Canada’s lack of corporate giants and why we need to dream big
Happy Canada Day!
Last week, Eric Reguly wrote an interesting article for The Globe and Mail on why Canada has so few of the world’s top companies. Out of Canada’s Top 1000 companies, more than 30 of them had profits of $1 billion+ in 2010- this sounds pretty impressive given the state of the global economy last year.
But Reguly’s lament centred around the fact that so few of our top 100 were global leaders. Reguly listed as his criteria:
a) Able to “compete in the international big leagues”;
b) Brand recognition outside Canada; and
c) In the news.
He came up with three definites and a few maybes:
They are: Research In Motion, Thomson Reuters, Bombardier and perhaps Royal Bank or Barrick Gold. A few years ago, I would have put Manulife among that group, but its image has waned in the post-Dominic D’Alessandro years.
And he argued that much smaller countries have just as many global giants as we do:
Australia: BHP Billiton, Rio Tinto, Macquarie Group
Switzerland: Nestlé, Syngenta, Glencore, UBS, Novartis, Xstrata
Netherlands: Shell, ING, Philips
Sweden: Volvo, Ericsson, Ikea
You could quibble with his list and add TD, SunLife, and BNS. But the argument stands: we really should have more world-beaters. Reguly argues that the reason for this is not that our taxes are too high, or that our labour force isn’t up to snuff, or that there is too much regulation (or not enough). He says it’s because of “epic Canadian investor greed”.
From 1997 to 2007, I felt all I did was chronicle the eradication of corporate Canada as investors, and CEOs who encouraged them, hit the sell button. Here are just a few of the companies I no longer write about: Inco, Falconbridge, Dofasco, Stelco, Algoma Steel, MacMillan-Bloedel, Molson, Alcan, Ipsco, Gulf Canada, Newbridge Networks, Poco Petroleums and Masonite. The sellout continues…Last year, Potash Corp. of Saskatchewan almost became another hollowing-out victim.
Reguly calls this greed. And greed may well be part of the problem- especially “if you consider that senior management of the target firms often stand to make a lot of money through unexercised options and a very lucrative severance package,” says Canadian business leader Stephen Gross. Clearly, there is a conflict of interest in recommending a deal to shareholders.
And yet seen from another angle, this example of “greed” is simply prudent investing.
When someone offers you a substantial premium over the share price, common sense tells you to take the money and run. You can use that money and then invest elsewhere and hope to repeat the process. As Richard Ruback and Michael Jensen pointed out in their 1983 paper on corporate takeovers, it is the shareholders in a target firm that benefit most. In the words of Scott Sharabura, fellow ex-pat and strategy consultant at Booz & Company, “most acquisitions are way overpriced by the buyers”. Smart investors know this and act accordingly. A more charitable view of Reguly’s experiences would simply conclude that Canadian investors are more conservative in their strategies.
But Reguly goes on to offer a real nugget of insight:
Canadian investors would rather take even a meagre payout today than stick with a company for years to create a world-beater… When Ralph Robins was CEO of Rolls-Royce in the 1990s, he earned no love from British investors and analysts by investing fortunes in jet-engine technology that wouldn’t pay off for years, if at all. But Sir Ralph refused to cave in to the gimme-returns-now mob. Today Rolls is one of the world’s top manufacturers and tech innovators.
This is much closer to the real problem. If there aren’t enough Cdn investors who are brave enough to risk it big (instead of locking in their gains), then in the aggregate, this means that we will have fewer world-class firms than we should given all of our other economic and geographical advantages.
Individually, our sell-out companies probably did right by their investors, but as a group, a few of them probably would have become global giants and substantially strengthened the Canadian economy. You can’t win if you don’t play.
Consider the technology sector. If you follow the prudent logic of the Canadian investor, then Mark Zuckerberg should have sold Facebook ages ago, Jim Balsillie and Mike Laziridis should have sold Research in Motion (RIM) before it ever went public, and Larry Page and Sergey Brin should have taken one of the many lucrative offers that they must have received for Google when they were still operating out of a rented garage. Take the millions and run!
But they had bigger (some would have said delusional) dreams for their companies and their products. I don’t even think they were necessarily holding out for more money. Their investors and shareholders must have also shared their vision or else there would have been huge pressure to take one of the many buyouts that surely came their way.
Yet to be the kind of person who will hold out for something bigger, you need to have massive ambitions- and also be ready for failure. In poker terms, you’ve got to be willing to go “all-in”. You have to see more potential in your firm than any rational investor ever would. You have to dream big.
And that is where Canadian companies fall down.
In Canada, we regularly complain about our southern neighbours. But when it comes to dreaming big, we really should be ripping a page out of their playbook. There is something in the American cultural DNA that encourages their leaders to go for broke. They always want to be the best, not just in America, but in the world. This kind of vision and hunger does exist in Canada at companies like RIM and Thomson Reuters, but fundamentally, we just don’t have enough of it.
Our problem is not that we are greedy (or prudent investors), but that we lack the kind of grand ambition that pushes us to be the best in the world.
I can see that more of this type of ambition would require a shift in our national character. I’ll leave the tricky bit of how that can be achieved for someone else, but I also want to argue that this willingness to dream big is a change that Canada must make if it doesn’t want to drown in the global economy.
Businessman Stephen Gross put it like this:
There is a big cost to Canada with these sellouts. The issue relates to head offices, because it is the head office where real value is created: R&D is centred there, this is where decisions are made regarding the location of new investments and jobs, high-paying and creative jobs are there, and there is the energy that goes with a head office. This is not just a question of trading one dollar for another.
Agreed, Stephen, agreed.
* This piece came out of a Facebook discussion after I posted Eric Reguly’s article on my wall. Thanks to Chris Mak, Scott Sharabura, and Stephen Gross for inspiration.