The year of 'hollowing out' is over

The year of 'hollowing out' is over

Gwyn Morgan
Monday, January 07, 2008

It was the year when the "hollowing out" of Canadian-controlled business became a front-page issue. In 2007, the hotel sector saw Fairmont and Four Seasons go to Saudi Sheiks. Canada's long leadership in global mining moved to a rump position with the loss of Inco, Falconbridge, and Alcan; joining the fate of most of Canada's famous forest products companies.
In full-page ads, Thomas Caldwell of Caldwell Securities lamented: "The loss of head offices and industrial leadership is one of the great corporate tragedies of our time." Industry leaders including the Royal Bank's Gordon Nixon, Manulife's Dominic D'Alessandro and Suncor's Rick George expressed their concern.

Finance Minister Jim Flaherty appointed former BCE CEO Red Wilson to chair a group of eminent Canadians to examine changes aimed at encouraging the retention of head offices, and Industry Minister Jim Prentice signalled that takeovers by agencies of foreign governments would be subject to special scrutiny.

These are all understandable responses, but neither business nor government wants to go back to the dark days when Canada's Foreign Investment Review Agency practically destroyed access to foreign capital markets.

In past commentary, I acknowledged that much of my personal motivation for the merger that created EnCana was the continuing series of foreign takeovers in the energy industry. But there is something even more important than keeping big companies Canadian: having a robust stable of enterprises working their way from startups to the corporate champions of tomorrow. One of the two partners that created EnCana was but a fledging startup when I joined it in 1975. And Research In Motion, which built BlackBerry into Canada's most globally recognized brand, was also a fledgling startup just over a decade ago.

In the circle of corporate life, most of today's leading corporations will eventually reach the end of their journey. Rather than mourning the loss of companies at the mature end of their corporate lifecycles, our prime focus should be on fostering the creation of the new startups that will eventually take their place. So the question is: What can we do to encourage the growth of new enterprises?

Clearly it starts with education. In a world where technology pervades almost every aspect of our daily lives, scientific research combined with innovative engineering is crucial. Yet our secondary schools are neither preparing nor inspiring enough kids to pursue the myriad of opportunities in science and engineering.

The next thing needed is entrepreneurship. Junior Achievement volunteers put thousands of hours into stimulating high-school students to think entrepreneurially, but more advanced business experience is needed to prepare for the real world. Great ideas are hatched every day, but most fail from a combination of flawed business plans and poor execution.
Business schools help, but role models and mentorship are crucial. Successful business people are ideal mentors for aspiring entrepreneurs, but the reality is that active business leaders are often hard-pressed by business and family obligations.

This is where uniting the ideas and passion of the young with the experience of the mature is a noble calling for retired business people.

The next big challenge for startups is seed capital. Many successful entrepreneurs tell stories of getting their start by tapping family and friends or mortgaging their house and cashing in the RRSP. Commercial debt is unavailable, and even if it were, taking on debt payments is a bad idea when you can barely keep the lights on. Startups need patient capital.
Enter the "angel investor."

Angel investors need faith in the idea combined with confidence in the entrepreneur. Even then, being an angel requires a sense of humour about the odds. I tell my friends that my record as an angel investor has to get better, because it can't get worse.
Unfortunately, Canada's tax laws are highly negative to investment in risky startups because losses can't be offset against other income. Since the failure rate of new ventures is high, the chance to offset losses may never occur, creating a big deterrent to critical early-stage seed capital. Changes to this part of Canada's tax code may well be the most important thing the federal government can do for our economic future.

There are also the "organized angels," such as the Canadian Youth Business Federation (CYBF). With participation by volunteer business leaders, a small but passionate staff, and funding support coming equally from business and government, CYBF provides both the seed capital and the mentorship needed to nudge new ventures over the starting line. Their theme is lending based on character, not collateral, and both the success and payback rate is very high ... an innovative way of stimulating innovation.

For a company or for a country, the key is having the vision to focus on the right things. The right thing for Canada to focus on is creating an environment where today's young leaders have the best chance of building the Canadian-headquartered business champions of the future.
Gwyn Morgan is the retired founding CEO of EnCana Corp.
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