BUSINESS

Mississippi blues

The Loewen Group’s recent woes provide a resonant and cautionary tale for all managers

DEIRDRE McMURDY February 12 1996
BUSINESS

Mississippi blues

The Loewen Group’s recent woes provide a resonant and cautionary tale for all managers

DEIRDRE McMURDY February 12 1996

Mississippi blues

The Loewen Group’s recent woes provide a resonant and cautionary tale for all managers

THE BOTTOM LINE

DEIRDRE McMURDY

The Loewen Group's neardeath experience in the state of Mississippi has brought new meaning to the term "capital punishment."

The B.C.-based funeral services chain wobbled on the brink of bankruptcy late last month when a rumble with some local lads from Biloxi turned ugly. Loewen Group grudgingly paid out $240 million at the eleventh hour to resolve a dispute over a funeral insurance contract. But the company’s buoyant share price has been battered. It’s now stuck with a hefty tab for the settlement. Even worse, the whole episode has badly bruised investor confidence. About 67 per cent of its shareholders are in the United States. And that’s a critical capital market for companies like Loewen Group that make a practice of growing through relentless acquisition.

Ray Loewen, the

founding father and a major shareholder in the company, wants to drive past the scene of the accident as quickly as possible. Other expansion-minded managers, however, should carefully consider the lessons of Loewen Group’s recent skid before they venture too far from home. Stripped of some of its more bizarre southern gothic trappings, this

is a resonant, cautionary tale that cuts to the heart of several worrisome questions. How can Canadian companies thrive in emerging foreign markets if they can’t hold their own in much more familiar terrain? At what velocity do the wheels come off a hyper-aggressive strategy of growth through acquisition? How long does it take to restore investors’ mangled trust once it has been tested?

Initially, at least, it’s hard to suppress a pang of sympathy for Ray Loewen. He’s a plainspoken, small-town guy from Manitoba. Armed with a bold strategy and a flair for finance, he parlayed his Mennonite family’s funeral parlor into the secondlargest publicly traded funeral services company in North America. On the surface, Loewen Group’s Mississippi mishap is just a case of outrageous misfortune. After all, who could have imagined that a jury would turn a $ 10.8-million spat over a routine business matter into a debilitating

$675-million judgment against the company?

Well, the answer is that someone should have imagined it, because that’s what senior executives are paid great whacks of cash to do. (In 1994,

Ray Loewen collected salary and bonuses of $906,000.) The shareholders in public companies entrust management to employ due dili^t-nce to protect their investments and dodge any nasty surprises. In this case, the top brass at Loewen Group did nothing of the sort. They grossly miscalculated a delicate situation and they continued to reassure shareholders that all was well, even as things careered out of control.

Perhaps because of the dizzying pace of the company’s growth, Loewen Group managers didn’t realize that they had landed in the corporate equivalent of Oz. But there’s never an excuse for losing your bearings to that ex-

tent. And it’s even less acceptable to overlook the importance of adapting to the local style and customs when doing business beyond your own borders. It’s a pretty safe bet that the folks in Biloxi approach things a little differently than residents of Toronto or New York City, especially when the plaintiff’s lawyer successfully depicts you in court as a

price-gouging foreigner, which is exactly what happened.

But Loewen Group’s most destructive stumble was the violation of its investors’ trust. A crisis of confidence can be a costly thing: in competitive international capital markets there’s a greatly reduced threshold for management blunders. There’s no need to stick with a team that doesn’t deliver when there are so many other choices available.

Furthermore, it often takes years to overcome skepticism about executive competence or credibility. Ray Loewen has directed considerable effort to smoothing and soothing ruffled feathers in the investment community. But even though Loewen Group’s stock has rebounded to about $40 since the settlement was announced, it’s still a fair distance from its 52-week high of $56. It may be too early to bury Ray Loewen, but it’s definitely too late to praise him.