Creating Owner Guardrails

By Josh Baron and Rob Lachenauer

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:

• Leadership: Does the company need to be led by its owners, even if they are not objectively the most qualified? One family business we worked with believed strongly that only a family member should run the company, even if it meant that the business would grow less quickly. This belief enabled the family to nurture leadership in each successive generation while ensuring that only someone who truly understood and valued the family legacy would be leading the business into the future.
• Business sectors and geographic locations: Are there particular businesses (e.g., tobacco, firearms) or places (e.g., South Africa during apartheid) that the owners wish to avoid investing in or, conversely, are willing to sustain even if the businesses are unprofitable? For example, one family business that started in the steel industry expanded more profitably into new sectors over the years as the steel business waned in profitability. But the family was reluctant to get rid of the steel business, even as it became a drag on its portfolio of companies, because the members believed that steel was an important part of their legacy. It had sentimental value to them that they were willing to pay for.
• Harmony: Will any decisions be made or avoided to preserve family harmony? Some family firms will keep a division or an office open despite its poor financial performance, because it is led by an owner and closing it will upset the broader harmony of the group. Others have a rule that a family member should never report to another family member, even if this rule causes inefficiency.
• Business practices: To what extent are you willing to sacrifice financial performance to align business practices with your values (social, religious, environmental, etc.)? For example, some companies pay higher than market wages or commit themselves to environmental sustainability standards that exceed industry expectations. (See “Philanthropy and your Family Business”)

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.

Josh Baron is cofounder and partner at BanyanGlobal Family Business Advisors. He works with the leaders of family businesses to define their purpose as owners and establish the structures, strategies, and skills they need to accomplish their goals.

Rob Lachenauer is a cofounder and managing partner of BanyanGlobal Family Business Advisors. Lachenauer works around the world helping families thrive.