Andrew Bell helps me figure out my question for 2012 on BNN The Pitch

Throwing his usual curve ball while on live TV, Andrew Bell asked me if business in Canada was being buried by government regulation.
Since I am on the board of the Exempt Market Dealers which seeks to regulate Loewen and Partners role as corporate finance adviser to business owners, I do accept some government regulation from the Securities Commission.
What is the role of government though in helping our industries outside of the oil and mining circles?
The cost of government is nearly getting to where tax payhttp://www.bnn.ca/Shows/The-Pitch.aspxers must work until August. It is a great deal to tax in order to pay to keep our regulations and government systems running. That is where I question the removal of money from the people creating jobs and money for the communities around their business. What is the opportunity cost of that transfer of money?
What can government do to help business in Canada get stronger?
That will be my question for the year 2012.

The Pitch gives marketplace for businesses wanting growth

The marketplace of ideas is what gets our engines running, or my engine gets a rev from others. This year, for sheer engine power, my favourite TV show is BNN The Pitch.  Andrew Bell is the wonderfully curious host and for the past year I have been part of the pane that interviews the two company owners seeking capital.
Here are the details from today's The Pitch show.

Stephanie McLarty, President & CEO, REfficient

www.REfficient.com

Stephanie McLarty, President & CEO, REfficient, has a way for businesses to sell surplus technology equipment to others. Her large clients generate between $50,000-$200,000 net proceeds from the process and divert 30-50 tonnes from landfills.

Christopher Serrie, CEO & Managing Partner, Building Water Solutions

www.buildingwatersolutions.com

Christopher Serrie, CEO & Managing Partner, Building Water Solutions, has already signed a deal with Canada's largest home builder to provide a special water filtration system for high rise condo buildings and is looking to expand.

Panelists:

Rick McGraw – President and CEO of Greenrock Asset Management

Sarah Prevette – Founder, Sprouter.com

Jacoline Loewen - Loewen Partners, Private Equity, author of Money Magnet.

Larger goals work The Running Room gave me a gift

Campbell Soup had a great leader, Doug Conant, who pushed his team to create a higher purpose in the business than just financial results.
I was fortunate enough to work with Doug Flynn at Flynn roofing who made the business of the outside covering of a building enormously fun.
Getting your staff to jump out of bed in the morning to work at what they believe to be worthwhile work is possible. By showing the bigger purpose of the company, employees realize they are contributing to their community more than just with dollar amount of units sold.
My seasonal shopping experience opened my eyes to the difference enthusiastic sales people can make. This year, The Running Room sales people amazed me with their interest in helping me select surprising gift ideas. My brother is an avid runner with lots of kit, yet The Running Room put together a gift basket with little products quite alien to me - like gloves that heat up with perspiration and little plastic pouches of energy goo. Thanks Running Room!
Read more at Harvard Business Review about how Doug Conant used positive feedback to reinforce the right behaviour.

Every family business should know this story

'A significant investment' in Ontario manufacturing - here is the quick story about how a Canadian 4th generation business grew beyond the family's wildest dreams.

Hamilton, Ont.-based Bermingham Foundation Solutions Ltd. has secured "a significant investment" says chairman and fourth-generation owner Patrick Bermingham.

Its new strategic partner, Soletanche Freyssinet, is part of the VINCI group, a Paris-based, publicly traded company that employs 180,000 people in about 100 countries.

Bermingham, founded in 1897, is Canada’s oldest foundation and marine specialty contractor, with a focus on the transportation, energy and mining markets. It also manufactures specialty foundation equipment and provides engineering services under the trade name Berminghammer. It currently exports equipment and services to more than 40 countries. Bermingham’s senior management will continue to run the business and remain shareholders.

How did a company with about 150 employees attract such a large foreign investor? 

Five years ago, Bermingham met Loewen and Partners who taught them about the benefits of private equity for companies under $100M. As a family business, Bermingham had slowed down its growth by relying purely on the banks. As a client for 110 years, Bermingham's bank gave good loans but not enough to grow the company at a quicker pace. Higher growth is tricky and much higher risk which puts it outside the bank's comfort zone. Private equity may have a poor reputation but so do banks. Yet, smart family business owners who have achieved considerable wealth educate themselves about why these different types of finance do have a good achievement rate. Staples, Facebook, Google and Caterpillar have all achieved their success with private equity underpinning.

Putting aside their fears, Bermingham used Loewen and Partners to build up their valuation case and brought in a private equity investor that allowed the company to recapitalize its balance sheet and build out its strategy. Bermingham subsequently repurchased 100 per cent of the business, returning the company to the family and employee ownership. Toronto-based investment banking firm Loewen & Partners, which advised the company in the private equity transaction and the VINCI one, says strong processes and reporting structure subsequently made it easy for a large firm to do its due diligence.

Backed by Soletanche Freyssinet, Bermingham now has a mandate to grow. It intends to expand its overseas operations with increased equipment sales and rentals, and enter into joint-ventures on large scale projects at home and around the world.

Bermingham's long history of innovation over multiple generations of family ownership, and the fact it has achieved continued success in manufacturing - an industry long considered on the wane in Ontario - makes this announcement significant on a number of fronts.

Read the full story at The Globe and Mail by one of my favourite business reporters, Sean Stanleigh

Quick question for a CEO - what is your company's identity?

As a CEO, here is a quick question for you.
What is your firm's identity?
Is it about the core capabilities. Is it about what you actually achieve - like West Jet that serves its employees first and then its customers. Looking after the social capital in the company will yield results.
It is about your passion.
One of my client firms is an engineering business with awkward geeks selling high level skills.
What was interesting is that they know they are sophisticated engineers passionate about using other people's technologies in new ways to create dazzling machine parts.
Even though their website did not give their capabilities a fair shake, their advisory board could all articulate within seconds the company's purpose.
Passion wins through but passion must be articulated and described.
Funny how once that is done, the strategy unfolds within each division.

Great leaders create value - both economic AND social

The point of human resources is to boost the energy levels in the organization.
Building up the employee enthusiasm while also directing their daily work in a similar enough direction is enormously challenging.
Even with Wikis or other wonderful technology, doing strategy with the top 300 people still is the more laborious but absolutely essential method.
Humans need the face time with their leadership and strategy done together is far more powerful.
It seems like busy work. Many believe their time would be better spent on a golf course.
But it is amazing how getting 3 objectives for the year does focus the company. The  Chinese leadership in government use a five year strategy and they have achieved more economic value than any other economy in the history of mankind over these past 30 years.

Follow up rigouros strategy sessions with free flowing, fun activities where people can talk quietly in small groups. The strategy will be more likely to take rot and grow.

MIX STRATEGY & GOLF

Keep focused on the "why" of your pitch

The goal of an elevator pitch isn't to close the deal.

The point of the 2 minute pitch isn't even to give a short, accurate, Wikipedia-standard description of you or your project.

Using jargon words to craft a mission statement that is safe and could be applied to similar businesses misses the mark.

No, the purpose of an elevator pitch is to describe a situation or solution so compelling that the person you're with wants to hear more even after the elevator has stopped and the doors are opening.

There be Monsters - the story of family business succession planning

Lawyers for family businesses are often accused of not speaking frankly to their clients about the need for business succession. At the Globe and Mail Business Summit, I chaired a panel on business succession where the panel spoke about the lawyers not being informed enough or preserving their business rather than helping the owner begin to think about transition.
The real secret is that not even the owner's wife or sons or daughters will broach the subject of succession first.
Why?
If you ask that question, you have not raised the issue with a business owner.
You will observe first a slight red flush and then it could rise up into a more heated discussion and maybe a full scale rage.
Everyone else will be looking down at their papers, especially the family members. No one will come to the rescue. This owner has such a level of power over their financial well-being and future. For a lawyer, why go there and risk being fired?
There be monsters.
That is also the sad story why family businesses do not grow beyond the owner. We will leave that topic to another day.

This model is a key tool used by Private Equity

Strategy sounds hard but it is actually wonderful and business teams are always motivated once they have taken the time to hold a discussion.
Don't be put off by the complex diagram. we are going to look at this one box at a time.
This model is a key tool used by Private Equity to see the attractiveness of a business. Hotels and Airlines are under far more pressure than say a chain link manufacturing company. That will impact on the value given to the business.
If you are a business owner, if you can show you know how to deal with each of the forces affecting your business, you will get a much higher price for your business and be able to persuade private equity to accept a higher mulitple.

If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profitable. Industry structure drives competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability in the short run—including the weather and the business cycle—industry structure, manifested in the competitive forces, sets industry profitability in the medium and long run. 

What is the job of the Strategist?

As a strategist to mid-sized companies, my job is to get senior management to understand the forces buffeting at their business. This week's blog will focus on the 5 Forces which is still the best framework for understanding what is going on around the business and how to shape the best competitive position. My guru of choice was and is Michael Porter and when I wrote my best seller The Power of Strategy back in the mid 1990's, I had applied his model across many businesses, small and large, and diiscovered its power.

the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.

As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care delivery industry in Europe. But to understand industry competition and profitability in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces.

How government could support mid-sized companies

The support of mid-sized companies by German government policy is worth understanding. Canadian government gives grant money to the universities but runs into the danger of rewarding the best paper pushers, not money makers. Germany seems to have managed a balance between mid-sized companies and university research.

Germany is known for its mid- to high-technology manufacturing. While the U.S. has witnessed a decline in manufacturing output as a share of GDP, Germany's has remained steady. By specializing in medium and high technology manufacturing, Germany is able support relatively high wages. The Fraunhofer Institutes in Germany are an important reason for its continued success in manufacturing. The Institutes support manufacturing SMEs by creating partnerships between businesses and universities and encouraging industrially-relevant research in advanced technology areas. The Institutes have a budget of $2.35 billion, with $2 billion of that generated through contract research or publically financed research projects. There are eighty research centers with a total staff of 18,000 qualified scientists and engineers. The expertise and partnerships created through this initiative helped sustain high technology manufacturing in Germany and resulted in a high level of market share for SMEs, fueling broad-based export growth.

Should the government match investment funds?

Should the Canadian government encourage international VC investments into Canadian companies.
OK that is a no brainer.
Now what about encouraging international investment partnerships by matching investment amounts? That is tougher but Israel built its innovative sector with this type of LP arrangement.

Israel has one of the most active venture capital networks in the world. While the U.S. might lead the world in venture capital investments in absolute amounts, Israel has surpassed it relative to the size of its economy. The Yozma program (started in 1993) is often credited with initiating the VC industry in Israel. The Yozma program provided tax incentives for foreign VC investments, and the fund was used to match investments. This provided a mechanism of due-diligence for the investments; professional VCs had vetted the firms. Yozma was also used to invest in existing domestic VC funds to help support the new industry.

The objectives of the Yozma program were to: 1. Establish the critical mass for a competitive VC industry 2. Learn from foreign partners 3. Create a network of international contacts

Typically, investments were directed toward high-technology companies in fields in which Israel already had an advantage or competency. By 2000, the amount of VC invested in the country had soared.

How Canada Goose won the E&Y Entrepreneur of the Year Award

Keeping manufacturing in Canada is possible. Canada Goose has their factory creating the quality jackets that fill up Harry Rosen at the beginning of Fall but is it in China? No.
Canada Goose is committed to producing in Canada and were told their costs would not be possible to cover competing against Made in Japan and China products.
Dani Reiss decided he would take the challenge that his paretns set with their appreciation of quality they had known in Europe. Canadian quality would be as wonderful.
Canada Goose has worked to attract the high fashion people, but also the outdoor buffs and above all, the working guys out in the cold. Dani Reiss took a risk and then worked to get the jackets on film sets over the winter and on TV Olympics. He also took up the cause of the polar bear and other innovative projects that project the Canada Goose brand.
I see the jackets on Bay Street and they always look smart. Well done, Dani, for winning the Ernst & Young Entrepreneur of the Year award. It was a long road with icy patches! You deserve it for building a genuine Canadian business. Nice guys finish first.

Why business should investigate R D tax credits

To get companies growing, research and development is required and Canada has a strong R&D credit although SREDS has a very low uptake still. Here are some other countries and their incentives from The Atlantic.

Innovation, along with entrepreneurship, involves a lengthy process of research and development, one that inevitably entails risk for firms and industries. There are three main categories of risk: regulatory, innovation and monetary. My research and others' shows that lucrative reward systems and regulatory structures directly influence the level of R&D activities. Tax credits are one way to effectively reduce the risks inherent in conducting R&D.

Some readers will be surprised to learn that France has the most generous tax incentives for R&D among the OECD countries. The government is continually expanding the scope of the tax credit, and the amount of funding available nearly doubled between 2006 and 2008. A company can receive up to 50 percent of its R&D costs the first year; 40 percent is covered the second and 30 percent in the third. There is a mechanism that allows funding to be "fast-tracked" for small- and medium-size enterprises, and in most cases, the waiting period for approval is only three months. Lastly, the tax credit is either deducted from the annual corporate tax or reimbursed after three years, providing greater flexibility. The tax subsidy rate per $1 of R&D in France averages 43 cents, while in the U.S. it is a paltry 7 cents.

Finland serves as another example of using policy solutions to transform its economy from resource-based to knowledge-based through consistently increasing gross expenditure on R&D. Simultaneously it has also pursued international scientific collaboration, university/industry partnerships, and enhanced venture capital availability. On a per capita basis, Finland now claims double the OECD average of patent output.

Why our government does need to help business

Innovation is something the government is trying to jump start. It begins at school and with the Canadian education system, although it is not too shabby, there are human capital investments that could be made. Our teachers' union is very powerful so these are probably a non-starter and since the majority of teachers are now female and so are university graduates, merit is a touchy subject.
Equity of input and outcomes is over riding merit and reward for effort.
Singapore paid attention to human capital and focused on merit. I believe their per capita GDP has now passed Canada.
Is the social cost of rewarding young people based on merit worth it?
 Here is The Atlantic:

 In 1960 Singapore had a per capita GDP of $2,300, roughly equal to Jamaica's. Singapore focused on becoming a financial services and research hub, while Jamaica concentrated on tourism. Fifty years later Singapore's per capita GDP was $43,100, while Jamaica's is slightly above $5,000.

The difference was investment in human capital. Singapore's education system is heavily subsidized by its Ministry of Education to ensure a meritocratic principle that identifies and nurtures bright young students for future leadership positions. In the '60s, Singapore attracted foreign capital by targeting labor-intensive manufacturing to create jobs. As its workforce became better educated through its investment strategies in the '70s, it began attracting higher value-added industries such as petrochemicals, electronics and data storage. Today, Singapore is a leader in a host of knowledge-based industries, including the biomedical sciences. In just the past decade, the number of scientists has leapt from 14,500 to 26,600, a gain of more than 80 percent. In the most recent Global Competitiveness Report put out by the World Economic Forum, Singapore ranked 1st in the quality of its math and science education.

How does a VC pitch get taken seriously?

Pitching your business is critical whether you are on BNN The Pitch or at the holiday cocktail party.
Here is a terrific, snappy TV Show with two business owners asking for $5 million equity investment into their business. How do they get taken seriously?
Watch the show here:
http://watch.bnn.ca/the-pitch/#clip573383

Is equality the best big goal for a society

Equality or equal opportunity for all? Equality in a society is a major goal for many - I get emails and Facebooked about this topic all the time.
So is equality for all the best goal? What are the long term consequences? I know when I see my tax bill, I often want to put my resume on Monster and get a union or government job.
I am not sure if this is a true story, but it resonates with me - a business owner, a job creator and a tax payer.

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama's socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, "OK, we will have an experiment in this class on Obama's plan". All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A.... (substituting grades for dollars - something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D! No one was happy.

When the 3rd test rolled around, the average was an F.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.

It could not be any simpler than that. (Please pass this on)

Remember, there IS a test coming up. The 2012 elections.

These are possibly the 5 best sentences you'll ever read and all applicable to this experiment:

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it!

5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

Next 36 Ventures tonight at MaRS and on BNN The Pitch

The energy in the room will be at nuclear fusion level tonight. Why? Imagine 36 of the young, newly selected participants in an entrepreneur incubator in one room with Canada's leading entrepreneur community and now you get the idea. It is a lethal combination of excitement.

I am meeting the Next 36 Ventures Finalists at MaRS and Claudia Hepbourn has done an incredible job of developing emerging entrepreneurs and making young people build their careers and business ideas.

Several of the better concepts made it onto the business owner show where they pitch for VC and private equity money. 

See "Whadyathink?" and  "Playfit Mobile" pitch to Jacoline Loewen, Loewen & Partners, private equity expert on BNN's The Pitch.

Whadyathink - http://vod.bnn.ca/Video/507127

Playfit Mobile - http://vod.bnn.ca/Video/507128

The Decision - http://vod.bnn.ca/Video/507129

or view at

http://vod.bnn.ca/Video/507127

Birch Box creates a new channel for make up and cosmetics

Cosmetic brands are the female equivalent of game apps. As a founder, if the brand catches on, the pay off can be great.
I was talking with a cosmetics business owner and a private equity fund from San Francisco and The Shopping Channel is one high risk and expensive way to get a brand boosted but there is an exciting new company called Birch Box that has created an entirely new channel to reach make up hungry females who can never have enough lipsticks or eye shadows.

Bayley Barna and Katia Beauchamp got their investor partners on board and learned that there is a dangerous side of shipping cosmetics.

Birchbox is the startup that VCs can't stop talking about and that new startups are trying to emulate.

The company, which sends its customers a box of beauty products samples every month, launched just over a year ago and it has been growing exponentially with more than 45,000 users and various upscale cosmetic partners such as Khiels, Carol's Daughter and Kerastase.

Read more: http://www.businessinsider.com/what-is-birchbox-2011-11#ixzz1ej6fTHG7

Private Equity wants you to have more than one client

A revolution, rather than an evolution, is happening in the natural gas and oil markets in North America and the world. The revolution results from the impact of fracking and horizontal drilling, and the resulting discovery and development of huge, unconventional oil and gas reserves around the world in shale formations.

The US has potentially two Trillion barrels of unconventional oil reserves in shale and other formations, which can be developed, making it the world’s largest oil producer.

This is followed by China at 350 Billion barrels and Israel with 250 billion barrels. These are all as compared to  Saudi Arabia’s current 260 billion barrels of conventional oil. For Canada, it is 179 Billion Barrels.

The recent US and Canada diplomatic slap in the face over the pipeline between the two countries, as reported by MacLean’s, is around the politics of environmentalists, but also rumored to be the large US oil and coal lobby groups pressuring the US government not to allow any competitors into the US market. Canada would be a big threat to these companies. As the Canadian government said, “The pipeline is a no brainer.” Not to the US government though.

Patrick Daniel, CEO Enbridge,  says that most of the transportation is not through a pipeline anyway, but he supports that the pipeline is a no brainer and the delay is a serious issue. Instead, Canada will now be pushing up the Gateway project to do a pipeline to Kitimat, not Prince Rupert. This pipeline will then transport energy for Asia and our geographic position puts Canada geographically closer to the Asian markets than the Middle East, a huge competitive advantage. Daniel said that environmentalists like to "mob the mike" and that other voices need to also make themselves heard. He said that technology companies say they are revolutionizing medicine but he believes energy already did that by making sure the patient got to the doctor. When you look at that reasoning, we do take for granted our transportation and lighting.

Having one client which is Enbridge's current client situation, the USA, would not be liked by a private equity investor. Enbridge and Canada are now being forced by the USA's politicking to look for their next big client. Asia is the next no brainer, but the Vancouver Port is too full so Kitimat needs to be developed. Enbridge says there will be environmental rules in place to ensure only top quality ships are allowed to be accepted. 
Providing energy to Asia is a race.

A recent article in the National Post titled “Democratic Jackpot” highlights the new sources of energy and how it will be an incredible game changer . Most of the finds are in democratic countries – interesting. They will also be coming online within 10 years.

 The game-changer is "unconventional fossil fuels," much of it trapped in shale - rock that often contains oil or gas. In the case of gas, the U.S. is developing so much, so fast in so many places that the domestic price for natural gas has more than halved. Whereas five years ago the U.S. planned to build major terminuses to import gas, it is now becoming a major gas exporter. America's Marcellus Shale formation alone - a natural gas reservoir that lies more than a mile underground beneath Pennsylvania, New York, West Virginia and Ohio - has enough gas to supply the Eastern U.S. for decades.

Europe, though a novice in the unconventional energy game, has already discovered vast amounts. The U.K., in the first shale gas field it drilled earlier this year, discovered a gas deposit close to half the size of Marcellus, enough to fuel the entire British economy for decades. France and Poland have comparable finds; Germany and the Netherlands smaller ones. Europe has also discovered immense amounts of natural gas in the Mediterranean, which Cyprus, Greece and Israel have begun to develop for delivery to the European mainland. Among the Western democracies, Australia, too, has massive amounts of exportable natural gas, as does Canada, Brazil and others in the Americas. As does China and other Asian countries. All told, the International Energy Agency estimates a world store of natural gas sufficient to last 250 years.

A similar tale of unconventional riches is unfolding in oil, where the U.S. has in excess of two trillion barrels, the world's largest store. China comes next, with some 350 billion barrels, followed by Israel's 250 billion barrels, an amount close to Saudi Arabia's 260 billion barrels of conventional oil. Thirty-five other countries, including 15 in Europe, are believed to have lesser amounts of unconventional oil, but they may not remain lesser for long - with each new assessment in recent years, the estimates have climbed with new discoveries.

The cost of developing these unconventional resources, meanwhile, continues to drop. In the case of Israel, which has developed an unusually clean and efficient drilling technology, oil is expected to flow at a cost of US$35 to US$40 per barrel, or less than half today's world oil price of US$90 a barrel.

The diversified democracies of the world - the U.S. and European countries among others - will profit big time from the world's endowment of unconventional oil and gas, partly because many of them will become energy exporters instead of importers and mainly because low energy prices will spur their advanced economies. Not so for today's undiversified, energy-export dependent countries.

Maxime Bernier delights the business owners at the Globe and Mail Small Business Summit

Maxime Bernier blew me away with the government's positive approach to business. He spoke at the Globe and Mail Small Business Summit about how everyone should be grateful to business owners and how hard it is to get past the politics of envy of success.
Never thought I would hear that in Canada.
There is more and I recommend that every business owner sign up on this new website. It is wonderfully easy to use and very practical.

The Honourable Maxime Bernier, Minister of State (Small Business and Tourism), today announced that BizPaL is becoming a permanent service available to small and medium-sized enterprise (SME) owners.

“The Government of Canada supports SMEs by putting in place initiatives that enable them and entrepreneurs to continue to grow and create jobs,” said Minister of State Bernier. “BizPaL is a concrete example of an initiative designed to cut through the red tape that small business owners encounter.”

BizPaL is an innovative and cost-effective one-stop online service that provides simplified access to information on permits and licences that entrepreneurs and small business owners need to establish and run their businesses.

This unique partnership among federal, provincial, territorial and municipal governments is designed to cut through paperwork burden and red tape. The $3 million in annual funding provided in Budget 2011, the Next Phase of Canada’s Economic Action Plan, will allow the program to provide even greater value to small businesses through continued expansion and service improvements.

In the coming months, BizPaL will become available to more Canadians as additional municipalities join the program. To date, 11 provinces and territories are participating in BizPaL, with more than 600 municipalities offering the service, making it available to over 57 percent of the Canadian population.

Visit the BizPaL website (www.bizpal.ca) for additional information or to access the websites of participating partners.

We are the 99% - Occupy spreads

Surprisingly, this anti-capitalist protester is not getting a lot of press...

Family Firms Perform Worse Without Professional Management

 Economists have found that family firms that pass the company down to the next generation perform worse than if they had brought in professional management. Freakonomics confirms this view. They report that:

+ Family firms are particularly dominant in less-developed countries, which tend to have weaker markets and rule of law. Here’s Vikas Mehrotra on that point:

In the developed world, you have good contracting environments, a good system of law enforcement, and so on. So, in the developed world, you can hire professional managers and expect a certain, you know, sticking to the contract law, and so on. It’s rather more difficult to have the same kind of adherence to the rule of law in emerging economies. So, in emerging economies, family firms sort of provide a second-best solution to this poorly developed institutional problem.

+ The U.S., despite having many highly visible family firms, is in fact far less enamored of inherited leadership than most other countries; Japan, meanwhile, is an exception, a wealthy country with a lot of handoffs to the next generation — but with a very strange twist.

Photo: Alessio85

+ If the above points are of any interest to you, then you should definitely read this Journal article titled “Culture Built on Family Firms Tests Italy’s Plan for Growth.” Note that it is hard to see what is the chicken and what is the egg — e.g., does the business environment, set by the government and the courts, dictate the proliferation of family firms or does the proliferation of family firms lead to a business environment whose habits are enabled by government and the courts?

Key excerpts:

Italy’s economy today is only about 3% bigger than a decade ago. Many factors have contributed to the country’s stagnation—from its rickety education system to its low rates of employment among women, youths and older workers. But a central reason, say economists, is that its private sector consists mostly of small mom-and-pop businesses that seem unable to grow.

And:

Behind the country’s stunted businesses lie the habits and fears of a long line of family entrepreneurs who cling to control of their companies late into life. Hemmed in by a thicket of regulation and legal restrictions, many of these families have learned to survive by doing business within networks of trusted customers and suppliers, rather than taking risks by dealing with outsiders.

“These firms have less propensity to innovate, engage less in research and development and rarely penetrate emerging markets,” said Mario Draghi, ECB President and former Bank of Italy head, in a recent speech.

And:

Italy’s legal and regulatory environment discourages firms from taking a leap in size, according to recent research. Businesses need an average of 258 days to get the permits they need to open a new warehouse in Italy, compared with 26 days in the U.S., according to the World Bank. And an entrepreneur who goes to court to enforce a contract must wait an average of 1,210 days for a resolution, compared with around 300 days in the U.S. or France.

As a result, entrepreneurs prefer to deal informally with people they know, rather than rely on public institutions if anything goes wrong. Thus they stay small even when they have the chance to grow, says Bank of Italy economist Magda Bianco. “The inefficiency of the court system is a widespread problem,” she says.

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.

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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.