Once upon a time, I invented the notion that there existed in this large, amorphous land of ours a tight-fisted cadre of elitists who controlled Canadian business—lock, stock and oil barrel. The intimate workings of this confederacy of high-octane influence peddlers was laid out in a baker’s dozen of my books, published under the umbrella title, The Canadian Establishment. The series sold more than a million copies and created fascinating new stereotypes.
That was no simple parlour trick. The exercise of power on the windy side of the 49th parallel has been reptile quiet, its intensity muted by a kind of “who me?” quality. Canada’s elite consisted of an informal junta of several thousand circumspect pragmatists, linked more closely to one another than to their country. I broke through the barriers and interviewed the many business aristocrats who had never before confided in “the blackguards of the press.”
The Canadian Establishment’s exercise of authority was never subtle. It was strong armed—aimed directly at fulfilling Bertrand Russell’s description of power as “the production of intended effects”—five words that precisely defined corporate influence and how it dares to be exercised. It was James Eayrs, the former University of Toronto political scientist, who got it right when he declared: “Corporate power is not tangential to Canadian society. Corporate power is Canadian society.”
Gradually, the power holders passed on or vanished behind the palisades of mansions, where they could escape notice and quietly marinate. Their names and their titles changed, their presumption of worship did not. At least, not until recently. These vanquished knights fell victim to their own success: their fever in the blood placed entitlement ahead of talent, which robbed them of the ability to perform those intuitive leaps that great business deals require.
It is not simple to pick an exact date when the Establishment vanished from being a decisive factor. Perhaps it was as far back as a certain implausible evening in 1993, at Montreal’s hallowed Mount Royal Club, whose main entry qualification required that you could strut while sitting down. That was where the Cigar Dinner was held, organized by Lynton “Red” Wilson, then chair of BCE Inc., Canada’s largest and richest corporation. His choice of speaker was Marvin Shanken, then editor of Cigar Aficionado, who had come north to instruct the amateur stogie-puffers among the Canadian elite in proper etiquette.
The ranking guest of honour was governor general Ray Hnatyshyn. The visiting American editor couldn’t figure out what the governor general’s grandiose title was all about, so he kept addressing his excellency as, “your admirable.” The club quickly became choked with the fumes of 45 cigars. Soon it became not only hard to breathe, but difficult to recognize anyone on the other side of the room. Finally the GG broke the ice and asked Shanken a question. “Now Marvin, tell us,” he said, “do you begin the day with a tiny cigarillo and work your way up to a man-size cigar, or what?”
“No way, your admirable,” Shanken shot back. “I just light up one big motherf–ker at seven in the morning and it keeps me in orbit all day.” Thus died the Canadian Establishment—at the Mount Royal Club, vaporized by cigar smoke and Yankee slang.
It’s an often-repeated story at the highest circles of the in-crowd, but it doesn’t explain how the Canadian Establishment, which by then was already fading, lost its mojo. Its influence eroded over time; the power links grew weaker; the marketplace became more complicated; the old boys’ club went ga-ga. They made too many mistakes in judgment and substance, too publicly.
The accumulation of wealth and power in this country used to be a gradual process. All that changed during the 1990s, when fortunes were made, if not overnight then over long weekends, by the warlords of the new technology. Inexhaustible investment funds and inflated expectations flooded the international marketplace. Instant corporate gratification became the order of the day. For a while it worked, and dozens of once-humdrum Canadian companies became world-class players, from Nortel to JDS Uniphase.
Canadian tax rates, the cobweb of Ottawa’s restrictive regulations, and our frigid climate could all be bypassed by expanding into foreign territories. By 1998, of the world’s 100 largest economies, less than half were countries; the balance consisted of transnational corporations, at least a dozen of them flying Canadian banners. Most of the Establishment types opted out of that flying circus. High flyers they might have been, they were not adaptable enough to deal with a world in which the average professional stock trader held on to his pick for 2.2 seconds—on a slow day.
When the century turned, so did the markets. Between the spring of 2000 and the summer of 2002, U.S. equity values lost an estimated US$7 trillion, grounding many of our most daring entrepreneurs. Many of our best-known corporate brands have vanished. The tsunami of change spared no one.
I had correctly identified Montreal’s Bronfman family as “the Rothschilds of the new world”—rich beyond calculation and smart enough to master the money culture. And yet they didn’t get beyond their third generation before sabotaging their unlimited credit lines. They became victims of the fantasies of Edgar Jr., the founder’s grandson, who was handed power and bet the family farm on the music business, losing the dynasty’s liquor empire and chemical holding in the process.
In 1994, when he succeeded his father as head of Seagram, which was Canadian-based and one of the world’s largest liquor empires, his first big decision was to sell its US$11.7-billion investment stake in E.I. du Pont de Nemours and Co., the giant U.S. chemical conglomerate and the safest investment on the Big Board. He used the funds to go on a wild buying spree, trading plastic for pop by snapping up MCA Inc. and PolyGram, the world’s biggest record labels. By then, the lapsed DuPont investment would have fetched US$28 billion, but at least the family still held 120 million shares of Seagram stock, worth $7 billion.
Young Edgar soon took care of that. He sold controlling interest in the family firm to Vivendi SA, the upstart French media empire, opting to take its shares in return for the Seagram grubstake. That gamble turned sour as Vivendi stock, dragged down by a debt load of $30 billion, went into free fall. (In 2011, a French court convicted Edgar of insider trading when he has vice-chairman of Vivendi.)
Other corporate cripples on the list were not yet ready for the dumpster. But such mighty Earth-shakers as Nortel, which once boasted a market capitalization equal to half of Mexico’s GDP, started a spiral into bankruptcy. With John Roth as its CEO, its share price tumbled twenty-fold. He left with a $130-million package.
At each year end, several wounded corporate giants reached the danger point. What happened was that reducing costs was also cutting revenues, and that was a vicious circle that spelled disaster if the fiscal hemorrhage wasn’t stopped. BlackBerry, meanwhile, the conversation stopper that was supposed to lead us into new frontiers, remains more of a hope than a reality.
Canada lost many other major corporations to a foreign takeover tidal wave. Outstanding examples included Inco, Alcan, Westcoast Energy, Canadian Hunter Explorations, Gulf Canada Resources, Anderson Exploration, Berkley Petroleum, and all of our basic steel companies. While the big boys were duking it out, the worst hit were the family-owned firms, led of course by Eaton’s, the once impervious retail chain that entered bankruptcy protection in 1999.
As part of the establishment’s demise, Quebec entrepreneur Charles Sirois, whom I billed as “the next master of the universe,” holds a very special place. In November 1996, during one of my interviews with him, the stock in his communications company, Teleglobe Inc., jumped $3.70. He owned so many shares (11 million) that this modest increase netted him nearly $40 million in 20 minutes. That was Sirois in full flight. Four years earlier, backed by Ted Rogers, he launched a successful hostile takeover and captured control of Teleglobe, then a sleepy Montreal outfit that owned the monopoly on Canadian overseas phone calls. Sirois pledged to turn Teleglobe into a global giant. But only 23 months later new competition placed those dreams in jeopardy, and his empire began to implode. His firm suffered the distinction, in May 2002, of being assessed by RBC analyst Richard Talbot as having a “nil” outlook for the next year.
When Teleglobe began to crater, Sirois’s unlikely saviour was Jean Monty, who purchased the collapsing firm on behalf of BCE Inc., for an astounding $6.4 billion. Not too long afterwards, Teleglobe sought bankruptcy protection and its pathetic remains were sold to an American capital management firm for $155 million. In 2009, Sirois became chairman of the Canadian Imperial Bank of Commerce.
Canadian Pacific Railway, which has personified so much of our history, is a case of its own. Dating back to 1881, CPR was the company that turned Canada’s scattered provinces into a country. Then along came David O’Brien, an ultra-Establishment Montreal lawyer who was appointed to head the CPR in 1996, and decided to end the glorious railroad company’s legend. On Feb. 13, 2001, he announced the dissection of the conglomerate into five smaller operating parts: hotels, ships, coal, oil and the railway.
The idea was “to unlock shareholder value,” but in the process the new little duchies lost the protection of the parent empire. Until recently, the company has been a basket case, rated as one of the continent’s worst-run railways. The open question remains: what would CPR be worth had O’Brien made it work as a conglomerate, which it had been for much of the preceding 120 years?
The ultimate significance of this dramatic shift was the arrival in Canada of Bill Ackman, the head of his own powerful New York hedge fund, Pershing Square Capital Management. Some doubters believe that what differentiates hedge funds from other investments is that their operators fly by the seats of their pants. That was emphatically not true of Pershing’s bid for control of CPR. I had breakfast with Paul Hilal, a partner at Pershing, about three months ago. A circumspect but charming fellow, he shook me up when he confided that before making the bid, his hedge fund had conducted the most detailed research ever done on any corporate takeover target in Canada. The bill for that search came to $20 million. Think about it. That single, spectacular fact—I would suggest—signals a qualitative change in Canada’s investment world.
Due diligence is far more rigorous and competitive than anything before. That was something the Establishment had not considered, depending on their sense of entitlement to carry them through, while quaffing Singapore slings in the oxen-red leather easy chairs of their favourite clubs. Doing deals on the basis of hunches, handshakes and the occasional prayers is history.
Ironically, the CPR’s epitaph as a Canadian-run company emanates from the same source as its original, historic birth: the boardroom of Canadian Pacific Railway, whose directors in the 1880s represented the new nation’s founding elite and included half a dozen directors bearing British titles, led by former fur trader Lord Strathcona. He set the record for concentrated power, as the power behind the Bank of Montreal, the Hudson’s Bay Company and the CPR.
The new group of merchant adventurers—an apt description of the new breed that has now grabbed control of Canadian Pacific—is out to modernize and monetize Canada’s founding commercial empire. Since October 2011, when Ackman started to accumulate CPR shares, he and his people have established an enviable record: new value of $12 billion has been created in the past 16 months, as the stock price leaped from around $50 to more than $120.
What we have here is not merely a tectonic shift of generations and the advent of a revolutionary method of financing, but the birth of a new work ethic. Or put more bluntly, the arrival of a new context in which our investment industry is now bound to live and work. Meritocracies choose their own heroes. The Ackman arrival has introduced the explosive technique of the Middle Ages’ siege guns to Canadian business. With it have come fresh techniques, different timetables. In fact, and above all, a new way of doing business.
From now on contenders must earn their own way into power and all its opportunities, share its promise of independence and greater occupational freedom. And how wonderful is that? Pretty damn wonderful, I say, because success and all its advantages will at last become a great deal more accessible. Sweat equity has become the wave of the future.