The Future Is Not What It Was

Head Table Guests

David Edmison, Investment Counsellor, Martin, Lucas & Seagram Ltd. and 3rd Vice-President, The Empire Club of Canada; Adriel Weaver, grade 13 student, Danforth Collegiate and Technical Institute; Gordon Bell, Director, Bank of Nova Scotia; Casey Mahood, Globe and Mail, Specialist, Forest Products Sector and Environmental Technologies; Larry D. Fairholm, Principal, BDI Facilities Management Inc. and former Defensive Halfback, Montreal Alouettes; John F. Bankes, President, Nova Bancorp Group and a Past President, The Empire Club of Canada; Margaret Scrivener, formerly Member of the Provincial Parliament for the Riding of St. David, member of the firm, Martin & Meredith Real Estate and an Honorary Director, The Empire Club of Canada; The Rev. Edward Jackman, Historian, Archdiocese of Toronto; Sam Wakim, Q.C., Partner, Weir & Foulds; Aubrey W. Baillie, President and COO, Nesbitt Thomson Inc.

Introduction by Dr. Jackman

In 1990 Domtar Inc. formed a search committee to find a president for its overgrown and underproductive company. At that time the Financial Post called the company, "a corporate basket case." The search committee was looking for someone who was comfortable managing a conglomerate with big problems.

Now, Domtar is a pulp and paper company which specializes in everything from construction materials to packaging to fine papers (photocopy paper, business forms, envelopes, computer paper). As a company Domtar is gigantic. It has assets of about $2.5 billion, it had sales of about $1.5 billion and what was more important it had annual corporate losses of about $150 million.

Clearly, the search committee was looking for someone with a proven track record, the ability to lead and the toughness to get the job done. In one article, which was written about Canada's most stubbornly troubled companies, including Olympia and York and Domtar, it said simply to the new leaders of these organizations, "Welcome to the Nightmare."

Pierre Desjardins entered the puzzled world of Domtar after having served as President of Labatt Breweries and as Vice-President of National Sales with Imperial Tobacco.

As a young man he studied at the University of Montreal and then on a football scholarship he earned a business degree from the University of Wyoming. He returned to the Montreal Alouettes as an offensive guard. He helped turn around a mediocre team and in 1970, as captain, took the Alouettes, with help from Mr. Larry Fairholm his co-captain, to a Grey Cup Championship. His flair for words led him to a sports commentator position on CBC-TV.

As a Liberal and a federalist, he was Chairman of Robert Bourassa's comeback leadership campaign in 1983, but now tries to keep Domtar apolitical.

It would be unfair to say that Mr. Desjardins is only a tough, hard-smoking, beer-drinking football player. In fact, he is also one of Canada's foremost strategic thinkers and expert corporate downsizers. He is sensitive to provincial and national political issues as well as to the ramifications of NAFTA. He is a family man, a golfer, a skier and a boater who spent many a leisure hour at Honey Harbour on Georgian Bay during his years with Labatts.

Today, Mr. Desjardins will talk about various aspects of the economy and some of the political ramifications of recent events. Ladies and gentlemen, would you welcome Pierre Desjardins.

Pierre Desjardins

Thank you very much for the opportunity to speak to you today. Your invitation comes at an interesting time, as we enter a new year. Will it turn out to be a happy and prosperous new year? Let us hope so.

I don't mean to sound too negative regarding our prospects for 1994. After all, the consensus view of economic forecasters is that Canada will outstrip virtually all other western industrialized nations this year in terms of fiscal growth. We're part of a newly-expanded North American Free Trade bloc. A new GATT agreement which should improve trade opportunities elsewhere is finally in place. And we have a new government in Ottawa that--whatever your partisan political view--appears genuine in its resolve to tackle some of the more difficult economic and social issues facing Canadians.

So, why my restrained enthusiasm? Well, let's face it. A changing of the political guard in Ottawa is not going to make all our problems magically disappear. Nor will an increase in real GNP or for that matter the record stockmarket performances we've been witnessing necessarily mean an end to all our economic woes.

In today's increasingly complex, global marketplace, conventional economic wisdom is being put to the test. Established cycles and patterns of economic behaviour have become less predictable, cause-and-effect relationships less clear. Boom times don't necessarily follow quickly on the heels of a "bust." Economic growth is no longer synonymous with job creation. Lower interest rates don't necessarily lead to increased borrowing or investment. And neither a wealth of natural resources nor unfettered access to the vast United States market are sufficient to guarantee Canada's future success in the gloves-off global trading arena.

In short ladies and gentlemen, the future isn't what it was. We can no longer rely on the old ways of achieving our objectives.

Not surprisingly, in light of these harsh new realities, yesterday's confidence has given way to widespread uncertainty among Canadians. Don't take my word for it.

Ask your sons and daughters or nieces and nephews what they think of their prospects after school. Youthful optimism aside, I suspect their responses will differ markedly from that cocky 'the world is our oyster' attitude which characterized my generation of college graduates.

That's not to say Canada and Canadians don't possess the wherewithal to excel in today's world. Au contraire, we do. But we've got to accept that there have been some very fundamental changes in the essential order of things. And we must revise our thinking and our tactics accordingly. To use today's vernacular, we have to "get real."

Like it or not, society's attitudes and values are changing in such a way as to impact on every aspect of our personal and professional lives. As a corporation, for example, it's no longer sufficient to simply go about your business, being a solid employer, turning out a good product and not polluting the neighbourhood. These days, we're also expected to use recycled raw materials to turn out environmentally-friendly products in a manner that will promote sustained development, and to accomplish all this without disturbing those pastoral wilderness areas where affluent supporters of the environment movement seem to like to build their country retreats! The environment has become as much a social issue as an ecological one.

The future is not what it was.

Next Monday, the first session of Canada's 35th Parliament opens and, quite frankly, I don't envy our parliamentarians. Canadians are looking for strong leadership. They are understandably worried about what the future holds for themselves and their families. They are angry with politicians and government officials. They are appalled at the mounting government debt and deficits at all levels, which they interpret as signs of waste and inefficiency on the one hand, and a lack of long-term planning and direction on the other. This is not the future they envisioned for themselves during the booming eighties. It's not what they anticipated the exciting, expansive age of technological and social advancement would bring them.

Yet, despite the anger, the reduced expectations and the increased cynicism, Canadians are hoping for a better future. Prime Minister Chretien appealed to this sentiment with obvious good effect during the recent election campaign. Now comes the acid test, the time when he and his ministers must begin to deliver.

I don't want to spoil your lunch by trotting out all the grim facts and figures about the country's deficit and public debt. Suffice to say that we are in a real financial bind and we have to put ourselves on a crash financial diet.

Obviously, government spending has to be cut. The question is where. We are stuck with paying 25 cents of every tax dollar on debt interest. These annual interest payments have increased 1,000 per cent since 1976, from $3.7 billion to last year's level of $39.4 billion. The only area in which the government has room to cut is the transfers to persons, provinces and businesses, which account for 70 per cent of federal spending.

You have to wonder how and why we got into this financial bind. The incoming Liberal government, on examining the books left by the departing Conservatives, had some predictable answers for the latest deficit horrors--the failure to provide for such contingencies as stabilization payments to the provinces, smaller-than-expected revenues from the GST, declining incomes because of the recession which resulted in bigger payouts for child-tax benefits and GST credits, the growth of the underground economy et cetera.

Finance Minister Martin says the former Conservative government opted for forecasts that were far too rosy so it would not have to deal with the real fiscal and economic problems facing the country. But in fairness, massive deficits are not a recent phenomena and earlier governments seeking new mandates also painted their economic pictures in rosy colours. Indeed the Mulroney government voiced the same complaint when it took over in 1984. One inherited economic mess begot another. To his credit, Mr. Martin seems to recognize that this cycle has to stop. Whatever the reasons, no government, no organization can operate effectively for long when its projections consistently fall short of the mark.

When it comes to the topic of government deficits, my observations that the future is not what it was would represent a welcome change.

Mr. Martin's decision to have the Department of Finance bring in a team of outside specialists to review its forecasting methods and performance is a good one. If the team can come up with a method requiring the department to produce realistic forecasts, its political masters will, presumably, be forced to make realistic decisions and produce better policies. This, in turn, would surely increase the politicians' credibility.

Recent appointment of a new Governor of the Bank of Canada, who has pledged to continue the anti-inflationary policies of his predecessor, is also a welcome signal. After years of letting the good times roll, we have been keeping inflation in check, and will continue to do so. That is all to the good. Prices are stable. Businesses can plan with greater confidence. And I'm convinced that we can have sustained economic growth without high inflation.

However, as Cedric Ritchie, Chairman of the Bank of Nova Scotia, wrote in a recent issue of The Business Quarterly, the habits acquired during 30 years of inflation must be unlearned and unlearned quickly. In this new environment of disinflation, companies must keep a tight rein on costs and avoid being seduced into asset speculation. As for governments, they can no longer count on revenue growth to solve their fiscal problems.

Inflation was a tremendous windfall for governments, increasing the money supply on which taxes were levied while serving to down-play the real severity of the debts that they were piling up through spending that far exceeded revenues. We're now stuck with the legacy of that behaviour--huge deficits.

It would be patently unfair of me to stand up here and go on about the difficulties that our governments find themselves in while ignoring the private sector's woes, many of which were also self-inflicted.

In point of fact, my own company, Domtar, is very much an example of the broader Canadian experience. A widely-respected, resource-based entity which enjoyed pretty much uninterrupted growth and prosperity during the post-war boom, it was nonetheless knocked on its heels at the end of the 1980s by the combination of an overly-ambitious expansion programme, the prolonged economic slump and a radical shift in the competitive environment.

For those of you who may not be familiar with Domtar, let me give you a brief verbal sketch of our operations. Although we tend to be perceived these days as a Quebec company, Domtar is, in fact, a Montreal-based, North American enterprise.

It has a proud history as one of Canada's first conglomerates and as I'm sure some of you know, was for many years allied with Toronto-based Argus Corporation. Today, Domtar is a major North American producer and supplier of fine papers, containerboard and packaging products. It ranks third among North American producers of gypsum products. It's the continent's largest manufacturer of thermally-fused melamine panels, and the biggest lumber producer in Eastern Canada.

Some 40 per cent of Domtar shares are held outside Quebec, 25 per cent of them right here in Ontario, where Domtar remains a significant and expanding presence in the business community. Your province is home to more than a dozen major Domtar plants and mills, which span the province from Red Rock in the northwest, where we have a linerboard mill, to Cornwall, home base for both our specialty fine papers division and our techni-therm roofing and insulation unit.

You might be interested to know that we are currently investing some $137 million to expand our Cornwall mill complex and ensure that it meets the latest environmental regulations. Later this year, the world's first commercial application of Domtar's patented process to manufacture fine writing and printing papers from old corrugated boxes will come on stream at Cornwall. This RBC technology (short for recycled bleached containers) positions Domtar--and Ontario industry--on the leading edge of global, recycled-papermaking technology.

While I'm on the topic of recycling, I should mention, too, that the "sandpiper" product line introduced a year or so ago by our St. Catharines Ontario mill was the industry's first 100-per-cent post-consumer, non-de-inked writing paper. And St. Catharines also produces a 100-percent-recycled file folder grade.

Elsewhere in the province, you'll find another Domtar mill situated at Mississauga, a medium-size mill at Trenton, a recently-expanded melamine panels plant at Huntsville, a gypsum board plant and a mine at Caledonia and corrugated box plants at Peterborough, Barrie and St. Marys. Right here within Metro Toronto and environs are four more Domtar box plants, our lithotech "high graphics" unit and the head offices of both Domtar packaging and our Buntin Reid Merchants Division.

Overall, there are some 4,000 Ontarians on the Domtar payroll, and Ontario customers last year accounted for more than $700 million of our $2 billion in sales. So, as you can see, we have a large presence in Ontario.

At any rate, the Domtar I joined back in 1990 was a corporation that had been very successful over the years and had a well-deserved reputation for quality products. However, it was also debt-ridden, too diversified and dominated by a production versus a marketing mindset. Drastic action was required.

Having served a stint on Domtar's Board of Directors before agreeing to take on the President and CEO's job, I was aware that it would be a character-building experience. And I can assure you that, in this respect, I've not been disappointed.

First off, action plans were put in place in every Domtar division to affect immediate, on-going improvement in three key areas:

• cost-reduction;
• product quality; and
• customer service.

To date, we've pared well over $300 million a year off our cost base while increasing our output and at no sacrifice in quality.

Incidentally, these cost reductions included reducing total personnel from 15,000 to under 10,000 and head office staff from about 700 three years ago to just over 100 today.

Having moulded the management team into a cohesive unit more attuned to the competitive realities of global commodities markets, we then devised a strategic plan that entails focussing more on fast-growing markets--particularly in the U.S.--for communication and specialty fine papers, seeking out opportunities to form strategic partnerships for some of our other businesses and exploring possibilities for the eventual divestiture of certain units.

Most important to the corporate rebuilding process has been the involvement and co-operation of our employees and their union representatives, who have teamed up with us. They recognized that their personal well-being depended on the company's survival and wellbeing. We now have agreements on job flexibility in most of our plants and contracts of five to eight years duration, which provide both stability in the work place and an assured source of supply for our customers.

I don't intend to subject you to a blow-by-blow account of Domtar's recent operating history. Suffice to say that, after some very tough times, we're finally turning the corner. In the third quarter of 1993, Domtar reported its first operating profit since the opening quarter of 1990.

The point is, we've been through the same type of painful adjustment that many other companies and, indeed, the entire Canadian economy has had to endure and we're coming out of it a stronger organization. And I am confident our organization is ready to seize the new trading opportunities being created by the NAFTA and the GATT.

In fact, we've been enjoying considerable success of late on international markets, particularly with high-value-added products such as our security-paper products that are used for currency, passports, postage stamps and stock certificates.

However, global trade is a two-edged sword, providing both increased opportunity and increased competition. While Canadian companies are looking to conquer new markets abroad, predators from the U.S., Europe, Latin America and the rapidly-emerging economies of Asia are targeting our home base.

Take, for instance, the security-paper segment I just mentioned. We're one of only five established major players in the global market for these very specialized products. The Canadian bank notes you're toting around in your billfolds or handbags are all printed on Domtar currency paper, as are the new Canadian passports. And the technical expertise we've built up over almost a century is recognized world-wide. But, as in virtually every other market segment, we're facing potentially tough new competition--in this instance from South Korea. So despite the success we're enjoying, despite our long-established track record in this field, we can't afford to relax our efforts--not for a moment. The future is not what it was.

The scenario is similar wherever you look and whatever line of business you happen to be engaged in. Our global business aspirations will be fully realized only as a result of sound strategies backed up by a lot of persistence and patience. We mustn't expect to take the world by storm overnight, and we must be prepared for potential pitfalls--especially given the fact that the global economic outlook is not all that bright, clear or predictable.

Lester Thurow, the noted MIT economist, believes the world economy will grow only slightly, if at all, over the next 10 years. Global economic growth has, in fact, been in steady decline for some time now, falling from an average of 4.9 per cent in the 1960s to 2.7 per cent in the 1980s and less than one per cent in the 1990s. And Mr. Thurow sees an average of no more than one per cent growth over the next decade.

Or course it remains to be seen whether or not Mr. Thurow and other economists are correct in their forecasts. In the not-too-distant past, when economic cycles followed a fairly regular pattern, experts could predict with a good degree of certainty what lay ahead and governments and the business community could prepare themselves accordingly for the future. But as economic rhythms have changed, accurate forecasting has become a more difficult game.

One thing is clear, however. Changes are in order for Canada and Canadian companies if they hope to compete successfully with the world's best. Only those organizations which succeed in implementing strategies to meet and better the competition in terms of price, product quality and customer service will survive.

Customer service--an aspect of business that used to receive scant attention at many companies--has assumed unprecedented importance in terms of competitiveness. Gone are the days when it was sufficient to fill orders more or less on time and to respond to complaints with an air of politeness but little sense of urgency.

At Domtar, it's become standard practice to have not just sales staff, but also product development, technical and production personnel working hand-in-hand with customers to help solve problems and ensure that their requirements are met to the letter. Virtually all of our divisions are involved in long-term partnership-type relations with major clients--relationships which often entail actually guaranteeing that the customer will save money and/or improve its productivity by dealing with Domtar.

Significant service improvements are evident in every aspect of business, from order-taking to invoicing. We offer just-in-time delivery for a roll of newsprint or a skid of photocopy paper--something unheard of in our industry only a few years ago. And this sort of pampering is no longer considered exceptional by customers. Rather, it's expected. Like I said, the future is not what it was.

Despite major losses experienced over the past few years, our industry has made significant expenditures on both environmental protection and capital improvements. During the 1980s, for example, pulp and paper producers spent $45 billion on capital improvements. They'll spend an estimated $50 billion more between now and the year 2002. And some $5 billion is being invested to improve environmental protection performance alone between 1989 and 1995.

Not surprisingly then, one of the big issues facing my industry is the availability and cost of capital. The fact of the matter is that capital in Canada costs between 1.2 and two percentage points more than what our competitors in the United States are charged. And the spread is much larger when you compare the cost of money in Canada with borrowing costs in Japan, Europe or many other emerging industrial regions. Furthermore, the U.S. industry has an additional advantage in that, for years, it has had access to environmental bonds which reduce the cost of capital for environmental expenditures by an additional 25 to 35 per cent.

As you can no doubt understand, we'd like to have access to similar financing instruments, so as to put us on a level playing field with our American competitors.

Investment in infrastructure has to involve investment in people as well. Technological advancement entails innovation, and successful innovation requires a mutual understanding and co-operation between labour and management.

Among other things, employees must demonstrate a willingness to undertake different jobs and to consider different forms of remuneration tied to their performance. Labour and management must work as a team to instil a sense of personal accountability in workers on the shop floor, and to ensure that all employees share directly in both the responsibilities and the rewards of work. Management leadership exercised through power alone will no longer work. Today, we must exercise our management prerogative more through persuasion.

At Domtar, we feel very strongly that establishing and maintaining a meaningful partnership with our workers is absolutely essential to the corporation's future well-being. Although forests and natural resources are very much our stock-in-trade, it is the effective involvement of human resources that will ensure our ultimate success. A properly-motivated, highly-trained work force sufficiently empowered to put that knowledge to good use is crucial.

In today's ultra-competitive world, we can no longer muddle through with under-educated, poorly-trained employees. Whatever field of endeavour you're engaged in, knowledge is power. It's that simple.

If the team approach is to succeed, management must be prepared to restructure the organization to accommodate new knowledge--and this requires constant adjustment. It also means decentralization, so that decisions can be made quickly. And as a new style of management emerges, decisions cannot be based on economic performance alone. They must also reflect the changes in society at large, taking into account the potential impact on employees, the environment, customers and the community in which the company resides.

I instinctively avoid being drawn into political discussions. But with an election coming up in Quebec this year, it would probably be remiss of me, before concluding my remarks, not to at least acknowledge to a Toronto audience that there is some cause for anxiety.

The sort of counter-productive political partisanship that has so long dominated federal-provincial and inter-provincial relationships must be abandoned if we are to survive and prosper as a nation. Mr. Chretien himself has remarked that the best thing he can do to convince Quebeckers of the wisdom of staying in Canada is to provide good government.

I'm encouraged by the positive noises that emerged from the First Ministers' conference held in Ottawa just prior to Christmas. The apparent willingness of the premiers to work together with Ottawa in a constructive fashion--be it in the form of an infrastructure programme or the elimination of provincial trade barriers--is a positive development, a refreshing change from the jurisdictional squabbling we've become accustomed to.

There are some hopeful signs on the economic front as well. Inflation is the lowest in three decades. Domestic cost pressures are stable. Unit labour costs have fallen on a year-over-year basis for the first time since 1962. Monetary conditions have eased. Short-term interest rates are at their lowest levels in 30 years and have closed in at least somewhat on U.S. rates. And the lower Canadian dollar can only help stimulate our export-oriented economy.

However, make no mistake. Political considerations aside, the recovery is still very slow, and it is part of a major transition to a new kind of economic reality that is propelled by new international forces. If we are lucky, and if we marshal our forces well, Canada and Canadians will prosper by the turn of the century. But first we must get our house in order. So we are looking forward--not without some trepidation--to the commencement of the new Parliament next week and to Mr. Martin's first budget.

That's not to say we business leaders should sit back passively and wait for government to lead us out of the woods--not at all. The challenge facing us today is to take full advantage of the new knowledge and incorporate it into our organizations. We don't need government to direct or impose. It can only provide the appropriate legislative and policy framework in which to operate.

We do not need more royal commissions, more studies, more economic conferences to debate, consider and recommend what should be done. What is needed is the will to get a move on--away from the daydream approaches and excessive practices of the past for which we are now paying such a high price, and into a certain future of prosperity, pride of place as a nation and pride of person as Canadians. With that will surely come a happy and prosperous new year.

It was exactly 90 years ago this week--on January 1, 1904--when Sir Wilfrid Laurier, speaking to The Canadian Club of Ottawa, uttered those famous words--the 20th century belongs to Canada. Now as we move towards a new century I wouldn't be quite so bold in my predictions. But, dominance aside, there is no question Canada can enjoy renewed prominence in the global scheme of things--provided we show the necessary resolve.

As I remarked earlier, the future isn't what it was. Rather, it is what we choose to make of it.

Thank you.

The appreciation of the meeting was expressed by John F. Bankes, President, Nova Bancorp Group and a Past President, The Empire Club of Canada.