community comes from the families of Sindhi, Marwari, Gujarathi, Banias, Agrawals, Maheshwaris. Some prominent companies are trading Internationally and contributing to India’s GDP. Each community, though not having a fixed business model, has been very successful in doing business and contributing to India’s growth.
In a research study on Indian family businesses, the financial success does not appear to be totally consistent with the prevalence of family businesses unless the family involvement in business is majorly through ownership and management. The Family firms account for 63% of the two-digit National Industrial Classification (NIC) codes in the list of 302 organisations, having operations through a broad range of industries.
Univariate analysis of the two groups, the family and non-family business was done using the samples of companies, which provides mean, standard deviation, minimum, and maximum values of all the important variables for understanding the performance indicator and other factors regarding the performance. The statistical results are depicted in Figure 2.
The results show that despite the prevalence and significance of family firms in the Indian economy, they do not seem to be performing better than their non-family counterparts. This could be due to a variety of reasons. The advantageous position of a family in the business can have certain repercussions for the business.
- Family businesses can suffer when there are several hostile family stockholders who enable them to cancel one another’s initiatives.
- With the passing of generations, the potential for conflict amongst the controlling family increases because of the increase in the number of relatives.
- Family conflicts can lead to a high rate of failure amongst family businesses and are the reason why a lot of family businesses are not able to continue their operations beyond two-three generations.
In comparison to its actual share of ownership, the controlling family has a disproportionate percentage of control. If there are specific sorts of shares that enable control with limited ownership, or if holding corporations are used for pyramiding objectives, this can happen.
Conflicts and legal entanglements
Cause of challenges
Most legal challenges that arise in a family business stem from unofficial familial relationships. The complexities of decisions made from love and affection are frequently challenging and lead to disagreements. If one manages a family business, here are the top three legal issues one should be aware of:
Organizational Structure: The majority of family businesses operate because of a strong family relationship or to take advantage of particular legal advantages. A HUF Deed, for example, is typically issued with the goal of obtaining tax exemption. It’s tough to get rid of something once it’s been made. It is indisputable that some family enterprises begin as a side business which then grows into larger entities once they have established a successful track record. It provides them even more reason to ensure that an appropriate structure is in place. This is only a small part of the problem.
|Figure 1- 3 Circle Model For Family Business Management|
|Family Integrity Good ROA|
|Family Dispute Business on Pyre|
|Figure 2- The statistical results|
At the outset of any organisation, deciding which ownership structure to use is a difficult task. In the case of a family business, the problem is made worse because one’s rights and obligations are determined by one’s status in the family rather than one’s contribution.
How to put structure in a setting where everything is run by hierarchy?
Any structure put in place must be carefully considered and implemented. It’s possible that there’s a solid shareholder or partnership agreement in place. The following are some of the points that should be included in the contract:
- The contribution/investment of each family member.
- Family member’s job in the firm is well defined.
- A stake in the family’s property.
- Sustained credibility.
Policies on Employment: While most organisations have employee rules that broadly clarify what an employee’s job, obligations, and liabilities are, there are times when family enterprises avoid having family members sign contractual agreements.
There is no actionable claim one can file against the other in the future if there is a problem because there is no contract to show it. It is one of the most common blunders made by these companies. There’s nothing wrong with ensuring that family members have agreements in place to guarantee that the business runs well.
A contract must also ensure that family members are treated equally and that employment duties are shared. Furthermore, it will ensure that everyone in the family has the same basic expectations and that no one has any contractual difficulties that could lead to a rupture.
Permits and licenses: Every firm, large or small, is expected to comply with a number of laws, rules, and regulations in order to avoid future legal action. They are the most crucial part of every company. However, in a family business, a lack of such information can be problematic.
Few legal entanglements in the family business
In the case of the Ambani family business after the death of Dhirubai Ambani the sons, Mukesh Ambani, Anil Ambani were so entangled in legal wars At present, it’s seen that Anil Ambani is financially blown up too much and is out of business now. (“Reliance Natural Resources Ltd vs Reliance Industries Ltd “, 2010)
Contribution to India’s GDP
Even in such a situation, there is a valuable contribution to India’s GDP by the ‘Family Business community’ and are discussed below:
Sindhis: With a population of only 0.30 per cent, they provide 2.4 per cent of India’s total income tax. Sindhis contribute 2.0 per cent of the country’s GDP. Entrepreneurship has long been regarded as a primary driver of job creation, economic growth, and national success.
Marwari: The contribution of Marwaris to the nation’s industrial activity is as great as it has ever been. Indian industry relies on families like the Birlas, Bajajs, Goenkas, Neotias, and Singhanias. In reality, this network includes some of the most well-known personalities in the stock market, from Radhakishan Damani, the man behind D’Mart, to ace investor Rakesh Jhunjhunwala, commonly known as the big bull. It’s probably safe to assume that the Marwaris have the Midas touch when it comes to making money!
Gujaratis: with only 5 % of the national population, contribute 7.3 % to the national GDP and 5.6 % of total FDI inflow in the country. 7.2 % of all the all-Indian Universities are in Gujarat.
Banias: accounted for 2.4% of the income tax and 2.0% of the country’s GDP. These people have been active in business for decades and have established themselves as forerunners by winning the trust of the people.
Agarawalas and Maheshwaris: accounted for 2.7% of the income tax and 2.4% of the country’s GDP.
Now after knowing the facts – “Is it not appropriate to question whether – 3 circle business model” was developed in 1978, when India was having family businesses for ages?
Conclusions and recommendations
The presence of family enterprises among the world’s business organisations is considerable. The extant literature on the performance of family-run firms in relation to their competitors presents a diversity of perspectives. It is opined that this is due to the “3 Circle Model” developed in 1978.
Family enterprises that come from ages clearly play a significant part in the Indian commercial landscape and economy. This is also true presently as only a select few business communities are contributing to India’s GDP. The findings demonstrate that when accounting-based measures of success are considered, there appears to be no substantial difference in performance between family and non-family enterprises in India, however, non-family firms appear to do better when market-based measures of performance are considered.
However, it should be highlighted that putting the advice offered to family-run firms on how to overcome their limitations and try to be global players into practice may not be simple. This is since family values, rituals, and traditions are deeply ingrained in family businesses. They find it difficult to change their business habits and traditions and undo what is comfortable to them. Some business families in the country have found that separating ownership from management did not produce the desired results, and they have been compelled to revert to the previous order because the split and greediness has resulted in a fall in family fortunes. Other business families are similarly concerned about such shifts because of such events.
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- Aditya Shrivastava. (2018). 3 Challenges You Face While Running A Family Business And What Can You Do About It. ipleaders. https://blog.ipleaders.in/family-business-legal-challenges/
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- Dearton Thomas Hector. (2021). Not surprisingly, banias dominate e-commerce space in India. Business Today,in. https://www.businesstoday.in/magazine/features/story/commerce-continues-to-be-dominated-by-b-even-as-it-goes-e-43690-2013-11-22
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- Himani Chahal; Anil K. Sharma. (2020). Family Business in India: Performance, Challenges and Improvement Measures. Journal of New Business Ventures, 1(1-2), 9-30. https://doi.org/10.1177/2632962X20960824
- John A. Davis (2021). How Three Circles Changed the Way We Understand Family Business. The Cambridge Institute for Family Enterprise. https://cfeg.com/insights_research/how-three-circles-changed-the-way-we-understand-family-business/
- John A. Davis. (2021). The Three-Circle Model celebrated 40 years in 2018. https://johndavis.com/three-circle-model-family-business-system/
- Joshua Project (2021). Bania in India. Peoples Groups. https://joshuaproject.net/people_groups/16318/IN
- Lakshmi Saran Agarwal and Others vs Guru Saran Agarwal, and Others Indian Kanoon, (Allahabad High Court 2015). https://indiankanoon.org/doc/178470450/
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- Nilesh Arora; Gunjan Arora. THE THREE-CIRCLE MODEL FOR FAMILY BUSINESS FRAMEWORK. https://www.valueaddedcoaching.com/family-business-management/the-three-circle-family-model.html
- Rachana Dhanrajani (2020). A peek into the Sindhi business community of India. ETnownews. https://www.timesnownews.com/business-economy/companies/article/a-peek-into-the-sindhi-business-community-of-india/700098
- Reliance Natural Resources Ltd vs Reliance Industries Ltd Indian Kanoon, (Supreme Court of India 2010). https://indiankanoon.org/doc/1070490/
- Sushil Kumar Sadani. (2021). Origin of Maheshwari’s. Sadani Family Tree. https://sites.google.com/site/sadanifamily/origin-of-maheshwari-s
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