Creating Owner Guardrails

Summary: The last piece of creating your owner strategy statement is setting guardrails, both financial and non-financial guardrails, that will help your board and management to put your owner strategy into practice. Clear guardrails enable more effective ownership.

Aligning your priorities through your purpose and owner goals is a good start, but it’s all just lip service unless you translate them into specific measurements that the leaders of the business can use to make decisions. These guardrails are the final component of your Owner Strategy. Like the guardrails we rely on to keep us driving safely on highways and busy roads, owner guardrails won’t tell you what to do. But they will provide boundaries around standard business strategy decisions (e.g., opening new stores and investing in new machines), allowing some actions and proscribing others.

Owner guardrails will help you ensure that those running the business day-to-day are directing their energy and resources to what you care about most. Clear guardrails enable more effective ownership. With guardrails in place to spell out how owners define success for the company, you can more confidently delegate decisions to directors and managers.

Guardrails are both financial and nonfinancial. Financial guardrails set specific standards of performance to align with owner goals. They identify the right metrics for evaluating performance and the minimum or maximum threshold for each metric. Imagine that your company has a growth-liquidity focus. You should define how you will measure success for both growth and liquidity—what metrics you will use and what threshold you expect the company to exceed. For example, you might define your financial guardrails as a minimum return on equity of 10 percent and a maximum debt-to-equity ratio of two times your earnings before interest, taxes, depreciation, and amortization.

Owners should home in on only a few financial metrics (usually four to six). Doing so provides clear guidance to the company’s leadership while leaving them ample opportunity to determine the best business strategy. These metrics should connect with the three core owner goals. The table below describes the objectives of the metrics for each goal and provides examples of those metrics.

Nonfinancial guardrails define outcomes for which owners are willing to sacrifice financial performance. These guardrails assess more abstract aspects of the company, for example, the family’s purpose for being in business together and the owner goals. Nonfinancial guardrails provide the rationale for maintaining control over decision-making. For some families, the nonfinancial goals are both part of the glue that holds them together and a means of making the world a better place.

These nonfinancial guardrails typically fall into four main categories:

Identifying your nonfinancial guardrails can be one of the most meaningful parts of deciding what you value. By establishing financial and nonfinancial guardrails, you select metrics to help inform major decisions and ensure that your family business continues to truly represent who you and your family are.

*Adapted from the Harvard Business Review Family Business Handbook by Josh Baron and Rob Lachenauer. Pages 88-91.