BUSINESS WATCH

The Canadian style: rewarding failure

We may be the only indudustrialized nation that places a premium on corporate bungling—provided it is spectacular enough

Peter C. Newman August 12 1991
BUSINESS WATCH

The Canadian style: rewarding failure

We may be the only indudustrialized nation that places a premium on corporate bungling—provided it is spectacular enough

Peter C. Newman August 12 1991

The Canadian style: rewarding failure

BUSINESS WATCH

PETER C. NEWMAN

Each decade has its mantras, and for the 1990s, we seem so far to be stuck with “competitiveness,” a worthy but much misunderstood concept. Competitiveness is usually measured by such boring criteria as productivity increases, technological-infrastructure ratings, along with resear ch-and-development ratios. Those are all vital indicators of how we collectively stack up in our ability to sell on the international marketplace, and the bottom line is simple: we are unable to effectively compete. A recent “World Competitiveness Report” published by the Switzerland-based World Economic Forum gives Canada high marks for cheap electricity and medicare, but leaves the country at the post in terms of our international orientation—we rank 15th out of the 23 OECD countries surveyed.

One reason we are unable to play effectively in the big leagues is that we have a bad vocational training record and cannot get our constitutional act together. Being the Yugoslavia of North America is bad enough, but the kind of productivity gains required to access the world marketplace are just not there.

The federal government’s own discussion paper, “Prosperity Through Competitiveness,” documents the remarkable recent downward spiral in Canada’s productivity growth rate, which essentially measures output per worker—from an annual average of 2.7 per cent between 1967 and 1973, to 0.9 per cent for the decade following, to no increase at all since 1985.

But the real problem has more to do with attitude than anything else. Canada may be the only industrialized nation in the world that places a premium on bungling, provided it is on a spectacular enough scale. The head of a Japanese company in trouble resigns in disgrace; here he is paid a bonus or granted an extra-generous golden parachute. Nobody seems willing any longer to accept the responsibility for wrong decisions.

The most spectacular recent example of this phenomenon is, of course, Robert Campeau,

We may be the only indudustrialized nation that places a premium on corporate bungling—provided it is spectacular enough

whose personal brain waves converted a perfectly good real estate company into an unsalvageable fiscal wreck. His crazy purchases created a $ 12-billion debt, driving down the value of his stock from a 1987 high of $30.38 to its current level of 50 cents. Does he have any regrets? Does he admit that he might have erred, just a touch? No way. He has taken his own company to court, demanding extravagant retroactive salaries and bonuses for his brilliance as a corporate strategist.

Or take another shining galaxy in the Canadian mismanagement sweepstakes—the executives of Dofasco Inc. Once Canada’s model corporate citizen, Dofasco, in 1988, began to invest a total of $713 million in Algoma Steel Corp. Ltd.—and lost every blessed penny of it. Did chairman Paul Phoenix and president William Wallace express any doubts about their decision-making process? Did they think of stepping aside? Hell no. During 1990, when much of the $713 million was lost, Dofasco’s senior management voted itself $1.6 million in executive bonuses on top of its $4.3 million in salaries. Phoenix and Wallace continue running the company, oblivious to any hint they might resign for almost sinking one of Canada’s great companies.

Although its losses are not quite as spectacular (because it has a smaller accounting base), Domtar Inc., the once immensely profitable Montreal-based conglomerate, last year lost $294 million and wrote down the value of nearly all its assets. The company that formerly consisted of 25 moneymaking forest-related paper and construction companies suffered major layoffs at its 12 surviving businesses: one-quarter of its salaried employees are being let go, and many of its unionized workers are out of a job.

Most of Domtar’s troubles are due to its illconceived and badly managed diversification policy of the mid-1980s, masterminded by chairman James Smith and chief operating officer Raymond Pinard. In a rundown of some of their many catastrophic decisions, the Toronto Globe and Mail singled out as “its most colossal blunder” the purchase in 1987 of Genstar Gypsum Products Co. and its five U.S. wallboard plants for $314 million. One plant is now closed and the others are in trouble. This duo of rocket scientists was rewarded for destroying what was once a jewel of a company with nearly $2 million in salaries, bonuses and special payments.

Smith received $857,362 on top of his regular salary of $424,160 when he left in August, 1990—which included $267,779 for unused vacation time. Pinard, who departed on May 31,1990, collected $623,856 for five-months’ work: $193,290 salary plus an extra $165,000 as a special payment in consideration of his long service, and $265,566 for unused vacation time. None of these extravagant handouts included pensions. By the simple act of leaving, Smith kicked in an astonishing pension plan designed to pay him $430,766 a year for life, while Pinard must make do with an annual payout of only $327,804.

It is, of course, unfair to single out these three companies, not because the facts and figures cited have been exaggerated, but because this style of rewarding executives who have made foolish and often stupid decisions that threaten the welfare, and even long-term existence, of their companies has become entirely typical of the Canadian business ethic. That is one reason Canadian stocks are so undervalued. Why should anyone buy shares in companies that not only allow their directors and executives to screw up, but actually reward them for it?

It happens with businesses big and small. When Chicken Chicken Inc., a poorly run fastfood franchisor, went bankrupt last spring, John Gillespie, the company chairman, attended the first creditors’ meeting during which the company was dissolved. No matter what information the hapless shareholders and franchisees demanded, Gillespie sat there not saying a word, although he had previously been only too happy to take their money.

Complained Peter Menoutis, one of the failed franchise holders: “He’s the head chicken, and he’s flown the coop.”

Canadian business will never be competitive until our chickens stay home to roost and our bungling executives are not allowed to fly the coop.