Wealth Management

Voted #6 on Top 100 Family Business influencer on Wealth, Legacy, Finance and Investments: Jacoline Loewen My Amazon Authors' page Twitter:@ jacolineloewen Linkedin: Jacoline Loewen Profile

December 1, 2011

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.

November 29, 2011

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.

November 28, 2011

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.

November 26, 2011

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

November 25, 2011

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.

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

November 23, 2011

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.

November 21, 2011

We are the 99% - Occupy spreads

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


November 17, 2011

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.

November 15, 2011

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.

November 14, 2011

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.  

November 11, 2011

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.
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.

November 10, 2011

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

November 1, 2011

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.