How Tom Jenkins tackles the urgency of innovation in Canada

Tom Jenkins is the dynamic founder of OpenText and when you hear his ideas about how to push Canada, you know why he was able to build OpenText in a growth capital starved environment. He has just concluded the Jenkins Report for the government to understand what role it can play in building businesses. I am grateful that he is giving back. Here is his blog post about how Canada can grow in innovation:

In this series, I discussed the urgency behind stimulating innovation in Canada and how, in particular, innovation in digital media boosts productivity which is a key driver for prosperity. In this blog, I’d like to take this conversation to another level to examine how we as Canadians can do this. How can we build an innovation nation? 

1. We need to tell our stories. There is folklore here and it needs to be shared. The Canadian Digital Media Network (CDMN) and Canada 3.0 provide platforms for Canadians to tell, share and celebrate our success stories.  Both are laying the foundations for resources for future entrepreneurs, including access to mentors, information about VC funding, success stories, and more. OpenText has facilitated that conversation by powering the CDMN social collaboration platform used during and between Canada 3.0 forums.

Keynote Speech at Canada 3.0, 2011

2. We must shake off a cultural legacy of modesty and an aversion to risk taking.  This calls for a cultural shift. Starting at the elementary school level, we can form strategic programs that encourage future generations to become risk takers, welcome competition, and embrace the unpredictability of entrepreneurship that drives innovation.

3. The time is right to establish and connect communities of practice around innovation. For example, there is a gap in the VC community post dot com meltdown that we as a country need to fill.

4. It’s imperative to continue to invest in business in areas like Research and Development. Along with this investment, we need to introduce the tools and technologies to suppport the new demographic—digital natives—that are entering the workforce. This group will expect to use the same tools in the workplace that they're using at home to access, share, and manage information. Investing in R&D will lead to breakthroughs in business applications of these digital consumer tools, and push Canada to the forefront as a leader in developing breakthrough technologies.

5. Finally, we need to think globally not nationally… all the world is our stage for great accomplishments. It is crucial for Canadian businesses and academic institutions to reframe their perspective to reach beyond North America, and consider themselves competitors in the global economy.

Why Every Business Woman Should Want Aussie X

 If you watch the TED talk by Facebook’s Sheryl Sandberg on work, she talks about encouraging young girls to “lean forward”. What does she mean by that? I knew exactly what Sheryl was saying because it is what females in business face daily – how to push a point, get ahead, make a move, face down misunderstandings, quickly adapt, throw over a new proposal even though it may get rejected, get smacked down, try again in the face of failure. In other words, Sheryl wants girls to play the business game at a higher intensity than today. 

This is why the Dragons’ Den pitch by Aussie X (life changing sports programs that teach Canadians footy, cricket and netball) and their lead presenter, Kaela Bree, is so important for young girls. Kaela is actually selling shares in a company to help young girls find their inner strength. Playing netball is a wonderful training to teach girls to stand up for themselves and take action.

When I grew up in Zimbabwe, I spent hours playing netball. It took up minimal space and was mini-basketball, but far better suited to girls with nimbleness and fast analysis required to win, rather than the height or strength of basketball. I was crazy about this game and disappointed it was not in Canada. I often think about netball as I make snap decisions, pick team mates, throw the ball assertively, get yelled at by the team and work with stress. You have to lean forward, as Sheryl Sandberg says, every day and netball is one of those developmental experiences that helped me.

Although I dislike separating female from male in business and prefer to focus on pure business, I have come to see how the right attitude is critical. Instead of being “polite, young ladies” we need to encourage girls to grow their “animal spirits” as John Keynes called the drive to do business.

Female entrepreneurs who build a start-up from nothing to a small-medium sized company are doing the remarkable. The uber-pitcher on Dragons Den, Kaela Bree, happens to also be one of those female entrepreneurs achieving the impossible. Her title is Goddess Partner which I could see her Aussie X team believed. Goddess and, yes, partner who you would want on your team.

Would the Dragons see the potential though?

Yes! They got Big Jim Treliving to commit and the Aussie X team looked as if they were the Australian rugby team who had just beaten the All Blacks at the World Cup. Kaela and Aussie X succeeded in getting Jim, Boston Pizza owner, to invest as a partner. She got her strength and ability to be forceful from her netball, no doubt. 

Hmm, I wonder if Kaela asked Jim what was his favourite animal and what is his motto for living life?

I am a leopard and I choose the motto “Lean Forward” from Sheryl.

Jacoline Loewen, MBA, is a Director of Loewen & Partners Inc., a corporate finance firm working with business owners and family businesses. Loewen & Partners has raised over $150 million for owner-managed Canadian companies, as well as managing family business succession, acquisition, and final sale. She is an advisor, lecturer and writer of business strategy and private equity. Her latest book "Money Magnet: How to Attract Investors to Your Business," published by Wiley, was selected by the Entrepreneurship course at The Richard Ivey School of Business.

Jacoline began her career working for Granduc Mines in Northern British Columbia and went on to work with Deloitte in their strategy unit. She developed a strategic planning model and published it in a book called "The Power of Strategy" which went on to be a best seller. She also wrote "Business e-Volution" which helped teams understand the business opportunities created by the Internet. She writes for the National Post, Globe & Mail and hosted Financial Post Executive podcasts (available on iTunes). She organizes CEO Roundtables and other conferences in alliance with Ivey Business School, Rotman and leading law firms.

Jacoline is a Director on the Board of the Exempt Market Dealers Association (EMDA), working with the Ontario Securities Commission to establish transparency in the private placement industry. She is on the advisory board of DCL International, Bilingo China, and Flint Business Acceleration. She was on the Board of Directors of the Strategic Leadership Forum where she ran the Knowledge Café series. Her other roles include serving as a judge for the U.B.C. and the Richard Ivey School of Business' Business Plan Competitions, mentoring for Canadian Youth Business Foundation as well as being a member of The Ticker Club.

Follow Jacoline on Twitter at @jacolineloewen

What can government do to help companies attract investors?

Speaking to a returning Canadian in the pharma industry, I asked him how Canada could improve its innovation. Not surprisingly, he said through investment dollars. He did want government to get out of the way and tax less but seems that theme is not heard. As he says, Government should not be picking the winners and losers. It is too hard for people who do not have industry depth and who are spending tax payers' money, not their own.
Here are more of his comments:

Our government needs to promote investment so that companies can access some much needed capital and expertise. On the VC side, for example, the Ontario government shut down tax credits for venture funds in biotech in the same year that it launched the Ministry of Research & Innovation, which effectively directed funds destined for biotech VCs towards academia. 

VC money is smart, vetted, and accountable, whereas academic grants are not.  Academia is important, but the lack of accountability suggests it is a much riskier "investment" than similar VC funds going into a company, so governments should adjust their investment portfolio accordingly to reflect this risk profile.

On the growth capital side, small, profitable, companies are often forced into two paths to access capital: (I) IPO prematurely (at least when capital markets are healthy) and (II) seek U.S. investors.  (I) leads to management distraction and an agency cost that has the potential to side track companies that need to focus on building their business rather than appease a large segment of near-term focused capital market investors.  (II) enables companies to access deep U.S. pockets and expertise, which is great.  But U.S. investors are more likely to move companies to the U.S., especially for knowledge-based companies, leading to the hollowing out of Canada that seems to continue.  Government can help mitigate the above two fates by facilitating a stronger Canadian PE industry.  I don't know enough about PE regulation to know how this can be achieved, but promoting the raising and deployment of capital for the mid-sized businesses, not just early stage, should be a pressing goal.

 On the flip side, governments do have deep pockets and some mandate for direct investment to foster critical mass in a given industry (isn't that the whole point of subsidies?).  Government can offer grants to companies as a form on non-dilutive funding.  But I don't think government should be allocating these funds and the money shouldn't be "free".  Perhaps some kind of process could be developed where companies can access grants if they can come up with matching funds from investors that ultimately manage the co-funded investments.  Red tape does need to be minimized, or else the money just goes to the best paper pushers rather than the best investors. 

Finally, because investors need to share risk on cash-flow positive companies with lenders, I wonder if there is some kind of mechanism for government to lubricate this process (but not participate in it).  They of course do this on a macro level with lower interest rates, but perhaps there is something they can do more specifically to promote investor-lender interaction.  

Ban stock-based compensation for bank employees

Back in the '90's, when I worked as the corporate strategist for a leading bank, Derivatives and the "Quants Jocks" were beginning their creation of investments that could be sold over phones, and then the Internet. I worked for the CEO and the top 25 SBU heads. At that time, the CEO said he did not want these fancy instruments because he could not get his head around them which signalled a strong message to me as he was a very numerate man. I respected his push back frommaking a lot of fast money.
He soon came under pressure as the bank began to fall back in the public stock market performance.
Since my boss was CEO but also the founder and still the owner of majority shares, he could refuse to go down the path of paid or employee CEOs who have put the entire world economy in such a terrible state. Hired bank CEOs raced to bring in derivatives because they boosted their results; why would they care about bank performance five years from now as they would probably be gone?
Pay for performance puts pressure on employee CEOs to act in their own self interest, enrich their personal bank account and try to keep up with all the other superstar bank CEOs.
Roger Martin, Dean of the Rotman School of Business in Toronto and a prolific author, has an excellent article on this topic of how bank executives are rewarded and the havoc the past pay structures have played as a result. Here is his comment on Chuck Prince saying Citibank and all the other bank CEOs kept dancing until the music stopped:

The answer was that thanks to the structure of their compensation, major bank CEOs were obsessed with their stock price and trying to keep beating expectations until the music stopped.  And the asset-based derivatives market was their clever device for beating expectations for much longer than could have happened before – because it was the world’s first market of infinite size. And it worked for them.  When the music stopped and expectations came crashing down, they were by and large wildly rich.

Public companies, such as FHFA’s target list, operate in two markets.  In the real market, they produce and sell real services – like mortgages and mutual funds – for real customers – like you or me or your company – who pay them real money, which, in a successful company, results in a real profit at the end of the year. They also play in an expectations market, where investors observe what is happening to the company in the real market and, on the basis of that, form expectations about what will happen in the future. It is the collective expectations of investors that determine the company’s stock price.

While most assume that stock-based compensation is an incentive to improve real performance, it isn’t.  It is an incentive to increase expectations about future performance because an executive’s stock-based compensation will be worth a penny more than when it was awarded only if the executive can cause expectations to rise. So the primary incentive at all times for executives with heavy stock-based compensation is to increase expectations – even when expectations are so high they can never be met.

So how heavily stock-driven were the bank CEOs?  There is very nice data in the study of the compensation and stock sales of the CEOs of the 14 leading American financial institutions by scholars Sanjai Bhagat and Brian Bolton. Seven of the American financial institutions accounting for 94% ($116B) of the FHFA suit totals for the American firms ($123B) are included in their study (Bank of America, Citigroup, Countrywide Financial, Goldman Sachs, JP Morgan Chase, Merrill Lynch and Morgan Stanley).  It shows that over the 2000-2008 period, the CEOs of these seven companies were making small fortunes by exercising options and selling stock – an average of $139M per CEO. That is almost double what they made in cash compensation ($78M apiece). They lost, on average, $83M in the market crash, causing some to argue that they weren’t taking excess risks because they had so much skin in the game. But it is hardly a compelling argument for a group that was left with net proceeds of the 2000-2008 period of $133M each, plus remaining stock holdings of $76M each.  Remaining personal wealth of $209 million is not bad given the massive destruction of value suffered by their shareholders and the American taxpayers.

So why did Chuck Prince feel so compelled to keep dancing? Shareholder expectations for Citigroup performance just kept rising.  During the 1990s, its stock increased 15-fold. Hence, expectations of future performance for Citi rose an incredible 1500%. And they increased another 50% between the beginning of 2000 and May 2007.  Goldman Sachs almost tripled between January 2000 and October 2007.  On the other side of the Atlantic, Barclays quadrupled in the 1990s and then more than doubled between 2000 and February 2007. These were universally sky-high expectations – and their stock-driven CEOs had to keep increasing expectations from the already sky-high expectations or their stock would fall, disappointing their overly optimistic shareholders and taking a chunk out of their wealth.

Because expectations take into account everything that investors now understand, the only way to increase expectations from the current level is to positively surprise investors – to produce results better than they couldn’t have expected.  That is awfully hard to do – especially if you did it last quarter and the quarter before that and the quarter before that.  And the financial services business is hardly like the smartphone business, which is growing so explosively that all players can experience dramatic growth simultaneously.  Consumers need only so many checking accounts, savings accounts, investment services and mortgages.  Companies need only so much credit, issue so much stock, and make so many acquisitions.  None of these are the possible source of repeatedly surprisingly great growth for the entire sector.  A given player can produce expectations-busting results by grabbing share but everybody can’t simultaneously – share change is a zero-sum game.

To keep producing positive expectations surprises, the leading financial firms had to create something unreal – something with no physical limits unlike the number of consumers, or real share certificates of real companies.  Their creation was the wide array of mortgage-based derivative instruments.  There was no limit to how much of it could be produced, sold and traded – trillions of dollars’ worth, in fact. As is chronicled in Goldman’s infamous Abacus transactions, all Goldman had to do is call up a crafty hedge fund and a couple of dumb insurance companies and create a product out of thin air to make some extra bucks while taking zero responsibility for any economic consequences. And since investors were not accustomed to the creation of infinitely large ethereal markets, they would be positively surprised for a while – maybe forever, the most delusional of CEOs might have hoped.

But nothing lasts forever – even an infinitely-sized product market – and boosted by enthusiastic and self-interested bank CEOs, expectations get overly high and then crashed spectacularly back to earth in 2008.  And the world is now dealing with an entirely new task: unwinding an expectations-driven market multiple times the size of the entire global real market. No wonder it ain’t going so great!

There is much discussion of tighter regulation of the banks, now that we’ve found out how damaging bad behavior on their part could be for the economy. One regulatory change would dwarf all of the others in protecting the economy: banning stock-based compensation for bank employees. It is not so much about how much they make but what incentives their compensation structures produce. Bank executives need to be turned back to managing the real market rather than dreaming up ways – and there will always be ways – of manipulating the expectations market and making off like bandits while the economy takes it in the teeth.

Read the whole article

Roger Martin is dean of the Rotman School of Management. He is also a professor of Strategic Management at the School. A Canadian from Wallenstein, Ontario, Roger was formerly a director of Monitor Company, a global strategy consulting firm based in Cambridge, Massachusetts. He is the author of "Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL." He serves on the Thomson Reuters board of directors.

How to do a Health Food pitch on Dragons' Den

"Hi, I'm from "Hali-flax," said Brent, the pitcher of 0megaCrunch Flax, a health food. By using this corny joke to open his pitch, Brent gave a quick insight into how five years of partnering with him could feel, and the Dragons responded warmly. A sense of humour shows a great deal, for example, how Brent would build relationships with the retailers who would be selling Omega flax. 


So what the heck is flax and who cares? In any pitch to investors, the entrepreneur must illustrate very quickly why there is a burning need for their product in the market. Who would buy these jars of what looks suspiciously like hamster food? Luckily Brent had Arlene to step in and give his pitch for him. She showed why she is the Master of Persuasion and gave Robert a thorough primer on the value of flax as the miracle food to help those baby boomers. 


Next, the make-or-break question. "Sales?" 


Turns out Brent has a steady cash flow and is already working with Sobys in the Maritimes. The large retailer demands professionalism. Brent is ready to expand his territory. The business is making a fair profit but his sunk costs are growing due to marketing costs. 


Finally, it was time to try the flax. Out came a slightly sinister mascot called Flax Boy. The Dragons nibbled on the flax and I waited for a grimace. What is good for you often tastes like lawn clippings or tree bark. Evidently Omega Crunch is pretty tasty because Bruce, who has revealed himself to be a bit of a foodie and health nut, was scoffing down the stuff, "This taste is unbelievable." 


Then came his Big Jim swoop: 50 grand in dough for half the pie. No doubt, he was thinking it could add a health value to pizza crusts for Boston Pizza. 


Jim needs a controlling interest because he'll need to make business moves that may be over Brent's head and out of his comfort zone. This is the big decision for owners. Do I want to be in control or do I want to share the steering wheel and go a heck of lot further than I thought possible. It may seem obvious that Jim will bring his food industry clout and within a year, Brent will be in a far more profitable position than today. Yet for Brent, he knows it will mean a sea change in how the business will operate. 


Kevin threw in an offer with a pearl of a marketing idea: put Uncle Kevin's "smiling bald head" on the jars. That might work for golf balls but Arlene and Robert submitted their views on that idea in their diplomatic way. I did agree with Kevin about getting rid of Flax Boy, although torching him seemed a tad extreme. 


Arlene choked on Kevin's marketing plans, but made an offer with a similar financial structure that included a royalty fee in order to get paid back more quickly. This is good for a silent finance partner, but Brent knew it would kill his cash flow, which he needed to build the business. He also wanted more expert help. 


"Holy Flax! Three competing offers," said Robert. Indeed, Brent had interest but he recognized that although Jim would take more ownership of the business, he had deep food industry experience. That expertise is priceless. 


I have to say, with the dragon heavyweight on board, I'm looking forward to seeing Omega flax its muscles. 

Jacoline Loewen, MBA, is a Director of Loewen & Partners Inc., a corporate finance firm working with business owners and family businesses. Loewen & Partners has raised over $150 million for owner-managed Canadian companies, as well as managing family business succession, acquisition, and final sale. She is an advisor, lecturer and writer of business strategy and private equity. Her latest book "Money Magnet: How to Attract Investors to Your Business," published by Wiley, was selected by the Entrepreneurship course at The Richard Ivey School of Business.

Jacoline began her career working for Granduc Mines in Northern British Columbia and went on to work with Deloitte in their strategy unit. She developed a strategic planning model and published it in a book called "The Power of Strategy" which went on to be a best seller. She also wrote "Business e-Volution" which helped teams understand the business opportunities created by the Internet. She writes for the National Post, Globe & Mail and hosted Financial Post Executive podcasts (available on iTunes). She organizes CEO Roundtables and other conferences in alliance with Ivey Business School, Rotman and leading law firms.

Jacoline is a Director on the Board of the Exempt Market Dealers Association (EMDA), working with the Ontario Securities Commission to establish transparency in the private placement industry. She is on the advisory board of DCL International, Bilingo China, and Flint Business Acceleration. She was on the Board of Directors of the Strategic Leadership Forum where she ran the Knowledge Café series. Her other roles include serving as a judge for the U.B.C. and the Richard Ivey School of Business' Business Plan Competitions, mentoring for Canadian Youth Business Foundation as well as being a member of The Ticker Club.

Follow Jacoline on Twitter at @jacolineloewen

Limit a "responsible" CEO's pay to 50 times that of staff

Pay limits for CEOs seem like a generous, "equalization" solution to the debate about pay of captains of industry. Governments can put in taxes to penalize companies that pay their CEOs more than say 50 times the lowest employee pay.

Seems reasonable. This proposed government legislation would please the hipster offspring of many of my wealthy friends' "kids", 25 year old types still doing media studies at university. The type of youth seen at Occupy Toronto or OWS. Coercive Utopians - that is what we are witnessing and need to stand up and let them know the foolishness of their ideas.

Cypress stands for personal and economic freedom, for free minds and free markets, a position irrevocably in opposition to the immoral attempt by coercive utopians to mandate even more government control over America's economy.

 Solutions designed by governments may seem simple solutions, they also tend to provoke anger and disgust with business, but are often fundamentally wrong. 

We seem destined to repeat the same fights between those who work and have a backbone and those who want to be given everything. Business is tough and very fragile. RIM's slide down the hill of prosperity should remind everyone of how fleeting commercial success can be. One minute, you are the darling of hedge funds, the next minute your company is vilified for crashing the network. 

Our NDP have not worked as business owners with their own income being diminished and so they insist that business should be only not-for-profit. Even more laughable and rooted in fantasy is the the NDP's platform that does not support business that want profit. This is socialism and highly inflammatory. When will we have a government or a business leader who addresses the positive role corporations play in our wealthy society?

Back in 1996, there were business leaders willing to challenge government interference. T. Rogers had a lot to say about government bullying companies back in 1996, but I fear nothing has changed.

One Senate proposal for "responsible corporations," as outlined in the February 26, 1996, issue of Business Week, would grant a low federal tax rate of 11% to "responsible corporations," and saddle all other companies with an 18% rate. One seemingly innocuous requirement for a "responsible corporation," as proposed by Senators Bingaman and Daschle, would limit the pay of a "responsible" CEO to no more than 50 times the company's lowest-paid, full-time employee. To mandate that a "responsible corporation" would have to limit the pay of its CEO is the perfect, no-lose, election-year issue. The rule would be viewed as the right thing to do by voters who distrust and dislike free markets, and as a don't-care issue by the rest. But the following analysis of this proposal underscores the fact that the simplistic solutions fashioned by politicians to provoke fear and anger against America's businesses often sound reasonable -- while being fundamentally wrong.
Consider the folly of the CEO pay limit as it applies to Intel: the biggest semiconductor company in the world, the leader of America's return to market dominance in semiconductors, the good corporate citizen, the provider of 45,325 very high-quality jobs, the inventor of the random-access memory, the inventor of the microprocessor, and the manufacturer of the "brains" of 80% of the world's personal computers. Suppose that Intel's lowest-paid trainee earns $15,000 per year. The 50 to 1 CEO salary rule would mandate that the salary of Intel's co-founder and CEO, Andy Grove, could be no more than $750,000. Otherwise, Intel would face a federal tax rate of 18% rather than 11%. Last year, Andy Grove earned $2,756,700, well over that $750,000 limit, and Intel's pretax earnings were $5.6 billion. Seven percentage points on Intel's tax rate translates into a whopping $395 million tax penalty for Intel. Consequently, the practical meaning of this "responsible corporation" law to Intel would be this gun-to-the-head proposition: "Either cut the pay of your Chief Executive Officer by a factor of four from $2,756,700 to $750,000, or pay the federal government an extra $395 million in taxes."
The Bingaman-Daschle proposal would limit the pay of the CEO of the world's most important semiconductor company to less than that of a second-string quarterback in the NFL! That absurd result is not about "responsible corporations," but about two leftist senators, out of touch with reality, making political hay, causing harm, and labeling it "good." Their plan is particularly immoral in that it would cause the losses inherent in practicing their newly invented false moral standard to fall upon all investors in American companies, even though the government itself had not invested in those companies.
Meanwhile, my current salary multiple of 25 to 1 relative to our lowest-paid employee would qualify Cypress as a "responsible corporation," only because we are younger and not yet as successful as Intel -- a fact reflected by my lower pay. If Cypress had created as much wealth and as many jobs as Intel, and if my compensation were higher for that reason, then, according to the amazingly perverse logic of the "responsible corporation," Cypress would be moved from the "responsible" to the "irresponsible" category for having been more successful and for having created more jobs! A final point: Why should either Intel or Cypress, both companies making 30% pre-tax profit, be offered a special tax break by the very politicians who would move on to the next press conference to complain about "corporate welfare?"
How long will it be before Senators Kennedy, Bingaman, and Daschle hold hearings on the "irresponsible corporations" that pay tens of millions of dollars to professional athletes? Or are athletes a "protected group," leaving CEOs as their sole target? If not, which Senate Subcommittee will determine the "responsible" pay level for a good CEO with 30% pretax profit, as compared to a good pitcher with a 1.05 earned run average? These questions highlight the absurdity of trying to replace free market pricing with the responsible-corporation claptrap proposed by Bingaman, Daschle, Kennedy, and Reich.
In conclusion, please consider these two points: First, Cypress is run under a set of carefully considered moral principles, which rightly include making a profit as a primary objective. Second, there is a fundamental difference between your organization's right to vote its conscience and the use of coercion by the federal government to force arbitrary "corporate responsibilities" on America's businesses and shareholders.
Cypress stands for personal and economic freedom, for free minds and free markets, a position irrevocably in opposition to the immoral attempt by coercive utopians to mandate even more government control over America's economy. With regard to our shareholders who exercise their right to vote according to a social agenda, we suggest that they reconsider whether or not their strategy will do net good -- after all of the real costs are considered.

No Entreprenur wants to be a public company CEO

Like Sony and the music industry, the Public Market is dying. No Entrepreneur aspires to be a public company CEO anymore.
When I wrote that back in 2007, my publishers at Wiley asked me to remove it from my book, Money Magnet: Attract Investors to Your Business. They said it was absurd and just not true.
I was allowed to keep a few pages on the slow demise of public markets due to Sarbanes-Oxley and then Elliott Spitzer's rule that banks could not allow investment banking to fund research. This was to stop the banks doing what they have done for decades, help fund managers decide where to invest and to use the bank for their trading.
Pretty soon, over the past decade, the graveyard of small cap companies were left "orphaned" - my publisher would not let me use that word either as it was "cruel". I tried to explain that is the official jargon used for companies ignored by the public market investors, but I am in Canada, and political correctness here is something to behold. These companies that no longer could get banks to do research on them, discovered that the investors shunned them too. There was no longer the time to investigate little companies and the cash flowed to the big, sure-bet stocks or out of the country to China, Brazil, India and Russia.
The more entrepreneurial investors with millions of dollars of their own, or pooled millions with ten of their buddies, were in the market for these smaller companies though. We have seen the rise in families investing in private companies directly and have built our business on this new, concentrated wealth. Ironically, the Teachers' pension and Hospital pension found out about the 25% return rates and have now channeled cash to these private equity companies too.
My company, Loewen & Partners, benefits from that red tape imposed by the US government, as it is impacting Bay Street too. One growing segment of our client base, are the companies leaving the stock exchange to go private, as the entire Real Estate industry did and the manufacturing base too. The companies that now go to the Stock Exchange tend not to make revenues and doing an IPO is a last ditch attempt. These are the medical and drug companies, along with the high tech businesses. They have a very short life and time to survive. Small cap mining is also going that way which is why the mining stock go to Europe instead. I am seeing more and more "refugees" from the public markets in my boardroom asking if we can help.

"Corporate responsibility" makes great TV sound bite

Government parties like the NDP want to make their ideologies law. Most voters are not aware of the destructive nature of legislating the "ethics" of business.
I was reading T. Rogers, CEO of Cypress, and his comments written fifteen years ago and we do not seem to have made any progress in understanding why government regulation does more harm. The NDP are particularly dangerous and keep their policies in mind while reading Rogers:

May 13, 1996 issue of Fortune magazine analyzed the "ethical mutual funds" which invest with a social-issues agenda, and currently control $639 billion in investments. Those funds produced an 18.2% return in the last 12 months, while the S&P 500 returned 27.2%. The investors in those funds thus lost 9% of $639 billion, or $57.5 billion in one year, because they invested on a social-issues basis. Furthermore, their loss was not simply someone else's gain; the money literally vanished from our economy, making every American poorer. That's a lot of houses, food, and college educations that were lost to the "higher good" of various causes. What absurd logic would contend that Americans should be harmed by "good ethics?"

The ethical funds, and their investors are merely making free choices on how to invest. What really worries me is the current election-year frenzy in Washington to institutionalize "good ethics" by making them law -- a move that would mandate widespread corporate mismanagement. The "corporate responsibility" concepts promoted by Labor Secretary Reich and Senator Kennedy make great TV sound bites, but if they were put into practice, it would be a disaster for American business that would dwarf the $57 billion lost by the inept investment strategy of the "ethical funds." And that disaster would translate into lost jobs and lost wages for all Americans, a fundamental wrong.

The rise of the private equity finance partner

The creative destruction of the public markets is underway. Private equity is rising up and becoming more mainstream. I did read in the |New York Times the broad brush condemnation of Mitt Romney because he was in private equity which just destroys businesses and breaks them apart and sells them off. 
The ignorance of such lazy journalism is incredible but good for my business, which works to help owners find capital and journey with partners for five years. Our clients end up with a far stronger business and many more options to go forward. One client is a fourth generation family business owner who was in poor financial health 6 years ago. He took on private equity partners and grew the size of the business threefold. Once private equity exited, this owner who was only 50 had so many more choices because his company was now a decent size. Public markets would not have been able to cope with their revenues stream which was chunky rather than smooth flowing. The large, lucrative projects suited the risk profile of the private equity guys. 
Mitt Romney would really get the issues of private, small companies as that is where the bulk of his business would be, not the glamourous big business stories that the newspapers can afford to follow.
Loewen & Partners just helped an amazing family business in the third phase of its long, slow exit but there has not been one newspaper article about the remarkable journey. It will probably stay that way too.
The WSJ at least is clued in to the future of finance and how technology can disintermediate the public market. This worth the read:

'No entrepreneurs I know aspire to be a public-company CEO anymore."

If that seems like a startling claim, it's all the more so coming from a bright-faced 35-year-old sitting a stone's throw from Merrill Lynch's famous charging bull. But Barry Silbert can back up his words because he's making money on them. He's the founder and CEO of SecondMarket, an online trading platform that pairs buyers and sellers of such financial assets as mortgage-backed securities and especially the stock of companies that haven't gone public.

Depending on your point of view, he is either saving capitalism from financial regulators or trying to evade them. Either way, he's an example of an entrepreneur finding a way to help America's other beleaguered capitalists find capital.

On a recent day in his Wall Street office, he starts by recounting the challenges faced by America's capital markets. Settling into an armchair, he starts with the advent of online brokers in the 1990s, which eliminated the "hundreds of thousands" of human brokers who were "focusing on not just the GEs of the world, but helping their customers identify small-cap stocks."

Then stocks went from trading in fractions to decimals, which shaved returns for firms dramatically and reduced their ability to research and market small-cap stocks. Add high-frequency trading, which led to unwanted stock volatility.

Then there are the regulatory burdens. The 2002 Sarbanes-Oxley law "made it more expensive to be a public company," mainly by imposing millions of dollars of compliance costs. And Eliot Spitzer's settlement with investment banks more or less ended research on small-cap stocks by forbidding banks to use investment-banking revenues to fund research.

Now the IPO market is limping, especially for small companies. According to a report this month from the IPO Task Force (a group of venture capitalists, bankers, lawyers and other interested parties), nearly 2,000 "venture-backed, emerging-growth companies" went public from 1991 to 2000. From 2001 to 2010, only 477 did.

Such problems have created Mr. Silbert's opportunity. He didn't grow up working in the hurly-burly of financial markets but was raised in a middle-class home in Gaithersburg, Md., mostly by his mother. His father died when he was 10. Mr. Silbert worked odd jobs from the time he was a teenager but was always drawn to trading, registering as a broker at 17.

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Terry Shoffner

Working for a restructuring firm, he recalls, he encountered "situations as a banker where there were illiquid assets, whether it was private-company stock or otherwise. I was always shocked there was no centralized place to go to, an eBay-type platform." So he quit the firm and put together a business plan.

"It was like a Wall Street version of a Silicon Valley garage start-up," says Mr. Silbert. "Our technology was a telephone and an Excel spreadsheet. But over time, we were able to develop such a deep pool of buyers and such a large amount of assets for sale that we had to really start investing in technology to make the process more scalable, more efficient."

In 2007, a former Facebook employee approached SecondMarket looking to sell stock options, so the company surveyed its clients. "It was interesting to us to see these institutions were willing to buy the stock without having access to management, without having information," Mr. Silbert recalls. "Microsoft had done their deal, which valued [Facebook] at $15 billion. It was pretty widely well-known where the company was issuing options, where the strike price was, which was one way to estimate value. So we did a few of these transactions."

Other companies and investors soon wanted to do similar trades. "So we said 'Okay, what's happening?'" Mr. Silbert says. "We went out to the venture-capital community, particularly up and down Sand Hill Road, saying 'Hey guys, what do you think? Is there a need for a private-company marketplace?' And the reaction was, it was funny, it was almost universally: 'There's no need for it, you'll never be successful, the market is cyclical, the IPO markets will come roaring back.'" Mr. Silbert pressed ahead.

His business boomed as public markets faltered. He took risks, making markets in unusual securities—like the state of California's individual registered warrants, issued during a 2009 budget crisis—and he received venture capital from FirstMark Capital, Hong Kong tycoon Li Ka-shing, and one of Singapore's state-owned investment funds. In 2010, SecondMarket traded $10 billion in assets, up from $2.5 billion in 2009 and $1 billion in 2008. (The company won't forecast this year's results.) Last month, it listed its own shares on its platform and they sold out quickly. "We have 140 employees, 20 open spots right now, hiring as fast as we can."

Mr. Silbert says he's not building a business by evading regulators, although there's always a risk that they will still come after him. SecondMarket is registered with the Securities and Exchange Commission as an "alternative trading system," its compliance staff communicates regularly with its Washington minders, and Mr. Silbert hired a former SEC lawyer to be his general counsel. "I spend a lot of time with the SEC, helping them kind of think through . . . how do we create the next new growth market for our country?"

SecondMarket requires companies to provide "audited financials and risk factors" to potential investors. "That's not required under the SEC rules," he says. "We don't want to see fraudulent companies on SecondMarket. We don't want to see people, you know, making investment decisions without being well-informed. That's bad for us as a marketplace."

So what is his comparative advantage over Wall Street? Well, he says, investment banks "keep the buyer and the seller separate and they control that information." SecondMarket is a platform that aims to "connect all the world's buyers and sellers—to essentially disintermediate anyone on Wall Street that does not add value." It allows companies far more flexibility to choose when their shares trade and among which investors, and its website helps companies build networks of "trusted" counterparties. SecondMarket doesn't disclose the identity of its clients to outside parties, however.

Which raises a broader question: Is Mr. Silbert creating a market open only to the sophisticated, a club that shuts out ordinary Americans? "I'm happy you asked that," Mr. Silbert says, adding that mutual funds like T. Rowe Price invest in SecondMarket's offerings and are "open to retail investors." And Mr. Silbert has an even bigger idea: to lobby the SEC to change its definition of "sophisticated investor."

"The SEC rules right now use income or net worth as the way to measure sophistication," he says. There are several tests. One defines "sophisticated" as having a net worth of more than $1 million, excluding the investor's home. But Mr. Silbert says "there are plenty of wealthy individuals who are not sophisticated in financial investing who maybe should not be investing." So he proposes an SEC-administered "financial literacy test" that would allow those who pass it to participate in SecondMarket and "any type of investment that is not an SEC-registered investment product."

Does Mr. Silbert really support fixes to the public markets, given SecondMarket's private-market business niche? "We too want to see a robust public market," he replies, because "for larger companies in particular, you'll never be able to find a deeper pool of liquidity." I press him on the point. "Let's make sure we at least have a private market that's robust and functioning and safe and trusted, so that either it's going to be supportive of a public market, or, worst-case scenario, if the public market is forever broken for smaller-cap companies, we have an alternative," he argues.

To that end, Mr. Silbert is lobbying Congress to change what he calls "outdated" rules that "have had a negative effect on private companies' ability to raise capital and compensate their employees." Among them: a 1960s-era rule that limits private companies to 500 shareholders and a prohibition on those companies soliciting broadly for investors. "Car companies can advertise on TV to 15-year-olds, and drug companies can advertise drugs to people who don't have a prescription," but start-ups can't advertise to potential investors, Mr. Silbert says.

His efforts may be paying off. On Wednesday, the House Financial Services Committee passed bills that would eliminate the advertising ban, raise the investor threshold to 1,000 from 500, and remove restrictions on so-called crowd-funding (when entrepreneurs raise money from relatives or others who aren't SEC-accredited, within certain limits).

So what will America's capital markets look like a decade from now? "There's not going to be a concept of public versus private," Mr. Silbert says. "What there's going to be is companies trading on different markets, and those markets have different rules." That vision assumes politicians will keep punishing America's public markets, and on present course it's hard to bet against him.

Do Car-pool lanes waste time?

We have decades of "burning issues" which are taught with religious fervour and then fade away as the science changes.
I recently watched a video of Bobby Kennedy telling a classroom of fresh faced children that pollution was so bad that within 10 years they would be wearing masks and having to live underground - really!
Corporations and their Boards are facing these burning issues of the year and having to decide how to work with them. It costs money to support decisions about the environment - some are good but some are less effective for the cost of implementation.
Again, good old Ted Rogers talks gruffly about dealing with putting social issues and environment issues above business priorities:


investors have their pet issues; for example, whether or not a company:

• is "green," or environmentally conscious.
• does or does not do business with certain countries or groups of people.
• supplies the U.S. Armed Forces.
• is "involved in the community" in appropriate ways.
• pays its CEO too much compared with its lowest-paid employee.
• pays its CEO too much as declared by self-appointed "industry watchdogs."
• gives to certain charities.
• is willing to consider layoffs when the company is losing money.
• is willing to consider layoffs to streamline its organization (so-called downsizing).
• has a retirement plan.
• pays for all or part of a health-care plan.
• budgets a certain minimum percentage of payroll costs for employee training.
• places employees on its Board of Directors (you forgot this one).
• shares its profits with employees.

We believe Cypress has an excellent record on these issues. But that's because it's the way we choose to run the business for ourselves and our shareholders -- not because we run the business according to the mandates of special-interest groups. Other companies, perhaps those in older industries just trying to hold on to jobs, might find the choices our company makes devastating to their businesses and, consequently, their employees.
No one set of choices could be correct for all companies.
Indeed, it would be impossible for any company to accede to all of the special interests, because they are often in conflict with one another.
For example, Cypress won a San Jose Mayor's Environmental Award for water conservation. Our waste water from the Minnesota plant is so clean we are permitted to put it directly into a lake teeming with wildlife. (A game warden station is the next door neighbor to that plant.)
Those facts might qualify us as a "green" company, but some investors would claim the opposite because we adamantly oppose wasteful, government-mandated, ride-sharing programs and believe that car-pool lanes waste the time of the finest minds in Silicon Valley by creating government-inflicted traffic jams -- while increasing pollution, not decreasing it, as claimed by some self-declared "environmentalists."