The Evolution of Family Organizations

The family is a highly stable social institution. When families organize themselves to own assets together and to conduct business or engage in politics, education, science, social enterprise (whether for profit or not for profit), religion, or the arts as a family, those organizations tend to look and act pretty much the same, all over the world.

What’s more, they tend to evolve in predictable ways over time. Until now, experts only recognized two evolutionary stages. I now see evidence that a third stage of evolution is taking place—and needs to take place—around the world.

So, let’s take a closer look, starting with the family business, since profit-making production of goods or services—or else engaging in trade—are usually the first building blocks in any family enterprise.

Stage One: The Family Busines

A family business is a profit-making enterprise intended to support the family, where two or more family members have ownership today, or where plans have been made for a founder to pass ownership to one or more family members. The family business is composed of owners, family members, and business employees.

Mortality is high. The Three Generation Curse means that by the third generation, less than 15% of all family businesses will still exist. There are several potential causes, including industry decline and family conflict. Looking at financial performance alone, studies done by John Davis and myself, based on historical performance of the Forbes 400, show that multigenerational family companies have dichotomous outcomes. Compared to non-family company peers, the family business will either perform markedly better—or much worse. The family company tends not to sit in the middle and be average. This is the Curse of Dichotomous Outcomes.

The reason for this big spread in performance is that family companies in general depend on strong family leadership. They place less reliance on a professional management team. What does it take to outperform the non-family competition? You need unity in the family. You need family talent for innovation. You need good stewards. And you need a sound, clear family wealth strategy. If you don’t have all four of those things, your family business is likely to crumble. Shared assets get divided and the result is a smaller financial base. As a result, the family loses access to attractive investment opportunities. It’s a downward spiral from there.

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Back in the 1970s my mentor, John Davis, along with his own mentor, Harvard social psychologist Renato Taguiri, published a major breakthrough in a working paper summarizing their field research. They had developed a simple model that gives a comprehensive explanation of the nature of family companies. Extremely elegant, the Three-Circle Model is still in daily use today around the world, primarily as a tool in succession planning.

Imagine how huge it was to visualize, for the first time, the way that such a complex form of enterprise was structured for stability and endurance over long periods of time. How reassuring and calming to realize that the structure itself was simple—not complex. As it turns out, most of the complexity you need to manage in family business is due to overlapping roles, the conflicts they create, and the decision-making problems that result.

Suddenly, the Three-Circle Model made it easy for everyone in the family to see the three major organizations that make up the family business system. They could place themselves in the model as family members, owners, and employees. Lightbulbs started going off for business families that wanted to battle the curses and outlast their competition.

As it turns out, most of the complexity you need to manage in family business is due to overlapping roles, the conflicts they create, and the decision making problems that result.

Each petal entity can contain one or more activities shared by family members. The organizations can be formal, like companies or foundations, or informal, like committees or projects in incubation.

This model is, essentially, a screenshot of the family enterprise at any given time. Family organizations can use the Family Enterprise Model to: (1) identify all the family’s shared assets and activities; (2) map the flow of information among them; (3) coordinate among them; and (4) develop talent specifically for each petal entity.

The Stage Two model shows us that the family endeavor has changed in an important way. The center of control at the family business stage was the family business leader(s) with controlling ownership. Examples are company founders and family business leaders controlling the family’s primary wealth engine, such as Bill Ford at Ford Motor Company. Now, in the family enterprise stage, what’s at the center is an organization consisting of a group of actively engaged family members working together as a team. This central organization can be either formal or informal. Examples of formal organizations are holding company boards, protector committees, and/or family councils An example of an informal organization is a group of actively engaged family members or owners communicating regularly and making decisions together. This central entity oversees and coordinates all the petal entities of the family enterprise. Family unity is imperative. Without it, the enterprise will struggle.

In Stage One, success was measured by gaining and keeping the control necessary to build and grow wealth in the flagship business. In Stage Two, success in the family enterprise is now measured by growth of the overall family wealth. This is measured by the output of all the wealth engines collectively, ranging from cash businesses to risky new ventures and cash-sucking growth companies. Stage Two success is no longer measured by the performance of any particular business.

In the family enterprise stage, people now recognize the importance of non-financial family resources and begin to use them more effectively in service of growing overall family wealth. To keep evolving now requires an even broader range of family talent, plus leadership to manage the more diverse and resource-rich enterprise.

With this model as a tool, friction points could be logically identified—even anticipated—and addressed. Individuals playing more than one role could now clearly see where their roles overlapped, causing conflicts that needed to be managed. At the center with the most complex role are the owner, family member, and business leaders with control who needs to balance the interests of all three circles.

That person is almost always under a lifetime of stress, trying to keep it all going and running smoothly. Luckily, other leaders emerge as needed. For all leaders and their followers, the ThreeCircle Model can pinpoint responsibility for making important decisions. That increases accountability for leaders to make timely decisions. Almost as importantly, people in the family business system were relieved to find that others in the family, in the ownership group, and in the business could now “see them” and see where they stood in their role on any issue. Their perspective and unique contributions would no longer go unnoticed or underappreciated. The Three-Circle Model supercharged many enterprising families and turned family members into team players in high-functioning systems with better odds for survival. For decades, the Three-Circle Model has been useful for aligning interest groups, especially in finding and training a successor for the existing family business.
If you have ever worked on improving your family business system, you know that the focus is on developing one person, or a core group of family members, as leaders—with other family members providing support and oversight. The Three-Circle Model is a useful training tool for building decisiveness. It helps with short-term planning and developing medium term strategy. But more is needed.

In succession planning today, the problem is this. Change is now accelerating so fast, it’s hard to know how business will be changing in five years—let alone ten. So what criteria should be used to spot and develop the right family successor to take over the existing family business when your end goal is a moving target? Will the family business still be controlled or even owned by the family in ten years? Will it be sold? Or shuttered by the unforgiving forces of sunset industries? There were signs in the early 2000s that for an increasing number of families, the Three-Circle Model does not address all their problems.

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The Family Enterprise Model. (John A. Davis, 2013)

Stage Two: The Family Enterprise

After much debate over what was foundational to multigenerational success, John Davis’s model of the family enterprise has gained wide acceptance globally.

A family enterprise is defined as an organization that is the collection of all assets and activities that family owners share. It is structured as a group of independent, but interrelated, organizations that collaborate and, ideally, coordinate with each other. In the diagram below, the organizations look like the petals on a flower.
At the core of the Family Enterprise Model is the group of engaged family members who create governance structures based on shared family values, mission, and vision to operate the organization. This set of articulated statements at the core serves as the guiding principles for family and non-family members working within each petal entity. The core governance structure brings unity of purpose to the overall family enterprise.

In the family enterprise stag, people now recognize the importance of non-financial family resources and being to use the more effectively in service of growing overall family wealth.

The Family Enterprise Model can be used by families to focus on building core unity among the actively engaged family members. If you keep working on the skills you developed in Stage One, a unified family can enforce critical behaviors that increase your chances of survival. The most
important ones are (1) lifelong learning and development, (2) timely decision making, (3) support of family leaders, and (4) buy-in around
critical initiatives.
Success in Stage Two improves your chances of survival because you focus more resources on developing wider strategies, creating more wealth engines, and executing these plans. The real growth opportunity for families in this stage involves developing and improving your internal responsiveness—how fast and well you can respond to the needs of the entities in your system. When one petal entity needs resources, you can coordinate among all the other petals to deliver them. Good timing, together with selecting the right resources, will help them build momentum, speed you toward success, or both.

Family enterprises tend not to deliver high performance as a broad resource developer. It is not optimized for engaging human capital both inside and outside
the family.

For example, take Mulliez. This leading French family enterprise is focused on retailing, best known for the hypermarket Auchan, and now in the fourth generation of family leadership. Mulliez family members have launched more than twenty retailing companies, some bigger than others, all supported by funding from the family enterprise that aims to encourage starting up compelling new businesses.

Both the Three-Circle Model and the Family Enterprise Model focus on the enterprising family as an organization. In the family business stage, the organization is formal and well defined: it is the flagship business. In the family enterprise stage, the organization can be formal or informal. It can even be a family governance body with voluntary membership.

In spite of having evolved from an earlier stage, family enterprise is still inward looking. It tends to focus on the development of the core group of engaged family members who will assume welldefined roles within the organization. It does not naturally centerprise (that is, focus on talent development of the broader family as a core shared activity). So, family enterprises tend not to deliver high performance as a broad resource developer. It is not optimized for engaging human capital both inside and outside the family.

This organization-focused approach of family enterprise develops talent to serve the organization. Compare that to the greater potential power you can get from a people-focused approach, where the organization facilitates investments in people to thrive.

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Family business advisors, such as Centerprising Founder Florence Tsai, often have to guide families through the challenge of engaging less-involved family members. These are family members who have not found a place for themselves within the family enterprise. So often, this problem occurs because the family enterprise puts too much emphasis on asking less-involved family members questions, like “What can you (individual family members) do for the family enterprise?” Instead, why not answer their questions, like “How could the family enterprise support me as an individual?” The organizational culture of the family enterprise often feels unwelcoming to family members with no official roles. As a result, their already weak links to it becomes even weaker over time. Typically, the family enterprise never benefits from the resources they already possess—or will acquire in the future.

At the same time, family members usually maintain close relationships with each other. That is just what families do naturally. In plain language, people like to socialize with each other and maybe collaborate on work-related projects as they occur organically. Families are bottom-up organic systems, not top-down organizations. Families are informal, not formal by nature. Family members enjoy shared identities even when their values, mission, and vision don’t completely align with those of the core family leaders running the family enterprise.

Families are encouraged to find ways to organically reinforce the shared identities that individuals have treasured over generations. But for those whose interests differ greatly from those at the core of the family enterprise, they just don’t enjoy attending formal family council meetings. It seems burdensome to decide on how to govern the family enterprise, especially when it has minimal relevance to their personal lives.

Any family business advisor who has worked to improve a family enterprise over a decade or more has seen this natural change in interest—and it is often in the downward direction, meaning dwindling participation.

It’s important to keep in mind that the family is not an organization. It’s a collection of individuals with shared identities, unique talents, and the Four Capitals that they each possess. What are the Four Capitals? These are financial, human, social, itellectual, and forms of capital. The best way to remember them is by using the mnemonic, FISH.  

The family ecosphere is flexibly arrayed as a distributed system, linking string of rising generation phoenixes and their innovations to the family enterprise core of highly engaged family leaders.

Stage Three: The Family Ecosphere

This is how the family organization amplifies the impact of its diverse resources. A well-functioning family ecosphere is the business family’s version of a distributed system, with a stable core and an active edge interacting flexibly so it can continuously replenish the resources available to the family enterprise.

Three-Stage Evolution of the Family Business System. (Florence C. Tsai, 2018)

Imagining a family ecosphere, then building one, is an activity that represents a profound shift in mindset on the part of family members. Their focus has changed forever. They are now focused on the future of family excellence. From now on, their mechanism for longevity will be to maximize performance of all family members, then to harvest those performances for the benefit of the family enterprise—and for all. 

The major insights that led Centerprising Founder Florence Tsai to develop the Family Ecosphere Model have been drawn from a decade of client work with enterprising families all over the world. From East to West, it’s always true, even in a highly unified family, that many family members’ level of engagement with the family organizations may ebb and flow over time. But well-run family organizations do help family members switch on the Longevity DNA they share—their identities, values, and mission. 

Family members do not, and usually won’t, serve as implementers of pre-fab directives from the family organization. They want to individually feel inspired to march in the same direction as the family group, where the family organization serves as the beacon. They want to play a part in charting out the general direction, which is most effective when partly planned (top-down) and partly organic (bottom-up). And this general group direction also has to fit well with their individual passions and ambitions.

With a family ecosphere model, you can make use of a wider, trusted family network that can bring new innovations from the edge back to the core. With more people out on the edge, you’re outward-looking and better positioned in the world to scout and recruit non-family talent that shares similar cultural DNA. When those people collaborate with the family enterprise, you create a resource force field to build new wealth engines based on diverse human talent. 

Rising leaders with East Asian origins have a great metaphor that can help you visualize the power and enduring advantage that is rarely unleashed by family enterprise. In auto racing (even more true in motorcycle racing), they say, “you’ve got to pass in the corners (弯道超车).” This takes masterful control of a high-performance machine coming into the corner, where you are jostling for position in a crowd, and then explosive power coming out. If control is lacking, the vehicle flips. Game over.

In Stage Three evolution, the main job for the seasoned family leader is to transform the resources of the family organization into a force multiplier. The main growth area for you and everyone to focus on is adopting a shared, Future-Forward mindset in the family as part of your Longevity DNA. You need to learn and practice staying collectively focused on selecting, solving, and profiting from emerging problems whose time horizons are too far out for the short-term-minded CEOs of public companies to act on. For maximum advantage, your horizons should even be beyond the range of professional asset managers.

The family ecosphere Model lets you see how to combine the unique competitive advantages of the enterprising family—long-term thinking in a renewable pool of resources plus an expanding pool of loyal, talented stakeholders—and turn them into wealth creation engines that generate uncommon profits and beneficial social impact. This is the moment when family enterprise takes a quantum leap and evolves from an inward-looking organization into an outward-looking family ecosphere with ever expanding influence, access to resource pools, and the ability to create impact multipliers from these resources.

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Works Cited

• Tsai, Florence C. “Family + The Quantum Machine” Phoenix Rising – Leadership, Chapters 1B, pp. 21-35

• Davis, J. and Tsai, F. “Strategies for growing multi-generational family wealth.” Article on Cambridge Family Enterprise Group website. https://cfeg.com/insights_research/strategies-for-growing-multi-generational-family-wealth (accessed November 5, 2018).

• Davis, J. 2012 Enduring Advantage: Collected Essay on Family Enterprise. Cambridge, Massachusetts: Cambridge Family Enterprise Group. 2012, pp. 1–7.

• Davis, J. “A tribute to Renato Tagiuri.” Cambridge Family Enterprise Group website. https://cfeg.com/about/tagiuri-renato (accessed October 31, 2018).

• Cornil, Y., Crawford, R., and Bennedsen, M. 2015. The Mulliez Family Venture, INSEAD Business School Case.