Are Canada’s richest holding us back?
Thomson. Weston. Irving. Rogers. Shaw. McCain. Southern. Richardson. Sobeys.
Every year a list of the richest Canadians is published by Canadian Business magazine. And every year, that list is dominated by families — many of which have controlled some of Canada’s largest businesses for generations.
Once again, the list for 2013 was topped by the Thomson, Weston, Irving and Rogers families.
At a time of free trade, global markets and intense international competition, Canadian families still control a surprising number of large companies, as well as the wealth that goes along with them. In fact, it’s such a uniquely Canadian quirk that in a 1989 paper on its macro-economic impact, the U.S.-based National Bureau of Economic Research described such concentrated ownership as “Canadian disease.”
The conditions that incubated this “disease” are firmly rooted in history. In the early 19th Century, Upper Canada was dominated by the Family Compact and Lower Canada by the Château Clique. While not actually family per se, it was a tightly affiliated group with a shared agenda.
The National Policy of 1879 established high tariffs and barriers to entry into the Canadian market that thwarted competition and encouraged concentrated ownership in a relatively small, insular market. As well, competition policy was essentially ineffective from its first iteration in 1889 until the 1986 Competition Act. Really.
The upshot is that, even as globalization began to revolutionize capital markets and corporate operations, by 1998 less than 16 per cent of this country’s 550 largest companies were widely held (with a single shareholder of less than 20 per cent of equity).
Not only that, but dual class share structures which awarded founders and families voting control and premium dividends were entrenched in Canada long after they were disallowed in the U.S.
For example, auto parts giant Magna International had a share structure that gave the Stronach family 300 votes per share, compared with the one vote per share allowed to outside investors. Ultimately, that gave the family 66 per cent of the voting power attached to all voting securities and less than one per cent of total equity. When that arrangement was restructured in 2010, the family demanded and received a massive payout.
Stringent foreign ownership rules, which have been relaxed only relatively recently, have also helped wealthy Canadian families to retain their grip on the market.
But what about the broader implications of enduring family dominance on Canada’s domestic economy?
It can be argued, for example, that economies where wealth is concentrated in a few hands grow more slowly and are less innovative over time. That’s because those with a vested interest in preserving capital and the comfortable status quo, are less inclined to take risks or to allocate capital to new ventures.
That, in turn, slows the often essential process of “creative destruction,” by which new enterprises arise from the rubble of those that have become obsolete and outdated, creating vibrant new entities that push growth and the creation of prosperity.
Another question is whether family control, passed down from generation to generation, provides large companies with the best possible management of assets. True, professional managers can be hired, but anyone who has ever worked for a family-owned business, can attest to the fact that the temptation to overrule and tinker with the decisions of outsiders usually proves irresistible.
Furthermore, when it comes to governance issues, there’s not much question that a controlling family will hold exceptional influence over the selection and the votes of directors — however independent they may purport to be. And that has a direct bearing on the discipline required to build a competitive company.
Arguably, this cozy arrangement has provided some benefits. At a time when so-called “activist shareholders,” hell-bent on achieving short-term results, have become a force to be reckoned with, a large, stable shareholder can provide an exceptional degree of stability. An important part of that is the ability to set and adhere to long-term visions, sticking to a plan that serves a broader range of economic and social stakeholders.
Of course, there are far fewer families in charge of the domestic economy than there used to be — especially in the retail sector. Over time, the Eatons, Woodwards, Billes, Steinbergs, Griffths, Allards, Aspers, Birks and many others have succumbed to mergers, acquisition and good old fashioned competition.
Darwin might say that natural selection has determined that only the best and the brightest have survived this far in a world of global markets and free trade. And for the sake of Canada’s economy, let’s hope that’s right.
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