"CONTROLLING INTEREST: WHO OWNS CANADA?"
Diane Francis Journalist and Author
Chairman: Nona Macdonald President
The Globe and Mail book reviewer wrote-"Diane Francis specializes in unravelling the complicated net of corporate ownerships in Canada. In what she describes as a 'Private-sector, One-woman Royal Commission, she has studied corporate concentration in this country and makes it clear she doesn't like what she finds."
Diane Francis may be here to tell us about successful Canadians, but she has a success story of her own. It should be noted that for one so keenly interested in Canada, she was born in Chicago and came here as a teenager. For a journalist who has travelled the length and breadth of her adopted country to glean the facts to complete her research, she is also a family manager, having married at 18 and now raising two teenagers in Mississauga.
Her interest in politics motivated her about ten years ago to take classes at Sheridan College in writing. From there she moved from local newspapers to Canada's largest daily-The Toronto Star - where she writes a business column called "The Insiders." Her keen observations of Bay Street and beyond, led to appearances on CBC's public affairs programs: TV's The Journal, Midday and radio's Morningside. Prior to going public, Diane Francis and her husband Frank ran their own commercial art business. So she understands the ups and downs of profit and loss. Today it is to our profit to welcome the author of the new bestseller, just on
Maclean's bestseller list this week, published by Macmillan, titled Controlling interest: Who Owns Canada?, which is also the title of today's address. Ladies and gentlemen: business woman, journalist and author, Diane Francis.
It is needless to say I am honoured to be here; I am two thirds of the way through a coast-to-coast tour promoting my book and if it is Thursday it is Toronto. l feel somewhat shellshocked. I have had some funny incidents. My book has a title and a subtitle and that has caused a little bit of consumer confusion. Apparently a number of the booksellers have said "We have had these people come in, asking for both of your books, Diane, Who Owns Canada? and Controlling Interest." But anyway, we have gotten around that problem. And the other situation was last February, I realized that Controlling Interest is the title of a colleague's book that was published a few years back, so 1 called Macmillan in a panic and 1 said "We cannot call it Controlling Interest: my goodness, someone else has published it." Well, they said, we like the title, you've got a subtitle and there is no copyright on titles, and I said, well let us call it In Search of Excellence and sell five million. They didn't go for that.
Seriously I am going to come across as a bit of a preacher here. I am the granddaughter of a Baptist preacher and you are going to hear a little business hellfire and brimstone. I have religion on this subject and 1 have been going across the country like an evangelist on the topic. Basically I want to start from this point of view: Basically I am a capitalist, not a socialist. I am a capitalist who believes Karl Marx was right. Marx said that capitalism will destroy itself, if completely left alone and I really believe this is true. I think we have to save the system from the capitalists. And the United States, where I come from originally, has realized this. Going back to the turn of the century when they industrialized, Teddy Roosevelt busted up the trust, took on John D. Rockefeller, made him split up the world's biggest corporation into five pieces and more recently A.T. & T. was split up into a dozen entities, all in the realization that you have to protect the system from the biggest, who can end up so big they become bullies. They also have a situation in the United States where a takeover is not a right, it is a privilege, and anyone who makes a takeover is called before the Federal Trade Commission, which is a tribunal which looks into the competition aspects, and very often no matter how large the company, they are ordered immediately to sell part or all of what they have just purchased; and that is in the interest of protecting the cornerstone of capitalism which is free and open competition.
Why are Americans smarter than us? Well they are not smarter than us. The reason is they industrialized at the turn of the century, we industrialized during World War 11, they had an economy characterized by bandits and robber barons, which gave them the political wherewithal to go and attack bigness and badness that was big and you know, it is not that they are smarter, but they have been at it longer. And as I say, at the turn of this century Sinclair Lewis, the famous journalist, and others exposed all of the abuses. They were raping the environment, exploiting the workers, exploiting the consumers and so on, so that they brought in a body of legislation that still remains a major legacy from that era of abuse.
There are basically two kinds of concentration of power and I try to deal with both of them in my book. The first one is what economists call aggregate concentration and that is just more and more being owned by fewer and fewer. The second is marketplace or industry or product concentration and that is where you have a few sellers of a certain product in a certain market. We have both kinds in spades. What 1 found in my book, and it is hard to quantify exactly because we don't have proper disclosure requirements in Canada in terms of private family companies, but basically to try to quantify the degree of aggregate concentration, these are some of the facts I came across:
Thirty-two families and five conglomerates control about one third of the non-financial corporate wealth of this country. Five banks control eighty per cent of the deposits on hand in the country, the financial assets in other words, the important ones, and their boards of directors are populated by members of these thirty-two families and five conglomerates, so they also have a very indirect control sometimes over the banking business and the banks in the past, as we have known, have acted often like open-ended slush funds for these tycoons whenever they wanted to make a takeover.
Bell Canada is a monster that is almost out of control. It is an excellent corporate citizen, but Bell in 1983 was given permission by the CRTC to make takeovers and restructure. Ever since, they have taken over a major corporation every year: TransCanada PipeLines, the largest corporation, British American Banknote. They of course also own Northern Tel and basically they have so much cash flow coming in from operations that they will do this indefinitely. Right now, the Bell family of companies, which includes as I say the ones mentioned, plus Daon Development and Bell itself which is gigantic, represent nine per cent of the Toronto Stock Exchange entire float and that is just after a number of years and I submit that that is a level of concentration which is highly questionable, considering the fact that some of the families that I profile in my book could probably buy this whole chunk of our economy or a foreign investor could. So I am very concerned about the size of the Bell empire.
Another empire which is huge and has grown very quickly is the Brascan empire, the Hees and Carena Cancorp. empire owned by Peter and Edward Bronfman. Just interesting facts - they have three times the capital of all the Bay Street brokerages combined; this is just from a stand still in '78-'79, they own seventeen per cent of British Columbia's mines, one third of its forest industry. The concentration has gone on to such an extent, that of the four hundred largest corporations in Canada, public corporations that trade on stock markets, three hundred and seventy-four have control of shareholding with twenty-five per cent or more of the shares. That means the game of Monopoly has gone on so long and so large that I guess only Boardwalk and Park Place are left. Compared to the United States, this does not necessarily lead to any definite conclusions, but it is interesting. I would calculate that we have six billionaire families in Canada. That is to say, that after they have sold their assets and paid off their debts, they are actually worth a cool billion or more. The United States has a dozen in an economy twelve times as large.
When it comes to marketplace concentration, we also have A similar problem, and it characterizes itself in my business, the newspaper business, the eyeglass frame business, the gasoline business, the retail business, the shopping centre business, in banking and brokerage and even in bread, in Ontario we have two guys baking half the bread in the province. There is a number of reasons we should all be concerned and, again 1 am a capitalist, l admire these people. The thirty-two people have been accused by one review of holding them up into reverential status and therefore undermining my hardhitting analysis. I can reconcile these two things, because these people do not write the law, they work hard. They are admirable, they are smart, but they beg a number of policy questions considering the size of the country and the amount of their success. I think we accepted a number of levels, as consumers we are affected. The best example of that is when the oil price collapsed in December-it dropped sixty per cent, the American consumer saw an immediate benefit at the gas pumps as each region, each city in the United States has dozens of refineries competing madly for market share. They get an immediate drop in the gasoline price; it took us four or five months of battering in the House of Commons and so on. The excuse was, well, we brought all this high priced off the awfully long pipelines. The pipeline from Alberta to Winnipeg is no longer than the pipeline from Texas to Chicago and the difference was we have five refineries with an iron grip on our economy, led by our own national oil company, who has been at certain times a particularly ugly conglomerate, among our midsts making takeovers and throwing Canadians out of jobs just all for the sake of getting big. We
had lost opportunities and? think our nagging unemployment problem can be in part blamed for the takeover binge that this country has been on since the Royal Commission whitewashed concentration as a problem and then it went crazy, that was in seventy-eight. Basically I think it has affected unemployment in two ways. These people who have embarked on these takeovers have done it with other people's money and the collective mortgage on our corporate sector is nothing short of breathtaking in Canada and that has of course meant that when someone takes over one company, they have got such a big interest to have to pay every month in buying it and acquiring it that they cut everything to the bone and lay off Canadians. The other problem has been that very often when Company A takes over Company B, to realize economy of scale and so on, they eliminate duplication and they fire a lot of people. We saw this recently with Petrocan which is in the process of laying off two thousand people after it bought Gulf Canada's gasoline stations. So I think as workers we are losing opportunities and it has cost us. As taxpayers, it is pretty obvious it has cost us. These big players can hire big smart tax lawyers and the interest deductions from corporate income taxes has cost our coffers billions of dollars. 1 noted recently in Ronald Reagan's tax reform they are somewhat clipping the takeover wings because the interest deductibility is not as open ended as it was, something 1 call for in the solutions of my book.
Then we have good old K.C. Irving, the richest Canadian in the world, who moved to Bermuda the day after capital gains was introduced, so when that empire, which 1 estimate is worth between 6 and 8 billion, passes from one generation to another, there won't be one dime of capital gains tax paid. I don't think that is fair. We are also the only country in the Western world that doesn't have estate (death duty) taxes and gift taxes and I advocate both of those coming back. So the result is the middle class is paying more and more tax, because these people are able to avoid tax. Investors, I think, are affected too because with so many controlling share-
holders in so many companies, very often we have a number of examples where minority shareholders have been badly treated and there do not seem to be sufficient remedies in our current system. As a trading nation, I worry. We are talking with the Americans about freer trade, whether that happens or not, I think we are still at a disadvantage. The takeover binge has cost us plenty, in terms of the fact that this huge collective mortgage on our corporate structure must end up costing more in terms of goods and services that we export to the rest of the world. For instance, an interesting statistic is that for every dollar of assets the average Canadian corporation has seventy cents in debt. Now I am including preferred shares, a lot of them do not like to include preferred shares, but it has debt, it is on IOU. This is by William Magnas, who is the economist with the Bank of Nova Scotia; he did a very extensive study. By comparison, in the United States, the corporate sector for every dollar of assets has forty-two cents in debt. Now it is argued, well, we have a more capital intensive industry up here, or resource base and so on, we have to get more so. Mr. Magnas went one step further. He said, our industries have seventy cents in debt for every dollar in assets and equivalent industries, foreign-owned equivalent industries within Canada have forty-two cents for every dollar of debt. So we are at a competitive disadvantage, it just seems very self-evident to me.
As voters, I worry. I think we could be affected because of inordinate concentration of power. They have obviously the ability to translate into political influence. It may or may not explain why this has been allowed to go on as long as it has without soon trimming of the sails of the takeover artists.
However, things are changing. The Ontario Legislature has a committee that has been struck since my book has come out into concentration of power. John Turner has been talking about it in speeches and it may have been unnoticed, but it was not by me, in a Throne Speech yesterday, the government talked about taking a look, whatever that will mean, because there is concern about needless takeovers. So I think we have perhaps a lot of political people on the side of keeping capitalism alive.
Now again, as I say, these are admirable families, there are no crooks among them. Occasionally some of them bend the rules, but they don't break them. And how can you not like families like the Eatons, who are wonderful corporate citizens, old money, not flamboyant, they run good enterprises, they don't get caught up in the takeover game and I love the phrase that Timothy Eaton, the founder had-"Early to bed and early to rise, don't get tight and advertise". Wonderful! I mean who can't like a family like that?
And then we have good old K.C. Irving, who tried to destroy the political career of whomever crossed his path and did a number of abusive things which I outline in the book. On the other hand, you see I have two minds; K.C. Irving is the last of the great nineteenth-century industrialists. And he is a builder, he really has done things for New Brunswick. As Louis Robichaud, the Premier who crossed his path, crossed swords with him I should say, and regretted it, said to me, the problem is not K.C. Irving. The problem is that New Brunswick did not have eight K.C. Irvings. K.C. Irving tried his best to keep the other seven out and did, except for McCain. So basically, from the point of view of being a capitalist I tried to put my mind to public policies solutions and again I want to emphasize that I think we have a talented economic lead in this country. I do not want anyone politically to go in there wielding an axe, when you should take a scalpel, because we don't want to drive these people, their money and talent out of Canada. Basically there are a number of solutions that I have come up with. First of all, I think Investment Canada, which you know scrutinizes every foreign takeover in this country, should scrutinize every takeover in this country, and I think we should open it up to public hearings as they do in the United States. I think questions should be put to anyone taking over a company. What is this going to do to jobs? What is this going to do to our currency? What is this going to do to monetary policy? Because some of these takeovers are enormously large and actually affect the currency of the country. What are you doing for research and development? Are you going to get so far in debt that you will have to turn back the sales and research and so on? Tough questions! Are you going to close this community down? Are you going to close that mine down? Let's put it to every takeover. Let's scrutinize every one. Right now we just discriminate and ask the British, the Americans or the French to go through this process. I think everybody should, because 1 think it is in the country's interest. We have a new Combines Act. The Tories, l must admit, former Consumer Minister Michel Cote was the first guy to bring in a decent Combines Act, hasn't been touched yet, may be full of holes 1 am sure the lawyers are already working on how to take shots at it, but it promises to be a better act and this will attack marketplace concentration and I think there are a number of things I would like them to do. I think they should monitor existing concentration levels and actually retroactively unravel those that may be troublesome, and there is a number of areas that I mentioned earlier.
When it comes to the huge banking concentration of power, I advocate a Chapter 11 type of relief. I think that all too often there is not a level playing field in Canada, because we have these big banks. Basically bankers have the patience of Job when it comes to the Dome Petroleums or the Turbo Resources, but they will very quickly pull the plug on an Ontario manufacturer or a farmer, a wheat farmer in Winnipeg, and 1 don't think the playing field is quite level. Chapter 11 is an American innovation. There is a similar situation in Britain where you can seek corporate relief for two years and that allows the unsecured and the other creditors to get a bit of the action too, if it is ever liquidated and to come to terms with it and it clips the wings of the banks, which I think is long overdue.
As far as taxes, I advocate, and we have to be careful here because we can't do anything the Americans aren't doing. Unfortunately that is the case because, if we would not allow our takeover people to make interest deductions for tax purposes,
they would go down south and make them there, make their takeovers there and we will lose them. But basically, I think if they have clipped the wings, I think we should go and lock step, maybe even negotiate more. The Americans are very concerned about takeovers as well.
I advocate the reinstatement of death duties and gift taxes. You need gift taxes when you have death duties because otherwise they will just give it away before they die to their kids. We are the only country in the Western world without it, l think it is long overdue. We have capital gains relief in spades and I think there is not a sufficient tax from one generation to another.
Another thing which I don't mention in the book, which is interesting: again the Americans do this and I hate to sound like America this and America that, but they have been at it longer and I mean 1 live here because I prefer this place, believe me. But on the tax side, they do have a way of getting around the K.C. Irving problem. That is if K.C. Irving were an American citizen and wanted to, let's say, avoid taxes by moving to Bermuda, he would still have to file taxes where he lived. They tax on the basis of citizenship, not residency. Firstly and secondly, if he renounced his American citizenship and moved to Bermuda, he still owed them tax 10 years after he renounced, so they kind of tie them up and they can extradite them for tax evasion and can make it stick. So I think maybe we should look at that; a lot of games are being played in this country, people moving down to the Caribbean to get out of their Canadian tax, that is their income earned in Canada. Another thing I am concerned about is the cross ownership of financial, non-financial assets. As Robin Korthals, President of the Toronto-Dominion Bank, said to me once, I think he regretted it, that the best way to steal from a bank is to own one. And while we have not had any of the problems, I think there is some concern and I really believe we should not allow people to be both borrowers and lenders. It is just asking for people to be too saintly in their lives.
I think in light of the inordinate amount of concentration of power among these families, 1 think that political reform is required. I think we must have a register of lobbyists, 1 think civil servants and politicians must know who they are speaking with and who is representing whom. I think that is long overdue. I think there should be more disclosure, I think politicians, their spouses and their children should disclose their debts as well as their assets to whomever. I think that there should be more disclosure on the side of ownership. My research showed me thirty-two families with five conglomerates have one third of the corporate wealth of the country. That could just be the tip of the iceberg. People like K.C. Irving, Fred Mannix in Alberta operate through provincially chartered companies and the only thing that you know about them is their head office address and the name of their three directors who are typically their lawyers, so you really cannot find out anything, you don't even know what business they are in. I have a number of examples in my book about where unions have been frustrated in bargaining on behalf of their work force and so on because they just can't find out who the owner is.
I would, and I am going to take a deep breath here-I think Bell Canada should be split into two, I think Bell Canada should be split into Bell Ontario and Bell Quebec. I do not think there is any justification for a monopoly of that size which is spewing off far too much cash. I think that we should open up long-distance telecommunications to other players and that hopefully we will have more research and development, we will have more innovation, we will have more opportunities for other players. That would clip the wings of that company. I think the refining section in the gasoline business should be busted up as well. I think there is a range of securities, law changes and other innovations too numerous for me to mention that are outlined in my Solutions Chapter. And I am coming to my concluding remark. Sorry I am preaching at you, but I am an evangelist on this topic. In essence, the reason I wrote my book is, I feel that what we need in Canada is a Charter of Economic Rights and I don't think we have one yet.
Thank you for inviting me.
The appreciation of the meeting was expressed by Henry N.R. Jackman, Chairman, Empire Life Insurance Co., and a Past President of The Empire Club of Canada.