BUSINESS/ECONOMY

A backbencher crusade

MARC CLARK May 26 1986
BUSINESS/ECONOMY

A backbencher crusade

MARC CLARK May 26 1986

A backbencher crusade

BUSINESS/ECONOMY

Next month, in the historic, high-ceilinged Railway Committee Room on Parliament Hill, an obscure committee of 11 MPs will hold an extraordinary hearing. The Commons standing committee on finance and economics will hear testimony from Bernard Ghert, chief executive officer of real estate giant Cadillac Fairview Corp. Ltd. of Toronto. Ghert, who in the past year has become increasingly public in his criticism of corporate concentration, has already told the committee that he is convinced that in at least one instance the senior executives of a giant Canadian conglomerate ordered a financial institution which they controlled not to lend money to competitors. Providing blanket parliamentary protection from prosecution, members of the committee will ask Ghert to name the individuals and companies involved. If Ghert’s testimony proves as sensational as the committee members are quietly predicting, it will set the stage for an inquiry into corporate abuse of power that could redraw the contours of Canadian business.

Using Ghert’s testimony as a springboard, the committee members said they expected to explore a series of abuses of power by conglomerates—particularly those that control financial institutions. Currently, no company or individual may own more than 10 per cent of a major Canadian bank. But there is no ownership limit for trust, loan or insurance companies, leaving them open to domination by a single shareholder. The ultimate goal of the committee, according to Tory chairman Donald Blenkarn, is to force the government to pass laws preventing any individual or company from gaining control of major Canadian financial institutions.

Because most institutions are already owned by conglomerates, the committee’s stated aim is to force the owners to sell off most of their share holdings in trust and insurance companies. In that, the committee will not only challenge the government, which has rejected ownership limitations, but will also issue a direct challenge to the most powerful corporate barons in Canada.

For many of the committee members it is a stand that threatens their own

reputations and their political futures. That is particularly the case with Paul McCrossan, William Attewell and Blenkarn, three Toronto-area Conservative MPs who are leading the battle. But the members of the committee say they are convinced that it is a risk worth taking. Said Attewell: “We’ve come to a fork in the road of Canadian economic development. There are simply too few people controlling too much of the destiny of this country. To not pursue the point would be frankly irresponsible.”

That stand has already drawn criticism from Trevor Eyton, the president of Brascan Ltd., the mammoth Toronto-based holding company that is at the heart of the corporate empire controlled by brothers Edward and Peter

Bronfman. Brascan, through holding companies, controls Royal Trustco. Ltd. (with assets of $13.5 billion), London Life Insurance Co. (assets $6.4 billion) and Wellington Insurance Co. (assets $316 million). Earlier this month, at Brascan’s annual meeting, Eyton said that “commentators in the press and in parliamentary proceedings” are arousing a “semihysterical debate over corporate concentration.”

The committee’s sense of unity and determination is unusually strong. The members of the finance committeeseven Conservatives, two Liberals and two New Democrats—have for the most part abandoned partisan positions and are working closely together. For many of the members, particularly the

veteran MPs, that is a refreshing change. Said Liberal member Aideen Nicholson: “After 12 years of sitting on committees, it’s nice to see one that finally works the way you thought they were supposed to.”

The committee first flexed its muscles last November when it released a report that amounted to a scathing critique of government policy. Charged

with examining a green paper on the regulation of financial institutions released by Barbara McDougall, the minister of state for finance, in April, 1985, the committee held five months of intense hearings. All the MPs said they were convinced by the testimony that the only way to assure the health of the Canadian financial community was to adopt ownership restrictions, rejected by McDougall’s paper. Committee members said that they were particularly alarmed by the phenomenon of self-dealing, which occurs when a financial institution controlled by one owner is forced to do business with other companies also owned by the firm. And they expressed concern about the possible abuse of depositors’ money.

Five months later the finance committee saw another opportunity to

press the government on the issue of corporate ownership. In late March, Imasco Ltd., a Montreal-based conglomerate which controls food, tobacco and drugstore companies, announced that it was attempting a $2.4-billion takeover of Genstar Corp., a San Francisco-based conglomerate which had interests in real estate, construction materials and transportation. But the real gem in the Genstar empire was Canada Trustco Mortgage Co., the country’s sixth-largest financial institution. Genstar had acquired Canada Trust in August, 1985, and intended to merge it with Canada Permanent Mortgage Co., which it had purchased in 1981. In November, a month before the merger was to formally occur, the finance committee urged McDougall to block it. McDougall said it was too late to reverse the deal. McCrossan said that he resolved to make the committee’s point more forcefully the next time.

On March 24, when Imasco announced the takeover, McCrossan asked McDougall during question period if she intended to prevent it. McDougall replied that the government would watch it closely. To his great surprise, McCrossan said, the opposition failed to follow up with additional questions. Two days later McCrossan requested a special debate on the finance committee’s ownership proposals. That unusual action by a government member led to speculation in the media that McCrossan was leading a backbench revolt against the government. On April 7 the finance committee discussed the Imasco transaction and unanimously voted to urge the government to ban takeovers until new ownership regulations were in place.

The same day, Finance Minister Michael Wilson, the minister to whom McDougall reports, offered to strike an accord with McCrossan. Wilson, McDougall and government House Leader Ray Hnatyshyn told McCrossan that McDougall was to introduce legislation that day that _

would allow her to block the takeover retroactively. They asked McCrossan to drop his request for a special debate, and McCrossan agreed to do so. But two days later, on April 9, McCrossan once again became involved in the takeover discussion. During a meeting with Imasco president Purdy Crawford, McCrossan insisted that the Conservative members of the finance committee would withdraw their objections to the purchase of Canada

Trust if Imasco acceded to a set of conditions. Those included stipulations that no subsidiary or affiliate of Imasco would engage in any self-dealing with Canada Trust, and that if the government later asked Imasco to sell some or all of Canada Trust in the open market, it would do so.

Imasco at first refused to consider those conditions. The next day, at a special meeting of the Tory caucus, McCrossan outlined the proposal he had made to Crawford. It would form the basis for negotiations between McDougall and the company.

On April 16 McDougall told an Imasco executive by telephone that she was having two press releases prepared, one saying that Imasco had accepted the proposal, the other announcing that she would prevent the sale. Imasco had until midnight Wednesday to respond. Shortly after 12 p.m. that night Imasco called back to accept the deal. Two days later, after McDougall publicly announced the compromise, she and McCrossan celebrated over a two-hour lunch at a private club.

But even then, both MPs were aware that the finance committee had already laid the groundwork for another round in the debate over corporate ownership of financial institutions. On Saturday, April 12, McCrossan had heard of a CBC Radio interview with Canada Trust’s chief executive officer, Mervyn Lahn, in which Lahn mentioned several instances of self-dealing between Genstar and Canada Permanent. On Monday the committee took action. An experimental parliamentary reform package introduced in February had given the committee broader use of its power of summons, a kind of parliamentary subpoena that has been used by committees only twice in the past decade. At McCrossan’s suggestion, the finance committee used that power to summon Lahn to testify, along with Angus MacNaughton and Ross Turner, Genstar’s chairman and president respectively. _ The committee decided to extend its net even further by summoning three other powerful executives: Brascan’s Eyton, and two other executives with Brascan subsidiaries, Melvin Hawkrigg and Robert Dunford. The MPs wanted to talk to the Brascan executives specifically about a complicated ex2 ample of self-dealing in which one Brascan subz sidiary had acted as a I broker for Trilon Finan| cial Corp., another Bras§ can subsidiary, u Two hours before the

hearing began on April 21, McCrossan assembled the committee members to discuss their strategy. Over dinner in a private room off the parliamentary restaurant, he and Attewell briefed the other MPs on instances of self-dealing between Genstar and Canada Permanent and between the two Brascan financial companies. “There was a sense that history was being made and new ground being broken,” recalled NDP member Simon de Jong. “But there was concern that some kind of decorum be maintained.” In fact, McCrossan’s briefing notes said: “The credibility of the committee and parliamentary reform is at stake. We must not let this turn into a zoo.”

During the evening hearing, the committee members questioned the Brascan executives on details of the Trilon deal. They also focused on transactions between Genstar and Canada Permanent in the months immediately following Genstar’s purchase of the company for $288 million. Genstar executives revealed that between 1981 and 1983 Canada Permanent paid Genstar $116 million—$87 million in cash and the rest in shares— for a Genstar mortgage subsidiary. It also paid Genstar $93 million in cash for several pieces of real estate. And in a complicated three-way leasing arrangement involving construction equipment, Canada Permanent effectively transferred $63 million to Genstar through a third party. Said McCrossan: “None of the transactions is illegal; all of them can be commercially justified. But the effect was that the depositors’ money was used to buy their own company. It’s those sorts of transactions which the finance committee is objecting to.”

Meanwhile, the use of the summons had an unexpected impact.

After several newspaper stories appeared noting the rare use of the summons, committee members had begun receiving calls from senior business people eager to support their stand—and to point out at least nine potentially sensational cases of abuse of power by corporate conglomerates. Among the charges: that on at least one occasion the head of a large Canadian company ordered the executives of a trust company which it controlled not to advance business loans to a competitor.

Another allegation about another kind of abuse of corporate clout: that a senior officer of a well-known conglomerate contacted an executive of a major Canadian bank and told him that he would lose a great deal of the compa-

ny’s banking business if the bank proceeded with a contemplated action. Since they have learned of those charges, several members of the committee have been trying to confirm them. Several of the MPs say they recognize that the allegations are potentially explosive. “We’ve got to be prudent,” said Blenkarn.

Even if the charges are proven to have substance, the committee’s task will be a difficult one. The debate over corporate concentration has traditionally preoccupied the Canadian business establishment. Currently 10 conglomerates—eight of them controlled by individuals or family groups—control 35 per cent of the Toronto Stock Exchange

300, a composite index of the major publicly traded Canadian companies. But there has been little pressure on governments to restrict conglomerate growth. “The reach and influence of these companies is extraordinary,” said William Stanbury, a professor of competition policy at the University of British Columbia. “But the fact is that, historically, Canadians simply don’t fear concentration of power, either public or private.” He added that only a

surge of public pressure arising from “an unbelievably outrageous scandal” might force Ottawa to act against conglomerates.

The committee is also fighting against time. Parliament will adjourn for the summer at the end of June, and McDougall is expected to introduce legislation regulating financial institutions soon after it resumes in September. “If we want to make our point,” said Nicholson, “we’re going to have to make it soon.”

The testimony of Bernard Ghert could mark a turning point. As the chief executive officer of Cadillac Fairview, Ghert is associated with another set of Bronfman brothers—Edgar and Charles—who also control The Seagram Co. Ltd. Cadillac Fairview owns more than $3 billion in shopping malls, office towers and industrial sites. Ghert, an outspoken critic of corporate concentration, told Maclean's that he does not know firsthand of cases of abuse of conglomerate power. But he added that he has “heard talk” in the business community of many cases. In at least two instances, Ghert says he is convinced that the allegations hold substance. If the committee asks Ghert to name the sources of his information— and McCrossan has told Maclean’s that it will—he will identify two senior executives. He says that both are “highly reputable individuals” with direct knowledge of the events. McCrossan said that the committee would summon the two people to testify.

The finance committee arrived at its singular determination and unanimity after months of hard work. Long hours spent together during hearings and travel last year cemented ties of loyalty and mutual respect which are evident at committee hearings. Attewell, who has 35 years of experience in the finance community, and McCrossan, an actuary who has held senior executive positions in the insurance industry, freely offered the benefits of their experience during the hearings. “Their technical expertise was invaluable,” said the Liberals’ Nicholson. “In many ways,” added de Jong, “they educated the other members of the committee.” The gregarious and independent-minded Blenkarn encouraged co-operation. “When his own party members become overly partisan he’s just as willing to cut them off at the knees,” said committee member and NDP finance critic Nelson Riis.

With few resources and little government backing, the committee has turned its battle against corporate concentration into a crusade. Its target is the Canadian establishment itself.

—MARC CLARK in Ottawa