articles - Annual Report

The Canadian who plans To deThrone FaCebook Christmas kitsCh

santa’s asian outpost

Paris Climate summit 21st time’s a charm

Guns,and banks train cars InSIde corporate canada’S vaultS

poWer broker ed clark’s tough love for hydro one

P. Thomas Jenkins, OC (MBA ’87, Hon LLD ’15) Chair of the Board OpenText Corporation

Kathleen P. Taylor (MBA/JD ’84, Hon LLD ’14) Chair of the Board Royal Bank of Canada (RBC)

of the Bharat B. Masrani oil tanked. (BBA ’78, MBA ’79) Group President & CEO TD Bank Group

Steve Williams

suncor didn’t

sponsor content

The Business of ideas schulich school of Business lays out the seven new realities reshaping the 21st century

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december 2015

2015-11-12 10:19 AM AM 15-10-30 11:05

Celebrating 50 Years of Breaking New Ground It’s the business school that led the way in developing a global perspective. Today Schulich has over 27,000 alumni working in 90 countries and campuses in three countries. It was ahead of the curve in integrating corporate social responsibility into its MBA program and is today ranked #1 in the world in teaching responsible business.

Thank you to our 50th Anniversary Season Sponsors & Patrons

Schulich is leading the way again with its 20 MBA specializations that give students the opportunity to combine traditional business specializations such as Marketing and Finance with groundbreaking industry-specific specializations such as Health, Global Retail, Real Estate & Infrastructure, and Global Mining Management.

PREMIER LEVEL

As Canada’s preeminent business school, we will continue to provide leadership and vision in the decades ahead. When it comes to the Business of Ideas, we’re just getting started.

EXECUTIVE LEVEL

ROB McEWEN CM (MBA ’78, HON LLD ’05)

schulich.yorku.ca

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SPONSOR CONTENT

THE BUSINESS OF IDEAS

27

15

Taking customer experience to the next level

Content map Inside this issue of Report on Business magazine you will be able to gain valuable insight on the new realities that are shaping the course of business in Canada and around the world. The Business of Ideas, a report created in partnership with Schulich School of Business, highlights the seven most important trends that C-suite leaders will need to address over the next decade and beyond. Look for the articles on these pages:

As retailers leverage ever more market intelligence, brands compete by providing a better buying experience

27

47

Leaders need new approaches to navigate the new challenges they face

47

If we build it, the customers will come

19

Big Design shows companies how to innovate first, then persuade the marketplace to embrace their vision

15

51

The company as good citizen A more socially-aware global marketplace has companies racing to invest in better practices

Banking on the digital revolution 51

19

The rise of disruptive ‘FinTech’ is transforming bricks-and-mortar banking

Cracking the code on data Businesses that embrace the advance of data-driven commerce will prosper

Canada will need to shape smarter, sustainable and more livable cities

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Rethinking cities in the age of urbanization

The Business of Ideas

Resources: All roads set to lead north The next decades will see mining and energy firms unlocking the Arctic’s vast untapped potential

11

Introduction: A transformed world of business

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This content was produced by The Globe and Mail’s advertising department. The Globe’s editorial department was not involved in its creation. Schulich School of Business

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FINANCE

INNOVATION

MANAGEMENT

STRATEGY

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CONTENTS

12/15

38

COVER PHOTOGRAPHED EXCLUSIVELY FOR REPORT ON BUSINESS MAGAZINE BY SHAUN ROBINSON; (TOP) THOMAS DAGG; (RIGHT) CHRISTOPHER WAHL

Does it matter who owns Ontario’s wires?

FEATURES

32 CEO of the Year

For scoring even when oil is in the dumps, Suncor head Steve Williams gets top marks. /By Jeff Lewis

38 An electric atmosphere

The IPO to sell off a chunk of Hydro One is just the start of transformation in Ontario’s power sector. /By John Lorinc

48 This guy wants to dethrone Facebook

It’s one thing to get millions of kids using your chat app. It’s quite another, as Kik Interactive is discovering, to monetize your popularity. /By Shane Dingman

57 Guns, furs and trains

The archives of Canada’s most history-rich companies maintain a physical connection to everything from the Franklin expedition to the Canadarm. /By Susan Krashinsky DECEMBER 2015 / REPORT ON BUSINESS 5

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• • • • • • • • • • • • •

Queen’s Commerce Queen’s MBA Queen’s Executive MBA Executive MBA Americas Queen’s Graduate Diploma in Accounting Queen’s Graduate Diploma in Business Queen’s Executive Education Queen’s Master of International Business Queen’s Master of Finance Queen’s Master of Management Analytics Queen’s Master of Entrepreneurship & Innovation Queen’s MSc in Management Queen’s PhD in Management

Get to know


.

smith.queensu.ca

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12/15 CONTENTS

57

With holdings like this 1904 switchboard, Bell Canada’s archive reminds us how far we’ve come

DEPARTMENTS

9 The Interview

Helming the Federal Reserve changed Ben Bernanke’s views on politicians. And as for the Tea Party variety, don’t even go there

PHOTOGRAPHS (TOP) AISLINN LEGGETT; (RIGHT) RODRIGO DAGUERRE

12 Kitsch

Sorry to break the news, kids: Santa’s workshop is a place in China called Yiwu

14 Graphic Details

Here’s one bulging middle we needn’t fret about—the expanding middle class around the world

16 Disruption

What’s behind the rise and fall of great tech companies? Call it the ecosystem effect

22 Venture

Bet you thought retail display was not a tech business. Toronto upstart Nulogy begs to differ

26 Corporate Governess Feeling indifferent at work? Paste a smile on it. But don’t go as far as gag gifts

28 Reguly

Is the climate gabfest in Paris part of the solution, or part of the problem?

64 Exit Interview

Amanda Lang says “so long” to the Mother Corp. and “hello,” she hopes, to millions of desktops at Bloomberg TV Canada

20 Made in Canada

When it comes to leather patches, Asian textile plants do their sourcing in…Markdale, Ontario? DECEMBER 2015 / REPORT ON BUSINESS 7

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TH E MA RK OF D I STI N C TI ON .

WIL L G A D D G L OBA L A D V EN TU R E R

L SERIES L E NSES

WAT CH T H E F IL M AT CAN O N . C A / L

Canon is a registered trademark of Canon Inc. © 2015 Canon Canada Inc .

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Let’s patch things up Inside the factory that made the leather swatch on your Levi’s page 20

Business Intelligence

Santa’s Asian outpost • Stuck in the middle (class) • Turn that frown upside down • Reguly thinks small on climate change

The Interview

All fed up

Ben Bernanke dishes on the fallout from his gutsy rescue plan (and why he quit the Republican Party)

PHOTOGRAPHS DAN WINTERS; (TOP) LINDSAY ROSSET

D

uring Alan Greenspan’s 18-year tenure at the helm of the Federal Reserve, the central banker once dubbed “The Maestro” was so revered by Republicans and Democrats alike in Congress that they practically genuflected in his presence—even when they didn’t have a clue what he was talking about. His successor, Ben Bernanke, a low-key, collegial academic with a penchant for speaking plainly, would have settled for a little more public civility and a lot more help in combatting a meltdown that triggered the worst global economic slump since the Great Depression. Bernanke, 61, who retired from the Fed last year, would engineer the boldest rescue ever undertaken by a central bank. He would also transform the way it went about its business—pushing for greater transparency; ditching the Oracle-like pronouncements of his predecessor; meeting ordinary people on Main Street; holding press conferences to explain decisions; and appearing on CBS’s 60 Minutes, which showcased his smalltown southern roots. Yet he managed to irritate— and in some cases infuriate— politicians on both sides of the aisle, sparked controversy in economic circles and provoked considerable hand-wringing over the Fed’s embrace of unorthodox measures to

With his new memoir, Bernanke opens the door on the decisions he made at the Fed post-crash DECEMBER 2015 / REPORT ON BUSINESS 9

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stabilize the financial system, to do most of the heavy overly cautious Washington was for the national save Wall Street from itself and lifting,” Bernanke says. central bankers bee, whose put a floor under the sinking While the central bank whose policies made winner would be controls such monetary U.S. economy. One argument, introduced on The things far worse. Ed Sullivan Show. that the Fed’s massive policy levers as interest His conclusion: He finished 26th rates and money supply, bond purchases (known as “Policy makers after misspelling “edelweiss.” Congress is responsible quantitative easing) and its confronted with for tax and spending decision to keep interest rates extraordinary programs that could stimulate effectively at zero for years circumstances must be would debase the currency and the economy. “I do believe prepared to think outside that a better balance between unleash a wave of economythe box, defying orthodoxy if monetary and fiscal policy killing inflation, persists necessary.” He would get to test would have given us a stronger despite being utterly wrong. “I that view to the fullest after the recovery without putting haven’t heard any mea culpas,” collapse in September, 2008, so much burden on the Fed.” Bernanke says drily in an of Lehman Brothers, which he The former Republican interview from Washington. insists could not be saved. In reserves particular venom In The Courage to Act, his the fallout, the financial crisis for the party’s vociferous engaging and occasionally that began with the bursting right wing, whose grasp of revealing memoir of his of the housing bubble in 2007 economics “leaves much tumultuous eight years as went into hyper-drive. to be desired.” He writes that the world’s most influential Shortly after being appointed he still considered himself central banker, Bernanke to the Fed’s board in 2002, a conservative. “But I had lost leaves little doubt about his Bernanke made his celebrated patience with Republicans’ disgust with politicians who “deflation speech,” laying had no qualms about launching susceptibility to the knowout options for central banks nothing-ism of the far right.” personal attacks during public once they ran out of room It was enough to turn committee hearings to cut rates. “I argued that 1 His family him off party politics while enjoying central banks are not out a altogether. Today, friendly conversations owned of ammunition when interest pharmacy that he calls himself “a with him in private. rates go to zero....That has was bought in 1941 by his moderate independent.” certainly been confirmed.” What’s worse, they grandfather, an Growing up in a small didn’t mind leaving The crisis left Greenspan’s immigrant from South Carolina town the Fed to hold the reputation in tatters. The what is now western Ukraine. (1), Bernanke spent a lot fort in the midst of staunch advocate of financial of time at the local library and the crisis—and to shoulder deregulation and unfettered won a state spelling bee at the any blame if its efforts went markets was blamed for sowing age of 11 (2). As an Ivy League awry. And they threatened to the seeds of destruction that academic, he would become chip away at the Fed’s vital were already sprouting on a leading expert on the causes independence. his watch. Meanwhile, the of the Great Depression. His Apart from 2009 and the reputation of the Fed chief who early months of 2010, U.S. fiscal research prompted him to lay played a crucial role in cleaning policy “was not very supportive much of the blame for those up the mess seems certain to years of misery at the feet of of recovery, and it left the Fed grow with time. /Brian Milner

O

TOP 1000

Check-in

In October, Canadian auto parts manufacturer Linamar Corp. (#90) tendered a $1.2-billion takeover offer for French competitor Montupet SA. It’s one of several billion-dollar acquisitions by Canadian firms in 2015. Here are some of the largest.

$11.6 BILLION

Brookfield Infrastructure buys Aussie transportation company Asciano Ltd.

$8.9 BILLION

Borealis Infrastructure Trust buys Swedish power distribution firm Fortum Distribution AB

$8.6 BILLION

Element Financial buys GE Capital’s fleet management business

$6.7 BILLION

Royal Bank of Canada buys U.S. private and commercial bank City National Corp.

$3.9 BILLION HBC buys German department store chain Galeria

NUDE NO MORE Over the years, Playboy published stories by Vladimir Nabokov, Michael Crichton and Kurt Vonnegut, allowing generations of men to claim they read it for the articles. But it was the skin that pushed circulation to 5.6 million by 1975. In October, with copies sold stuck at 800,000, Hugh Hefner announced Playboy would no longer run nude shots, blaming the Internet for devaluing nakedness. Here are three other companies that have shed their core products.

INTERNATIONAL BUSINESS MACHINES INTERNATI

IB began selling punch-card tabulators in the 1910s. In the computer age, IBM it made its name selling mainframes and servers, and went on to popularize personal computers in the early ’80s. In 2005, it stopped selling PCs; under a decade later, it ditched servers. Now, ow, it sells mostly services and software. NINTENDO N

From 1889 to the 1960s, it made playing cards—first, Hanafuda anafuda flower cards and then traditional Western-style cards. Itt launched Japan’s first electronic toy, the Beam Gun, in 1970, and followed soon after with arcade games. Nintendo made its first video game console in 1977. FORTUNE BRANDS

Once known as the American Tobacco Co., its primary business was selling cigarettes—namely Lucky Strikes. In the 1960s, it dropped “tobacco” from its name; in 1994, it sold off its cigarette division, leaving it with home furnishings, golf, hardware and liquor brands. It is now split in two: Beam (named after its primary asset, Jim Beam) and Fortune Brands (led by faucet-maker Moen).

10 DECEMBER 2015 / REPORT ON BUSINESS

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SPONSOR CONTENT

what if?

THE BUSINESS OF IDEAS NEW BUSINESS REALITIES

smart thinking

fintech

internet

personalization disruptive technology

sustainability

big design

transformation property

big data

the arctic

responsible business

roads

corporate governance

urbanization experiential retail mining

creativity

shopping

data

social impact innovation resources predictive analytics real estate long-term capitalism

A transformed world of business Leaders need new approaches to navigate the new challenges they face

W

hen many economists reflect on the recession that sent shockwaves through the global economy in 2008, they view the near-catastrophic event as a global recalibration. Specifically, they see it as a rebalancing of a system shaken by everything from greed to excessive deregulation. For them, the most significant recession since the Great Depression was a particularly devastating moment in time. But in Dezsö Horváth’s view, the recession was more. It represented a tectonic shift in the way we think about business; a catalyst for change that will be felt for decades to come. He calls it a classic Black Swan event, the phrase coined by academic and risk analyst Nassim Taleb to describe a rare anomaly that defies analysis or prediction and has the potential to overturn traditional systems. “The way the corporate landscape looked before 2008 has transformed dramatically and it’s still undergoing a transformation,” Dr. Horváth, Dean of the Schulich School of Business at York University, explains. “I don’t think what happened then prepared anyone to realize just how interconnected the world is today.” The economic effects of that recession are still being felt around the world. That macroeconomic reality alone would be enough to challenge even the savviest of CEOs. But in addition to rapid and relentless globalization, throw in other complexities such as increased government regulation, the emergence of disruptive technologies from big data and “big design” to the digital revolution − not to mention sudden and unexpected mini Black Swans − and the challenges facing business leaders seem immense. “Effective management is far more difficult in a world that’s highly competitive and experiencing major disruptions on an ongoing basis,” Dr. Horváth says. “You need to use very different methods to survive and do well.” The other major change that has ensued, according to Dr. Horváth, is an emerging focus on what he calls responsible or long-term capitalism. In the place of so-called quarterly capitalism − which prioritizes quarterly profit maximization and shareholder returns The Business of Ideas


above all else − an increasing number of organizations such as consumer products giant Unilever are beginning to embrace a longer-term focus in regard to investment and value creation and a much broader stakeholder orientation. “The countries that are relying on long-term capitalism over quarterly capitalism, like Switzerland, Sweden, Finland and even Germany, are becoming more competitive,” he explains, adding that Canadian CEOs are paying close attention to the trend. Dominic Barton, global managing director for management-consulting firm McKinsey and Company, says longer-term capital investments will deliver benefits both for innovation and society. He adds that the existing emphasis on short-term shareholder returns has encouraged some organizations to forego investments that might yield breakthrough research or benefit their employees and communities more broadly. Transitioning the focus away from quarterly financial performance, in other words, is simply good business, stresses Dr. Horváth. “Companies that orient themselves towards a triple bottom line will generate opportunities to differentiate themselves among consumers and improve employee retention,” Barton explains. “Millennials are entering their prime spending years − in 2015 they became the largest generation in the Canadian workforce. They care more about sustainability than any other generation, and have a greater willingness to pay a premium for ‘green’ products. This extends to the labour market, too, where, according to the Pew Research Center, 80 per cent of millennials want to work for companies that care about their impact on the world. How can executives develop the right strategies to capitalize on the new opportunities as they pivot towards a long-term model of success? One way is to place

a greater emphasis on strategic management using advanced predictive analytics, according to Dr. Horváth. Making decisions based on gut instincts or last year’s performance will no longer suffice. Achieving success also becomes an issue of strategic management and asset allocation. “In order to spur change, business leaders must be willing to substantially reallocate people and capital across their business over time,” says Barton. But enacting real change starts by transforming corporate cultures, adds Dr. Horváth. From implementing policies that encourage innovative risk-taking to making the triple bottom line a fundamental aspect of the company’s business practices, it’s a process that must be driven by the C-suite. DEVELOPING GLOBAL EXPERTISE FOR

New Business Realities n Schulich’s

global footprint includes campuses in three countries, satellite centres around the world, a network of corporate and academic partners on every continent and alumni working in more than 90 countries.

n Schulich’s

Centre of Excellence in Responsible Business is one of the world’s largest and most influential academic centres dedicated to triple-bottomline thinking.

n Schulich,

in partnership with McKinsey & Company, is producing a book titled Re-imagining Capitalism to be published in 2016 by Oxford University Press.


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PHOTOGRAPH RICHARD JOHN SEYMOUR/INSTITUTE

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The real North Pole

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PHOTOGRAPH RICHARD JOHN SEYMOUR/INSTITUTE

Yiwu is a city in China’s Zhejiang province, located at roughly the same latitude as Miami and more than 6,000 kilometres from the North Pole. But it is here that more than 60% of the world’s Christmas decorations are made and sold (that’s according to China’s state-run Xinhua news agency). As of 2012, there were roughly 750 factories producing cheap baubles in Yiwu, with low-wage workers making the stuff largely by hand, pulling 12-hour shifts, six days a week. Then it’s on to the Yiwu International Trade Market, which covers four million square metres with upwards of 70,000 booths. The place is so vast, it’s become its own city, with streets, districts, restaurants and coffee shops. The wholesale buyers who flock here from around the world can buy 410,000 kinds of items, from neckties to pens to off-brand electronics. The Christmas kitsch occupies just one floor of one building. There, the stalls are stuffed with colourful Christmas balls and garlands, stockings, wreaths, giant light-up Santas, tinsel and mini plastic trees. It’s all churned out by the nearby factories from spring to late summer. Most of the decorations are bound for dollar stores worldwide—the market’s own website hails its products as “Cheap, OK Quality.” /Dawn Calleja

Photographer Richard John Seymour shot hundreds of booths at the Yiwu market. “It was interesting to see things you recognize from your own house and know that they may have come from that exact stall in such a distant location” DECEMBER 2015 / REPORT ON BUSINESS 13

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Middle Earth

Justin Trudeau’s successful bid for prime minister was bolstered by his focus on middle-class Canadians, neatly captured in the title of his election platform: “A New Plan for a Strong Middle Class.” According to a new study by Credit Suisse, almost half of Canadian adults—or 47.8%— meet the bank’s standard for middle-class wealth that begins at $49,481 (U.S.)*. Over the past 15 years, the ranks of the Canadian middle class increased from 10 million to 13.2 million. The growth is echoed across the globe, with the middle class expanding from 524 million people in 2000 to 664 million in 2015. Today, 13.9% of the world’s adult population is considered middle class. /Steve Brearton *All currency in U.S. dollars

GROWTH IN MIDDLE CLASS, BY REGION, 2000 TO 2015

NORTH AMERICA +18%

BMW AG’s China sales surged 16.6% to 456,732 units in 2014, making China its largest market

EUROPE +14%

70 million women joined the Latin American labour market in the past 40 years

CHINA +55% INDIA +40%

AFRICA +2%

LATIN AMERICA +43%

ASIA/PACIFIC +32%

50 MILLION The number of Indians expected to travel overseas by 2020. Currently, 15 million travel abroad each year

WORLD +27%

16.8 TRILLION

WEALTH HOLDINGS OF MIDDLE CLASS, BY COUNTRY, 2015

9.7 TRILLION 7.3 TRILLION



2.2 TRILLION 791 BILLION

780 BILLION

MIDDLE-CLASS ADULT POPULATION, BY COUNTRY, 2015

108.8 MILLION

91.9 MILLION

62 MILLION

27.9 MILLION 13.2 MILLION 12.9 MILLION

CANADA

MEXICO

20.9 MILLION 23.8 MILLION 23.7 MILLION 11.2 MILLION

UNITED STATES

UNITED KINGDOM

SPAIN

FRANCE

INDIA

CHINA

AUSTRALIA

JAPAN



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SPONSOR CONTENT

THE BUSINESS OF IDEAS THE RISE OF RESPONSIBLE BUSINESS

Entrepreneur Adam Camenzuli (centre) is bringing solar power units to villages in Tanzania.

The company as good citizen A more socially-aware global marketplace has companies racing to invest in better practices

A

dam Camenzuli has travelled a long way from the Schulich School of Business campus in Toronto, where he graduated with an International BBA degree in 2010, but he credits the lessons he learned as an undergraduate for driving his efforts to bring lowcost power to a segment of Africa that has long been underserved. “Before I went to Schulich, I didn’t really know what social enterprise was,” says Camenzuli, 27, describing the business model behind his Tanzania-based startup, Karibu Solar Power. The company, which he founded in 2013 with his brother Brian, is poised to introduce solar energy kits to the country’s 10 million households that remain off the grid. Camenzuli believes there is profit to be made in such a large and underserved market. At the same time, the company is guided by strict adherence to ethical and environmental values. “For us, our feedback loop is: If we make money, we do good, and if we do good, we make money,” says Camenzuli, speaking via Skype. Camenzuli typifies the modern entrepreneur emerging from business schools such as Schulich where classroom discussions increasingly focus on business as a means for generating positive change as well as profit. Since the global economic meltdown of 2008, many of the world’s biggest brands, from Wal-Mart to Starbucks, have been grappling with issues of environmental stewardship, human rights and fair trade, as investors and consumers refuse to tolerate ethical and environmental abuses. Companies like Patagonia and Unilever, widely considered to be leaders in the move towards corporate social responsibility (CSR), are taking that mission even farther by embedding those practices into all levels of the business − from the decision makers in the C-suite through the supply chain to its lowest paid workers and the communities where they live. “If you talked with (Unilever CEO) Paul Polman, I think he would agree that there is increasing recognition in the business community of an obligation to address wider social concerns,” says Dirk Matten, professor of strategy and Hewlett-Packard Chair in The Business of Ideas


Corporate Social Responsibility at Schulich. Of course, there is also profit potential in serving the billions of customers around the world who are at the base of the pyramid. Traditionally, most companies have all but ignored emerging markets, says Geoffrey Kistruck, associate professor and Ron Binns Chair in Entrepreneurship at Schulich. If they did make an investment, it was in the form of a donation − money no one expected to recoup other than through a few positive media hits and perhaps a boost to corporate morale. That attitude has changed. Emerging markets now account for 57 per cent of Unilever’s global business, according to the company. Other companies have followed suit with more targeted programs. “Where companies used to go only where there is the most money, spending hundreds of millions fighting over 1-per-cent market share, they now realize they can spend a fraction of that money by moving into these new markets … and do it in a way that the money actually comes back to them,” says Prof. Kistruck, founder of the Social Impact Research Lab at Schulich. Andrew Crane, a business ethics professor and director of Schulich’s Centre of Excellence in Responsible Business, said the conversation around CSR has been rumbling for at least two decades. The changes have partly come as a result of external pressure − investors, consumers and social advocates who want everything from greater corporate transparency and better consumer protection to reduced carbon emissions and enhanced global labour practices. But Prof. Crane also believes most company leaders and their globalized workforces genuinely want to make a positive difference. “The question is always about how to do that and how to reconcile that with the other expectations they have in terms of creating shareholder value and making a profit,” he says.

Critical to the company’s success is visionary leadership. “This is not something that is done by a separate CSR team. This is done by the CEOs,” says Bruce Simpson, a senior director with consultancy McKinsey and Company and a contributor to Re-imagining Capitalism, to be published in 2016 by Schulich in partnership with McKinsey. For Camenzuli, his journey has been challenging in many ways. Now, with the official licenses needed signed and stamped, his company is ready to introduce its solar kits into the broader Tanzanian market in the coming weeks. “For us, what we like to do is see our product being used by people,” says Camenzuli. “If that happens, we have literally changed their lives for the better. There is absolutely nothing else that matters.” DEVELOPING GLOBAL EXPERTISE IN

Responsible Business n Schulich’s

MBA is ranked #1 in the world in Responsible Business in the latest global survey conducted by Corporate Knights magazine.

n Schulich

co-hosts The Business for a Better World Case Competition, an international MBA competition held annually at the World Economic Forum in Davos, Switzerland.

n Schulich

has one of the highest concentrations of endowed research chairs dedicated to Responsible Business, with chairs in Business Ethics, Business & Sustainability, Corporate Social Responsibility and Corporate Governance.


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12/15 Disruption

If you can’t beat ’em...

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wo decades ago, Japanese electronics giant Sony was ascendant. Not only were its products everywhere— televisions, video game consoles, cameras, headphones, watches—but owning a Sony device was a status symbol. In 2015, however, the company is a shell of its former self. Though it still had revenue last year of $68 billion (U.S.), its market share in both TVs and smartphones has dropped by over half in the past six years. It only managed to eke out a profit last quarter because it supplies parts for Apple’s iPhone—a competitor to Sony’s own Xperia line of handsets. Conventional wisdom states that Sony fell because, as the digital era arose, it simply didn’t understand software; using a Sony MP3 player or DVD player was for years an exercise in frustration. Yet, software is only part of the equation. Sony shrank so radically because it couldn’t produce a digital ecosystem—that is, a mix of devices, software and services that work seamlessly together. By the time Sony started to get it right, it was too late. Hundreds of millions of users were already loyal to ecosystems created by Apple and Google.

It’s a struggle more companies will face in the coming years—if they aren’t already. Once upon a time, there was a clear line separating digital from analog. A company like Sony only had to worry about how each of its products performed in isolation. Today, everything from cars to kettles relies on software— and an online network—to function. Call it the ecosystem effect: Suddenly, companies that make washing machines have to think about which smartphones their potential customers are carrying around. As is often true at this point in history, Apple is instructive. It once focused exclusively on what were essentially just computers of different sizes—iMacs, iPads, iPhones, iPods. But over the past two years, it has been expanding further afield. It has made forays into fashion, with the Watch, and home automation, with its HomeKit platform, which turns Apple devices into controllers for thermostats, smart door locks and more. It has even made significant investments in the auto sector—for now, just the software for navigation and media in cars, but it’s only a matter of time before it releases its own electric vehicle. If these were all disconnected products, this might not have companies like GE, LG and General Motors running scared. But they’re not disconnected products. All of Apple’s devices run on varying versions of its own software, which means they all work best together, with an iPhone or iPad as the control centre. The beauty of the ecosystem effect, from Apple’s point of view, is that it’s sticky: Once a customer invests in an appliance or auto navigation system that works with her smartphone, she’s much more likely to buy products that function effortlessly with the same system. Understandably, then, Apple will continue to create more and more varied products in the same line. Of course, this new connected world still holds loads of possibilities—as long as you’re willing to hook your products into these existing ecosystems. There are pitfalls, however. Consider Samsung: Not only has it raked in billions

ILLUSTRATION ANDY MARTIN

Apple’s ever-expanding roster of products are all connected by software, creating a sort of digital ecosystem. And that means other manufacturers have to make a choice: join ’em or go it alone


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Call it the ecosystem effect: Suddenly, companies that make washing machines have to worry about what kind of smartphones their potential customers are carrying around Unfortunately for Samsung, and the many companies that once had no reason to think about digital, the success of Apple and Google make that change an uphill battle. When everything runs on software, it is the digital interface that is primary—and Google’s Android and Apple’s iOS control nearly 85% of the computing market. Even Microsoft—a company that once held a near monopoly, and has both enormous cash reserves and deep software expertise— has found no way to chip away at the Apple/Google duopoly. Late to the shift toward the ecosystem, it sits at 14% of the computing market, a disparity that is likely to get worse, not better. In theory, digital and software offer limitless choice and opportunity. In actuality, the ecosystem effect is subject to a distinct first-mover advantage: Once entrenched, those with comprehensive ecosystems become increasingly difficult to dislodge. Now, companies of all stripes are stuck dealing with the implications, and they really have just two options: build their own ecosystem and try to challenge the established players; or rely on someone else’s and be subject to what may be competing interests. Unfortunately, neither option is particularly palatable. /Navneet Alang

Automotive

DRIVE ON This fall, Ontario became the first province to permit road tests of self-driving cars. In making the announcement, the government also committed money to a program that will bolster the region’s auto industry by pairing academic research on automated vehicles with business. Here’s how the emerging technology is likely to impact Canadians in the future. /Steve Brearton

$65 BILLION

Amount that self-driving vehicles would bolster the Canadian economy, according to a 2015 report by the Conference Board of Canada. The result: fewer collisions ($37.4 billion), time saved ($20 billion), less congestion ($5 billion) and fuel savings ($2.6 billion).

$2,716

1,400

LIVES Number of people who die in traffic accidents in Canada every year. Transport Canada, in 2007, pegged the costs of collisions at around $62 billion annually.

Estimated annual household savings per vehicle. A 2015 KPMG report on the impact of driverless cars on the insurance industry in the U.S. predicted the number of accidents will be reduced by 80%, but the average cost of accidents will increase 150% by 2040. Warren Buffett, whose holding company Berkshire Hathaway owns insurer Geico, had this to say: “If you could come up with anything involved in driving that cut accidents by 30%, 40%, 50%, that would be wonderful, but we would not be holding a party at our insurance company.”

Since robot cars are way more efficient at parking than humans, a huge amount of space will be freed up, according to McKinsey & Co. The result: Land could be reallocated to parks and other spaces

5.7 BILLION SQUARE METRES

$102 BILLION

(U.S.)

selling smartphones and tablets, it also sells everything from vacuum cleaners to televisions to refrigerators. It seems perfectly poised to succeed as it transitions to the world of ecosystems. Yet, its tent-pole smartphones are reliant on Google’s Android software; adding in new capabilities that would allow Samsung to connect all its products digitally means waiting on Google to upgrade its operating system to include those features. Recognizing the long-term implications, Samsung has begun deploying its own software, called Tizen, which it has started to embed in some of its TVs and phones in the hopes of kick-starting its own interlinked ecosystem.

The market for advanced driver-assist systems by 2030 (currently $2.4 billion), according to Boston technology consulting firm Lux Research. Ontario’s Ministry of Transportation pledged almost $3 million to grow the industry. That pales in comparison to the United Kingdom which, in 2015, pledged £100 million for research and support of intelligent mobility, including driverless vehicles.

$150,000 (U.S.)

Current cost of the technology in a Google driverless car. IHS Automotive predicts consumers will pay a premium of up to $10,000 for automated cars in 2025, and $3,000 10 years later. By 2035, IHS foresees 54 million self-driving cars on the road globally.


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15-11-06 9:48 AM

SPONSOR CONTENT

THE BUSINESS OF IDEAS SMARTER REAL ESTATE & INFRASTRUCTURE

Another condo rises in Toronto. How can we make our cities smarter?

Rethinking cities in the age of urbanization Canada will need to shape smarter, sustainable and more livable cities

THE GLOBE AND MAIL

A

new age of urbanization has begun. Around the world, people are migrating en masse to cities. Few countries, including Canada, can keep up with the growing demand for urban real estate and infrastructure. For business leaders in Canada, ranked 40th in the UN’s global urbanization report, this presents both an opportunity and a challenge, says James McKellar, who launched Canada’s only formal graduate real estate program in the early 1990s at the Schulich School of Business. Five years ago, Schulich’s program was expanded to include infrastructure management, the second most important building block in the regeneration of cities. As economic migrants help to fuel demand for real estate in Toronto, Vancouver and other centres, the thriving sector is able to entertain big ideas to meet the country’s unprecedented need for housing and shelter, social services, sanitation, access to clean water, alternative energy, education, and transportation. A renewed push to make our cities better places to live, address social needs and enhance the prosperity of our urban regions is having an impact on the way we do business. In the 1990s, a time of wild volatility in interest rates and uncertainty in urban housing markets, many of the country’s largest property management and development firms went bankrupt, recalls Prof. McKellar. Out of the ashes, arose a stronger, vibrant industry, flush with professional talent and well-informed leadership, disciplined lending practices, creative new business arrangements and financial models, government initiatives and new institutional investors such as OMERS and other pension funds. Today, Prof. McKellar estimates that half the business that banks do is related to real estate, whether it’s mortgages or construction lending. A much stronger regulatory framework helped Canada avoid the 2008 credit crisis that burst a real estate bubble in the United States fuelled by mortgage-backed securities. “We’re seeing the emergence of real estate as a major investment asset class and a broader recognition of its importance as both a factor of production and a social good,” says Andre Kuzmicki, a former industry executive and Executive Director of the Schulich program. The Business of Ideas


Given the scope and scale of the urban challenges across the globe, experts are now focusing on ways the industry can intelligently meet the demand for more livable and sustainable communities, using new technologies and new business models. Yet in many cities across Canada, the building of infrastructure isn’t keeping up and existing infrastructure is crumbling. “We don’t use our cities very efficiently,” says Prof. McKellar. He says Canadian cities remain wedded to the car − a mode of transport that spawned superhighways and low-density sprawl beginning in the 1960s. But what kinds of infrastructure, other than more roads, do we need to address today’s demographic trends? Particularly since young people are increasingly attracted by walkability and proximity to amenities, while the growing senior population desperately wants to be independent and involved. To solve these problems, Prof. McKellar says we’re going to have to get creative. In an age where Airbnb has disrupted the hotel industry without owning a single hotel room, technology is also poised to have a major impact on the way we use space. Apps such as LiquidSpace are beginning to offer companies a way to book unused office space for short stints, bringing the sharing economy to real estate. One U.S. expert predicts that office sharing, combined with portable work stations, could eventually reduce the need for office space in major cities by as much as 50 percent. New business models are reshaping the urban environment as well, Uber being one example. Other, more far-reaching business models will follow as firms such as Apple and Google begin to recognize the enormity of this global market for smarter and more sustainable cities. This can only be a positive trend to solve the problem of increased demand for space amid aging buildings and infrastructure that belong to

an older era, says Christopher Wein, president of Great Gulf Residential. “You need to look at a city as a renewable resource,” says Wein. “How do we take the office buildings we had in 1975 and repurpose them, reuse them, create different uses for them? Can we convert parking lots into entertainment spaces, subterranean farms, gardens?” Future trends include smaller individual living spaces and greater investment in shared social places. Will Canada become the new frontier in addressing quality of life in our cities? Our urban centres are the laboratories of the future, testing and adapting as changes in technology, climate and demographic shifts change our way of life. DEVELOPING GLOBAL EXPERTISE IN

Real Estate & Infrastructure n Schulich

developed Canada’s first MBA specialization in real estate in the early 1990s and expanded the program in 2010 by becoming the first business school in the world to offer a specialization in Infrastructure.

n Schulich’s

Real Property Students’ Association, in partnership with RealNet Canada Inc., hosts an annual international Developers’ Den competition to analyze and determine the optimal solution to a real-world development challenge.

n Schulich

is in the process of launching a one-year Master’s degree in Real Estate and Infrastructure – the first of its kind.


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Y

Made in Canada

Patch work

1853 The year Levi Strauss was founded

MEN’S

U.S. JEANS MARKET

WOMEN’S MEN’S

LEVI’S U.S. PRODUCT SALES

WOMEN’S 0

1

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3

4

5

6

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$ billions 9 10

“I want to die with my blue jeans on.” —Andy Warhol

PHOTOGRAPH LINDSAY ROSSET

You know that patch on the back of your jeans? Usually leather, sometimes paper or rubber? Well, there’s a decent chance it was made in Canada. Every Friday, the leather workers at Medike Branding Solutions in Markdale, Ontario, pack a truck with three or four pallets of patches emblazoned with brand names like Guess, Lucky and Calvin Klein. By Saturday, they’re loaded aboard commercial jets on the way to the company’s Hong Kong distribution centre. From there, they’re sent to textile plants across Southeast Asia. CEO Jonathan Harris bought the company four years ago. It started in 1984 as a supplier to Levi’s, and Harris still keeps one salesman permanently at Levi’s headquarters. “There’s a fair trick to making leather for denim, to try and get a natural leather to last at 46 C for 10 or 15 washes,” he says. It’s only gotten harder as fashion companies increasingly sell themselves as ethical brands: “All these guys have lists of chemicals that are banned and performance benchmarks you have to hit.” In addition, Harris’s 125-person shop churns out lots of high-margin patches—ones with Swarovski crystals or metal pieces embedded in them. “Some of these patches need five machines to make,” says Harris. Now, he’s looking to branch out. For the past eight months, he’s been taking on smaller custom jobs, and he’s looking to buy a company that makes high-end leather bags or accessories. The margins would be higher—and he might even be able to brand his own company’s name on the hide. /Shane Dingman



15-11-05 10:02 AM

T:7.875”

Ph Physicality

Da Ct Connectivity

T:10.75”

Data

A powerful human reaction happens when you combine three important elements. Introducing Canada Post Smartmail MarketingTM. It utilizes the physical qualities of direct mail, new data with precise targeting, and seamless connectivity with other channels. It’s a more intelligent approach to direct mail. And when it’s part of your media mix, it drives action.

canadapost.ca/smartmailmarketing

TM

Trademarks of Canada Post Corporation. The Envelope and Circle Design is a trademark of Canada Post Corporation.


15-11-04 1:58 PM

12/15

Venture

The package deal

Economic theory arcane? Not to Nulogy, where a Nobel thinker’s ideas inspired a cleanup in aisle 1 (and every other aisle)

I

f you’ve ever steered your shopping cart into one of those cardboard displays in supermarket aisles, snapped up a shrink-wrapped three-pack of detergent from Costco or bought a bottle of something because of the enticing freebie satchel dangling from its neck, you’ve encountered the strange fruits of the customized packaging industry. And you should get ready for more of the same. According to Nulogy, a Toronto-based firm that develops supply-chain management services in this space, the business of contract packaging has ballooned in the past decade or so, now representing a $25-billion (U.S.) market in North America alone. Nulogy is the work of co-founders Jason Tham, Kevin Wong and Jason Yuen, who popped out of the University of Waterloo in 2002, keen to start a company. Tham, who is now CEO, had a degree in systems design engineering. But the spark behind Nulogy, he admits a bit sheepishly, was a 1996 Wired article in which Steve Jobs said the Internet would usher in an era of mass customization. When he got to Waterloo, Tham studied with legendary business professor Larry Smith, soaking up the theories of Nobel-winning economist Ronald Coase, who studied whether certain tasks on a company’s way to market are best kept in-house or farmed out. Tham concluded that the future of consumer product manufacturing lay in curated supply chains. The opportunity that presented, as Tham explains it, is this: Brands typically produce a range of standardized products. But retailers have increasingly wanted

customized merchandising—everything from pop bottles with customer names printed on the label to cardboard displays whose offerings cater to regional tastes. Manufacturers hire so-called copackagers to take care of such tasks. But the industry, as of a decade ago, still relied heavily on spreadsheets and manual work to get the job done. Nulogy’s idea was to take the job into the cloud. Five years after starting Nulogy, when the co-founders were still hustling up business from Tham’s parents’ home, they applied for $200,000 in seed capital from the Investment Accelerator Fund (IAF), a MaRS Centre capital pool for early-stage companies. The fund found Tham’s concept overly complicated, among other things, and said no. But Tham, who exudes entrepreneurial bonhomie, persuaded a former colleague with a connection to Cycle Capital partner Shirley Speakman, an IAF evaluator, to take a second look. “When I started talking to [Tham’s] customers,” Speakman recalls, “they said, ‘My business wouldn’t run without this.’ ” She recommended investing in Nulogy. Another judge, MaRS Innovation managing director Barry Gekiere,

PHOTOGRAPH JC PINHEIRO

Nulogy CEO Jason Tham at a custom-packaging facility: hooking up the cloud and the checkout


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12/15 was also taken by Tham’s cheerfully persuasive manner, but quietly wagered Speakman a bottle of Scotch that Nulogy would never survive. The world of customized packaging has exploded since Speakman had her hunch, although Nulogy claims that it is still the only firm that provides co-packers with the specialized software systems designed to automate—or “curate,” in the company’s parlance—what they typically do at painstaking length on spreadsheets. Other investors have cottoned on. Nulogy secured $7.5 million in an October, 2014, financing round; a year later, the firm had surpassed the $10-million plateau in annual sales. Since 2011, in fact, the company has seen top-line growth in excess of 350%, earning it a spot on this year’s Deloitte’s Fast 50. Gekiere, in other words, lost the bet. Tham says Nulogy’s solution has evolved over a decade. The firm now offers product tracking and web-based portals so customers can see how and where their wares are selling. Nulogy

works with logistics companies used by more than 100 brands, including giants like Johnson & Johnson and Bayer. Yet Nulogy’s growth isn’t an uninterrupted good-news story. In the summer of 2014, with the new financing in place, the company was in pedal-to-the-metal mode, hiring dozens of young engineers and adapting its unique software to the rapidly growing market. Tham, a triathlete who competed in 2012 on the Canadian national team, had recently run the Boston Marathon in under three hours. One June day, he awoke feeling unwell and dragged himself into a walk-in clinic. A few days later, Tham was in Toronto General Hospital’s intensive care unit, suffering from pneumonia, aggressive sepsis and organ failure. His doctors gave him a 25% chance of surviving. After a month in a coma, Tham had to relearn how to think, talk and walk. But with the support of his wife, parents and twin sister, he battled back. Last year, Tham decided to run Boston again, even though he’d lost lung capacity. This time, it took him four hours.

Remarkably, many of Nulogy’s staff— there are now about a hundred, packed into a clutter-filled, open-concept office where it’s not uncommon to see some of them padding around in bare feet— never knew what had befallen their CEO. Now that Tham has recovered, he and his board are looking to push the firm into a new phase. “We’re at a point where we can start thinking about hockey-stick growth,” says director of marketing Bally Boodram, a JDS Uniphase alumnus. Nabbing a spot on the Deloitte list— and a parallel North America-wide ranking—will help Nulogy’s brand. And while the profile means that investors may come a-knockin’, Tham still adheres to the view that every hard-won dollar of customer revenue is 10 times more valuable than a dollar of equity financing. He seems much more determined to hit $100 million than to take the company public. And Tham’s brush with death has only made him more determined. “It’s transformative,” he declares. “It’s given me clarity about what I want to do with the company.” /John Lorinc

WHICH CONFERENCE IS RIGHT FOR ME? The annual World Economic Forum in Davos, Switzerland, kicks off on Jan. 20. For four days, 3,000 of the globe’s decision makers—CEOs, world leaders, thinkers and, of course, Bono—will try to solve the world’s problems. But, at $71,000, is it really the best use of your cash and time? /Dave Morris Are you spending your money, or someone else’s? MINE (OR MY CONSTITUENTS)

MY BACKERS ARE VERY PATIENT

DO YOU TAKE AMEX?

Let’s do lunch

Describe your company

Here’s your credit card, madam

ONLY FOR YOU, PRESIDENT CLINTON.

I’M BOOKED... AS IN, I’VE GOT A BOOK TO PLUG.

WORLD ECONOMIC FORUM Davos In terms of its ability to draw the great and the good, the panel discussions and lavish parties are rivalled only by a G20 summit.

TED2016 Vancouver For trendy idea-slingers, that red-letter stamp of approval remains the ultimate resumé-builder.

UBER WITH A DASH OF AIRBNB/ YELP/PINTEREST. BUT, Y’KNOW, COOL.

SXSW INTERACTIVE Austin Primarily associated with three things: social media (Twitter and Meerkat ascended here), big-name keynotes (Zuckerberg, Snowden et al.) and delicious barbecue.

CRUSHED SILICON VALLEY AND NOW GIVING INCUMBENTS IN BANKING/ AUTOMOTIVE/ TELECOM NIGHT SWEATS.

MOBILE WORLD CONGRESS Barcelona This massive confab is where the latest in network protocols and standards emerge. But, for most, it’s all about the hardware: bendy phones, smartwatches… swoon.

HANG ON, USING MY APPLE WATCH TO PLACE AN ORDER TO SHORT APPLE STOCK.

IRA SOHN INVESTMENT CONFERENCE New York Your David Einhorns and Bill Ackmans aren’t known for leaving money on the table, so why do they announce their best ideas at a conference? It raises money for cancer research.

DARN. WILL YOU ACCEPT TWO MILLION TONNES OF IRON ORE?

PROSPECTORS AND DEVELOPERS ASSOCIATION OF CANADA Toronto The mining industry has had it rough, so expect a subdued atmosphere. Attendees will be looking for the silver lining—and staking a claim on it.


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15-11-04 1:49 PM

12/15 140-CHARACTER REVIEWS Dealing with people, black-belt edition: How to handle the worst among us

Corporate Governess

The Invitation-Only Zone: The True Story of North Korea’s Abduction Project by Robert S. Boynton From ’77 on, North Korean commandos abducted Japanese citizens off the streets. Burning question: What does Japan do now? #CallMacGyver

Grin and bare it —Sam B., Toronto

Dear Sam Your question reminds me of a waiter I encountered in Paris who sneered openly at my wine choice and never cracked a smile throughout his service. When I complained to the manager (in my fractured French), he replied (in perfect English), “Why do you Americans expect everyone to be happy? He is doing his job.” I didn’t bother to correct him because, as Canadians, we share the same bias. We expect employees to love what they do and, moreover, to unleash their enthusiasm at every opportunity. Any CEO today will tell you they’re looking for “people who are passionate” about their work, whether the job is for an aerospace engineer or packaging candy on an assembly line. But while I concede a grudging admiration for the Parisian server’s authenticity, he also made the dining experience unpleasant and tense. I suspect that’s the case with your office interactions. Your team, and indeed the employees you serve, may be feeling your indifference (accurately) by the lack of expression on your face. So if this job is valuable to you, I’d dig a little deeper to find something in it that you genuinely like, if only the paycheque.

Dear Corporate Governess I used to work at a big bank but I’ve just started at a smaller company. At my previous employer, there was no gift giving, but I’ve noticed that everyone here is very close. What should I do with Christmas coming up? —Angelina D., Calgary Dear Angelina Going into a new workplace can feel like encountering the practices of a remote tribe. There are unspoken rules that everyone else seems to know. You don’t want to get it wrong, yet you’re afraid to ask. But that’s exactly what you need to do. Gift-giving customs vary, particularly for bosses. What’s the norm in one place may be seen as kissing up in another. It’s easier if you already have a mentor who can fill you in. If not, invite someone out for coffee and ask the following: Do employees at your level give the boss a gift? What’s considered appropriate? How about co-workers? Do you include everyone or just the people you hang out with? If there’s a Santa exchange, do staff still give each other gifts? A $20 limit, including for the boss, shows common sense, even if others are more extravagant. It’s hard to go wrong with a book, gift card or delicious goodies, especially if you take note of individual taste. It’s a small office, so don’t blanket everyone with the same boxed truffles. Steer clear of gag gifts, which are often just embarrassing to the recipient. And yes, wrap a few extra items to keep in your desk, just in case. In no time, you’ll be the queen bee of gifting.

The Right Wrong Man: John Demjanjuk and the Last Great Nazi War Crimes Trial by Lawrence Douglas Mistaken for Ivan the Terrible, freed, then tried for his actual crimes—SS guard and U.S. auto-worker’s tale is a riveting legal cluster bomb

Should the West Engage Putin’s Russia? The Munk Debates by Stephen F. Cohen, Vladimir Pozner, Anne Applebaum, Garry Kasparov Spoiler alert: Crowd narrowly voted No, but Yes made a solid case that NATO membership is a key factor. Way out: Obama-Putin slapshot contest?

ILLUSTRATION ANTONY HARE

Dear Corporate Governess My manager expects our HR team to be thrilled about working here, but to me it’s just a job— although one that I’m grateful to have. My last evaluation suggested that I need to smile more. I’m not into faking it.



15-11-05 9:57 AM

SPONSOR CONTENT

THE BUSINESS OF IDEAS THE NEXT LEVEL OF EXPERIENTIAL RETAIL

Personalized experience is at the heart of the new retail.

Taking customer experience to the next level As retailers leverage ever more market intelligence, brands compete by providing a better buying experience

REUTERS

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etail on a global scale is in the midst of a transformation, as a new emphasis on experiential marketing and omnichannel selling is revolutionizing stores, both online and bricks-and-mortar. Sophisticated brands that anticipate rapidly emerging trends and execute well are thriving in this new landscape. Marketing professor Rob Kozinets, who developed the unique Global Retail Management MBA specialization at Schulich School of Business, is on the vanguard of research into how customer experience drives retail. He has investigated experiential brands that range from Wal-Mart and Target to ESPN Zone and Disney. A number of brands are differentiating themselves by offering themed retail spaces, he says, citing the way McDonalds’ McCafé redesign has aimed to provide an Italian coffee house feel through its use of colour schemes and other physical details such as seating. Apple and Tesla stores have altered the way that people buy electronics and automobiles and have changed the way all kinds of retailers approach their customers, from restaurants to banks. Customers often perceive theming as adding value to what is essentially the purchase of a commodity, says Prof. Kozinets. Experiential marketing, according to Schulich assistant marketing professor Alan Middleton, is all about identifying the optimal kind of experience the consumer wants. He cites research that says if customers can spend an extra 20 minutes in a bookstore, they will double their intended purchase. At other times, however, such as on a grocery run, shoppers want to get in and out efficiently. “The base benefit of products is growing more and more similar because of technology, so the experience you can offer people grows more and more important,” says Prof. Middleton, who is also executive director of the Schulich Executive Education Centre and an inductee in the Canadian Marketing Hall of Legends. “Underlying this is another important trend: personalization. This is where The Business of Ideas


analytics is so critical. The more I can understand about the desire of the customer, the more I’m able to meet that need.” Associate professor David Johnston, who teaches operations management for Schulich’s Global Retail Specialization, researches the way brands are harnessing big data, or business analytics, to identify sales patterns to help them decide what to stock in a warehouse. “If you’re Canadian Tire, how many lawnmowers versus litres of motor oil do you order to fully stock the shelves of your 400-plus stores across the country?” he says. Analytics is providing retailers with the real-time logistics answers they need, while feeding them insights into the hearts and minds of consumers. Companies are also increasingly embracing omnichannel retailing – a buzzword for the utilization of multiple channels beyond bricks-and-mortar stores to online stores and mobile app stores, all offering the same retail shopping look and feel. Retail has been transforming itself since the days when open bazaars evolved into shopping malls and big-box stores, says Alex Arifuzzaman of InterStratics Consultants. But today, more than ever, merchants must stay on top of trends. “Even if demand for a retail category goes down, say 10 per cent, that doesn’t mean all retailers will be impacted evenly,” he says. “The strong retailers who successfully react to these changes will continue to thrive. Others could fall by the wayside.” One of newest and fastestgrowing frontiers in the evolution of retail, says Prof. Kozinets, is branding that crosses over into the realm of entertainment – what has been dubbed “retailtainment.” One retailer that does this well is the U.S. chain American Girl Place, which has turned selling dolls into a $620-million empire by offering families a unique store experience featuring detailed, museum-like displays of dolls and themed dining.

“Parts of the stores are like a museum, and parts are like a theatre where customers act out American history,” says Prof. Kozinets. “The chain had sociologists and historians write background stories for these dolls in different phases of American history. The consumer goes there to shop like at any store, but also gains an emotionally-charged brand experience.” Prof. Kozinets refers to these as “brand scapes” – stores that sell brands as entertainment. Ultimately, he says, this retail segment is growing because it is delivering a level of customer experience that is at once immersive and entertaining. “The cutting edge in retail is not one of quicker supply chains, better data analysis, improved pricing and selection, or even a better and more visionary customer experience,” says Prof. Kozinets. “It’s one that demands all of them, all together, all the time.” DEVELOPING GLOBAL EXPERTISE IN

Experiential Retail n Schulich

launched Canada’s first MBA specialization in Global Retail Management in 2014.

n Schulich

has developed a number of cutting-edge courses such as Retail Analytics, Professional Selling, and Customer Experience Design.

n Retail

is one of the top 5 industries that Schulich MBA graduates work in, according to the School’s Career Development Centre.


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15-11-04 2:58 PM

Eric Reguly

Short of breath

As thousands of delegates yammer about long-term climate catastrophe in Paris, fixes that could be made now are being ignored

PHOTOGRAPH GREG FUNNELL

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o one has any idea if all 195 countries at today. Why bother to find ways to prevent birds from being the Paris climate change conference will sliced and diced by wind generators cluttering the landscape, sign a binding agreement to stop climate or to preserve wetlands for ducks, if global warming is going to change from turning Planet Earth into a eradicate most species anyway? “To prevent extinctions in the cosmic Turkish sauna. What is becom- future, it’s not enough to curb our carbon emissions,” he wrote. ing apparent is that the conference, “We also have to keep a whole lot of wild birds alive right now.” which runs for 12 days starting Nov. 30, But the conservation efforts will get short shrift, he says, “if is sucking the oxygen out of all the other worthy conservation the problem of global warming demands the full resources of and sustainable development efforts on our debilitated planet. every single nature-loving group.” Canadian climate change consultant and COP veteran John The Paris conference, formally known as COP21 (for the 21st Conference of the Parties since the landmark Rio de Janeiro Drexhage has a similar view on the COPs. He calls the planetEarth Summit in 1992), is a machine that mows down every- sized climate change file an inadvertent “policy bully” that has thing in its path. Its sheer, numbing size shows you just how largely brushed aside other environmental issues and sustainable development goals. easily lesser environmental causes can get crushed. The United Nations set out 17 goals at a sustainable develThe event is to be held at Le Bourget airport—nothing in central Paris was big enough to hold it. The conference halls opment summit in New York City in September. They ranged from ending hunger to making cities livand pavilions will cover some 45 acres. able, green and safe. Only one of the goals At least 40,000 participants are expected, was directly related to climate change, and among them 3,000 journalists, and 300 Why bother to that goal was focused on adapting to rising negotiators and minions from Canada find ways to temperatures, not preventing them. alone. More than a 100 civil society groups, prevent birds from The messages from that summit have from England’s Artists Project Earth (APE) already been buried by the Paris avalanche, to Toronto’s Zerofootprint, will open stalls being sliced and which is a pity, because you would think in the vast climate souk. The direct conferdiced by wind that fixing climate change and making citence budget is €170 million. That excludes generators, or to ies, agriculture, forestry and industry less the fortunes spent on hotels, meals, transpreserve wetlands destructive are more or less complemenportation and inevitable posters declartary pursuits. ing Canada the “Fossil of the Day” for the for ducks, if global There are two structural flaws with Harper regime’s blocking moves on cliwarming is going COPs, especially the biggies like Copenhamate agreements over the past decade. to eradicate most gen and Paris. The first is that they are allAfter the failure of the last big COP, in or-nothing events. If the top polluters, like Copenhagen in 2009, the Paris edition has species anyway? the United States, China and India, don’t emerged as crunch time for the long-term sign up, the event collapses. The second is health of the planet and the COP process itself, which is severely discredited and in sore need of a win. that multilateral effort crowds out national efforts. No one in In the 23 years since the Rio summit, carbon dioxide emis- Paris will care that Norway is paying Liberia up to $150 million sions have soared relentlessly, despite efforts—ranging from (U.S.) to stop the destruction of its lush and ample forests. The COP process needs a radical rethink, even if, against the hopeless to the heroic—to merely slow their rise, and only eventually reduce them. The expectations, and the demands all odds, the Paris summit succeeds. In the corporate world, that go with them, are high. India alone is on a mission to shake “silos” is a bad word. Management consultants advise that they down the rich world to fund its $2.5-trillion (U.S.) carbon- be broken down. But within the climate change framework, reduction and climate adaptation agenda over the next 15 years. sustainable development silos need to be erected. National No wonder lower-profile causes can’t compete with the conservation and sustainable development goals, from preCOP machine. The pity is that they have a chance to make the serving forests to making beaches safe for nesting sea turtles, environment better now, while the COP process is obsessed might be only tiny steps. But if a lot of tiny steps are taken together, they can make a lunge—one that can help mitigate with preventing mass extinctions decades down the road. In a New Yorker article published last April, called “Carbon climate change while keeping a lot of beasties alive. capture,” bird lover and bestselling author Jonathan Franzen argued that the global effort to slow climate change in the Eric Reguly is an award-winning columnist with The Globe and Mail. future has made it hard for anyone to care about conservation He is now based in Rome and can be reached at [email protected] 28 DECEMBER 2015 / REPORT ON BUSINESS


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HOW TO BECOME AN INTERNATIONAL CEO Want to be a global leader? Here are some of the skills you’ll need to succeed outside of Canada Most entrepreneurs would love to build an international company – especially Canadian business owners. Although our business environment spawns plenty of innovative products, the domestic market for sales can be fairly limited. Despite this, only a small fraction of Canadian businesses – a mere 10 per cent of Canada’s 1.1 million small and medium-sized enterprises (SMEs) – succeed at making international sales, according to Industry Canada. Why? Because it takes a certain skill set to go from domestic business to international operation. Fortunately, enterprising

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business owners can learn how to go global. According to a report by HSBC and the Conference Board of Canada, Selling to the World: The Keys to International Business Success, the four characteristics of an international company – or what HSBC calls a “global competitive advantage” – are having skilled executives, market knowledge, the ability to innovate, and international networks. Executives who master these keys to success will be the ones who create the best global operations, says Linda Seymour, executive vice-president and head of commercial banking for HSBC Bank Canada. While every part of the global competitive advantage is important, the most successful international CEOs are entrepreneurial, says Seymour. “They

understand the challenges of expanding internationally,” she explains. “They’re also very proactive in identifying opportunities. They’re not just looking within Canada, which is a relatively small market.”

To expand internationally, think bigger

That entrepreneurial vision is a big reason why AMP Solar Group has done so well. The company, which develops and owns solar projects around the world, has grown revenues by around 11,000 per cent over the last five years. About 40 per cent of its revenue comes from foreign sales, but Dave Rogers, AMP’s president and CEO, sees that rising to 90 per cent by 2017. Rogers, a former investment manager, founded AMP Solar in 2009 on the

2015-10-30 2:35 PM 15-11-04 2:07 PM

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KATIE DIANE PHOTOGRAPHY

Global CEOs like 1-800-Got Junk’s Brian Scudamore, here in his Vancouver office, are always talking to staff, clients and locals to better understand new markets.

belief that the market for renewable energy was about to take off. While AMP launched in Ontario, which has made significant investments in solar energy, he knew that sales in other nations, like the United States, the United Kingdom, Japan and India – which have stronger renewable regulatory frameworks and where solar prices are in line with fossil fuel costs – would ultimately be a longterm driver of his company’s growth. A couple of years after launching AMP Solar, the company started a careful process of foreign market selection and, in early 2014, signed its first local partner in the U.K., and then subsequently raised $250 million for the U.K. business from Apollo Group, one of the world’s biggest infrastructure investors. Expanding to international or unfamiliar markets is risky and causes uncertainty, says Seymour. Rogers mitigated that risk right from the beginning by working with a U.S. business partner experienced in finance: co-founder and executive chair Paul Ezekiel. Their combined knowledge of world finance and capital markets allowed them to make inroads in a new field rife with prospectors.

Create your own global knowledge network

Getting help from a U.S. partner was a smart move, says Hugh Arnold, adjunct professor and former dean of the University of Toronto’s Rotman School of Management. Leaders who have had success in foreign markets are ones who have surrounded

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themselves with great people, he says. “You need to be identifying who will be your sources of market intelligence and market knowledge,” he explains. This could include new international hires, but not necessarily. It may also mean an expanded network of foreign consultants. Prospective foreign CEOs should attend international conferences and develop local contacts, he says. Having an entrepreneurial spirit also includes getting on a plane and physically being in the country you want to expand to. Rogers travels to the U.K. every second week, where he is developing his business along with local partners. Travel was also a must for Brian Scudamore, whose rubbish removal franchise, 1-800-GOTJUNK?, expanded from Canada to the U.S. and then to Australia. In Australia, his contacts advised him to change the name of his company because, in their country, the word “junk” isn’t well-known. Before agreeing to a name change though, he spoke to locals to see if his business partners were right. “I went there, I hauled junk, I spoke with Aussies and (found out) first-hand that the word does exist,” says Scudamore. He also thought that if people saw the word on his trucks often enough, he would own the concept there. The gamble worked.

cloud-based compliance messaging and archiving solutions to the global financial services industry. It grew its international revenues by 500 per cent between 2008 and 2013, and does almost all its business outside of Canada. CEO Warren Roy’s success is in large part due to his commitment to R&D, which led to the creation of the company’s software. “That allowed them to create a technology that was a differentiator in the marketplace,” says Seymour. Although any enterprising leader can be successful beyond our borders, CEOs can be derailed if they’re over-confident or if they underestimate the differences and challenges of a new market. While places like the U.S. might seem like obvious targets for expansion, “We’ve seen all kinds of highly successful Canadian companies blow their brains out trying to move there,” says Arnold. There’s one more thing to keep in mind: You don’t need to be any less Canadian to be global. Rogers may be a jet-setting CEO who has met with Indian Prime Minister Narendra Modi and former Canadian Prime Minister Stephen Harper to secure global partnerships, but he prefers to “do it all with humility, like every good Canadian should,” he says. “We’re one of the biggest and best solar businesses in the world, but you’d have to search to find us. That’s okay with me.”

“LEADERS WHO HAVE HAD SUCCESS IN FOREIGN MARKETS ARE ONES WHO HAVE SURROUNDED THEMSELVES WITH GREAT PEOPLE.”

Invest in innovation

Globally successful leaders are also highly innovative, says Seymour, which often means investing more in R&D to stay ahead of the curve. One of the companies mentioned in the HSBC report is Global Relay, a software firm based in Vancouver that provides

This content was produced by The Globe and Mail’s advertising department. The Globe’s editorial department was not involved in its creation.

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Steve Williams

2015

When oil tanked, Suncor didn’t. And it’s taking advantage of the downturn to make bold plays in the patch (much to COS’s chagrin)

OF THE YEAR

BY JEFF LEWIS P H OTO G RA P H S BY SH AUN ROBIN SON

DECEMBER 2015 / REPORT ON BUSINESS 33

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Even the biggest oil-sands bulls don’t think the party north of Fort McMurray will last much beyond 100 years. It’s already showing signs of fatigue: Thousands of jobs have been hacked and billions of dollars’ worth of new projects scrapped, shaving more than a million barrels a day from the long-term production outlook. But Steve Williams plans in centuries. And the CEO of Suncor Energy sees no reason the music should stop so soon. “We plan to be there as long as that reserve is being developed,” he says, perched in a boardroom on the 46th floor of Suncor’s Calgary headquarters. That “could be 200, 300 years from now,” he proclaims. “Everything we do there is long-term.” Just as some of the world’s largest energy companies flee for the exits, Williams is doubling down in the oil sands. He sees the collapse of oil prices (to around $50 U.S. from more than $100 a barrel a year and a half ago) not as a long-term risk that has permanently squelched growth prospects, but as a

chance to pick off weaker rivals. “We’re not really a shark,” he insists— but he does smell blood. Last month, Suncor sank its jaws deep into its close rival and next-door neighbour in the muskeg of Northern Alberta, launching an unsolicited takeover bid for Canadian Oil Sands (COS). The play (code-named Mustang) came weeks after Williams beefed up Suncor’s stake in the $15-billion Fort Hills mine, despite lingering questions about the project’s economics. The moves add up to a brazen bet on the future of the oil sands—an industry

Suncor helped build, but one that now faces a reckoning as profits shrivel and global efforts mount to slow growth in climate-warming greenhouse gases. The latest setback: In early November, Barack Obama rejected the Keystone XL pipeline, dealing a blow to the industry’s long-held ambition to reach more lucrative export markets. Williams is unfazed. In roughly a decade at Suncor, he has helped transform a big-spending behemoth into a frugal giant with a quasi-religious zeal for controlling costs. Nonetheless, Suncor hasn’t exactly skated through the oil crash. Layoffs since January, 2015, top 1,300, and about $1.4 billion has been chopped from this year’s budget. Meanwhile, net earnings in the first nine months of the year plunged to $12 million, from as much as $2.6 billion over the same stretch in 2014. (On an operating basis, the drop was less extreme, but still significant: Earnings tumbled 65%, to about $1.5 billion.) Still, the company is churning out cash, buoyed by strong results from its refining division. By early November, Suncor’s shares had notched a modest gain on the year compared to a roughly 30% slide in the broader listing of energy companies on the Toronto Stock Exchange. Cash flow skidded just 17% in the third quarter from a year earlier, versus a 50% drop in the price of global benchmark Brent oil. In the oil sands, Suncor’s cash operating costs per barrel have fallen to $27—the lowest since 2007. As of Sept. 30, the company had amassed a $5.4-billion war chest. No other oil-patch executive has displayed the same mix of swagger and vision as Williams in what is clearly the industry’s darkest hour. That makes him the standout candidate for CEO of the Year—a nod that will no doubt have many of his rivals grumbling. Indeed, his call for a broad-based tax on carbon emissions has put him at odds with oilmen across Alberta, as many bemoan the fact they’re being pushed to slash emissions when they can least afford to invest in new, cleaner technologies. “Climate change is happening,” Williams told industry leaders last spring. “Doing nothing is not an option.” Similarly, his $4.3-billion all-paper bid for COS has shaken Calgary’s clubby corporate scene. And Williams is by no means done scouting for deals—though he’s clearly uncomfortable being labelled a predator. In fact, he refuses to even call the deal “hostile.” Ryan Kubik, COS’s chief executive, is shopping for


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hile most mining companies are slashing spending amid the ongoing slump in commodity prices, Agnico Eagle Mines Ltd. has nearly doubled its overall exploration budget, driven in large part by what it sees as the promise of Canada’s Arctic. Exploration spending is ramping up at the company’s Amaruq gold project in Nunavut, about 2,600 kilometres northwest of Toronto, based on strong drilling results. Agnico had earmarked only $1.5-million in exploration spending in 2014, but wound up pouring $10-million into the project; and the additional $15 million earmarked for Amaruq in 2015 has more than doubled to $35-$40 million. “As far as we can see, the Arctic is the place of the future for resource development in Canada,” says Agnico chief executive Sean Boyd. Melting polar ice caps, as a result of climate change, are expected to slowly open up the area for more exploration and resource activity in future. This should also help to reduce costs, which are significantly higher in the Arctic due to its remoteness, brutally cold winters, undeveloped infrastructure and sparse populations, which makes sourcing workers difficult. “Climate change isn’t driving exploration, but it’s an added benefit over time,” says Boyd, whose company has other gold mines in operation and development in Nunavut. “The allure of the Arctic is that it’s relatively unexplored,” says Rod Thomas, president of the Prospectors and Developers Association of Canada. “From that perspective the exploration risk is lower, but the costs are so much higher to explore there. It takes a certain level of expertise and a lot of money.” Exploration costs range from 2.2 to nearly six times higher in remote northern regions of the country, according to a recent joint industry report called Levelling the Playing Field: Supporting Mineral Exploration and Mining in Remote and Northern Canada. Meanwhile, capital costs are around double. Lower costs are especially key for an industry struggling with depressed commodity prices. Everything from gold and copper to coal and iron ore has fallen dramatically from record or near record The Business of Ideas


highs in 2011. Lower prices have also meant a drop in valuations for mining and exploration companies which, in turn, have dried up a lot of investment. To help make doing business in the Arctic more attractive, the industry has been calling on governments to offer special incentives, such as better tax credits. It also wants the government to help build more infrastructure, such as airstrips, roads, ports and power plants, to open it up to more resource development. Richard Ross, director of the Global Mining Management MBA program at the Schulich School of Business at York University and former chairman and CEO of Inmet Mining Corp., says publicprivate partnerships can help to generate investment in Canada’s Arctic. Ross says that would benefit not just mining companies, but Canada as a whole. For example, according to the industry report, the eight mines operating in Canada’s territories account for about 15 per cent of overall employment and have generated more than $800-million in royalties to governments from 2003 to 2012. It says 15 potential new mines could start in the territories over the next decades, depending on markets, creating more than 7,100 full-time jobs, or double the employment levels in 2013. “If we are really serious as a country about providing opportunities, we need economic development,” says Ross. “Right now, what is presented in front of us is the opportunity to mine, to extract minerals and to provide jobs, education, training as well as a sources of taxes and royalties, so we can see positive outcomes both socially, environmentally and economically from this region.” Ross says government can help by investing in not just roads and airports, but expanding access to hydro power and improving connectivity to the grid in

Canada’s Arctic. This investment will also help to improve Canada’s competitiveness in the global resources industry. Sergio Marchi, president and CEO of the Canadian Electricity Association, believes Canada needs a stronger national energy strategy that recognizes the needs of Canada’s Arctic. “I do believe that energy is one of those big deals that require a sense of urgency and purpose. It’s a central issue in how we have wired our national economy,” says Marchi. “Without that infrastructure, we aren’t going to be able to build as viable an economic future as is deserved … if you don’t build it, the investment won’t come.” DEVELOPING GLOBAL EXPERTISE IN

Mining Management n Schulich

launched the world’s first MBA specialization in Global Mining Management in 2011, strategically located in Toronto, the mining equity financing capital of the world.

n The

Canadian Institute of Mining, Metallurgy and Petroleum approached Schulich to develop the specialization because of the School’s strong reputation as a leader in sustainable business management, its global reach and orientation, and its status as a top-ranked business school.

n MBA

students from around the world compete to best solve a real-world sustainability-related issue facing the mining industry during the annual Schulich International Case Competition.


n

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C

rival suitors and insists Suncor is trying to fleece shareholders. Williams, meanwhile, is growing impatient. “I’ve been talking to their CEO and their chairman since March,” he says. “How long a conversation can you have?”

Suncor’s CEO

possesses, by all accounts, a hyper-inquisitive mind. The son of a plumber in Bristol, a port city in southwest England, he describes his upbringing as “very humble.” Yet, the family home was filled with lively debate, which he credits for moulding three overachieving kids. His brother is now a coroner in Somerset; his sister worked in the U.K. education inspectorate. Growing up, Williams played rugby—first as a hulking prop (“I grew funny,” he says, “so early on, I was big”) and later as a light-footed fullback. The 59-year-old still jogs regularly, and finds time between his role at Suncor and

and was never going to be.” Williams graduated from Exeter University in 1977 with a degree in chemical engineering and joined a unit of what would become Exxon Mobil. By the time he left 18 years later, he was operations manager at the Texas-based giant’s sprawling Fawley refinery in the U.K., fusing technical know-how with a knack for managing people inside large organizations. To this day, Williams comes off as a man fully steeped in Exxon’s famously staid corporate culture. But he is also described by colleagues alternately as a “brilliant,” “gutsy,” “methodical” and “rational” oil executive—albeit one with an “enlightened” streak. But the portrait is incomplete. It is common for Exxon employees on the management track to spend their entire careers there. Williams, who sits for our interview in an open-collared shirt sans tie, felt hemmed in by the rigid structure.

Williams’s call for a broad-based tax on carbon emissions has put him at odds with oilmen across Alberta. “Climate change is happening,” he told industry leaders last spring. “Doing nothing is not an option” multiple charitable organizations to ski and play golf. He likes to cook (from Indian to French) and enjoys preparing meals with guests at dinner parties. Jim Simpson, Suncor’s board chairman, is often baffled by his colleague’s pace and intellectual rigour. “I have, from time to time, wondered how he does what he does,” Simpson says. “Just mentally, he does a lot of preparation. You can ask him anything, any time, and he knows the answers. Detailed questions, strategic questions—it really doesn’t matter. He’s thought his way through pretty much everything that is relevant to our business.” Williams admits to being “intellectually impatient.” He can be wordy. Early in his tenure at Suncor, he was nudged by advisers to be more succinct on quarterly analyst updates. Williams viewed it as “so very American to go out there and lay it down,” a person familiar with one episode of verbosity says. “He pleaded that it wasn’t in his character 36 DECEMBER 2015 / REPORT ON BUSINESS

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After Exxon, he helped spin off chemical maker Octel Corp. from its parent company. That experience put him in touch with debt and equity markets in the U.S., giving the operations-focused engineer added familiarity with finance. About that time, a headhunter showed up with an intriguing opportunity. Did he want to manage money for a littleknown oil company called Suncor? Williams balked: “I didn’t know if I wanted to count beans.”

Williams also

had doubts about dragging his wife, Mary, and their two kids—Jack, then aged 9, and Emma, then 10—from the north of England to a scrappy oil city nestled in the foothills of the Rocky Mountains. He’d been offered a job that would have taken the family to south London, and besides, he was keen to get his hands dirty. Initially, he told then-CEO Rick George he had the wrong guy.

But George was persistent. He was searching for a chief financial officer with experience at a super-major, befitting George’s ambition to pump a million barrels per day from the oil sands by decade’s end. A months-long courtship ensued. George, originally from Colorado, was aggressively fixated on top-line production growth, at the expense (so say detractors) of profits. At the time, Suncor was a minnow. It was early 2002, and the company’s brand-new Millennium mine was struggling to reach full capacity, wracked by power outages and frigid Alberta weather. Output targets had been chopped and profits were anemic. George (who declined an interview request) needed help smoothing out performance and driving down costs at Suncor’s refining and upgrading operations—vast tangles of pipes and vessels that convert molasses-like bitumen into lighter oil suitable for refining into gasoline. The pitch to Williams was straightforward: Come to Calgary and test our strategy, then go run the oil sands business. “The big challenge for Suncor was to run what it had,” Williams recalls. “We were underperforming with our assets. I knew how to do that stuff.” So it was that Williams, together with his family, opted for an “adventure” in Western Canada. He committed to three years in Calgary. He moved on after just one, decamping to Fort McMurray, a scraggly outpost 500 kilometres north of Edmonton that has only recently started to shed its boom-town exterior. For the U.K. transplant—he became a Canadian citizen in 2002—the experience was jarring. “You are on the edge,” he says. “You’re isolated.” But the Williams family adjusted to what he says is a very close-knit community. “It’s quite old-fashioned in a sense, because you know everyone.” It’s been nearly four years since Williams took the company’s helm. He calls his predecessor a “great leader” and credits him with turning a small, unprofitable oil sands developer into an energy giant with a market capitalization that today is approaching $60 billion. But there are stark differences between the two men. “He had that desire and ambition to grow,” Williams says. “And don’t infer from this that I don’t have that. I just think there’s a different way of doing it when you get the hand I was dealt.” The difference reflects, in part, seismic shifts that have upended global energy markets. Among the biggest is the flood of shale crude uncorked in the Continued on page 37

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United States, which has played a role in driving down prices. Whereas George chased big production targets, Williams has long said he isn’t much interested in growth for its own sake. Instead, he views the company’s core as a delicate balance between managing project costs, quality and schedule. Early on, he pulled the plug on Suncor’s $11.6-billion Voyageur upgrading plant, which was midway through construction—a sharp break from the company’s history of lavish spending that analysts say presaged structural changes in crude markets. Williams says he believes firmly in leading by example. In 2014, several Suncor workers died, including one from a bear attack. In response, Williams docked the bonuses of senior leaders by more than 10% (Suncor also created a safety task force and mandated wildlife training for field workers). On the operations side, Williams sees parallels between Suncor’s early woes and the faltering Syncrude operation. When he took over as CEO, there were doubts on Bay Street about his ability to deliver smoother performance while at the same time keeping a lid on costs. Today, George’s million-barrel vision has been eclipsed by an efficiency drive and a modest goal to squeeze 100,000 barrels a day of new output from existing assets. By November, reliability at the company’s upgrading plants was above 90%, and Williams was openly musing about driving oil sands cash costs under $20 (U.S.) a barrel. “I think the Street presumption was that they would spend every dollar that came their way,” says Bank of Montreal oil analyst Randy Ollenberger. “He got a lot of pushback on that. His response was, essentially, ‘Watch me.’ ”

The takeover of Canadian

Oil Sands may be Williams’s biggest challenge yet. If all goes according to plan, Suncor’s ownership stake in the Syncrude operation would jump to 49%, from the current 12%. (COS is the largest partner in the joint venture.) Few expect Williams to stop there. Still, some analysts question the wisdom of piling on exposure to oil sands assets as competitors beat a hasty retreat. Even fans doubt Williams can fully deliver on a pledge to boost reliability at Syncrude. The operation led by Exxon has struggled for years under a complex management agreement, repeatedly missing production targets because of breakdowns and outages.

age 37

“We’ve heard that for over three years now from various parties involved within Syncrude,” says Lanny Pendill, an analyst at Edward Jones in St. Louis. “So far, nobody’s been able to do it.” Since announcing the bid in early October, Williams has gone on a marketing blitz, pitching the deal to COS shareholders as a lifeline. (COS posted a loss of $174 million in the three months ended Sept. 30 and has chopped its dividend 86% since the downturn began.) Over 10 days in October, Williams’s itinerary included stops in Toronto, New York, Los Angeles, San Francisco and Victoria. In Calgary, however, the target company branded the deal naked opportunism. It rejected the offer and instituted a shareholder-rights plan that requires a bid to be open for 120 days. (Suncor has challenged the move before securities regulators.) Billionaire investor Seymour Schulich, who owns about 5% of COS, likened Williams to a bandit

as long as I can remember,” says one analyst. “And now we’re in an extremely challenged environment on oil prices, which is going to make it really difficult to run that project profitably.” Williams ardently defends the venture, urging doubters to look beyond the enormous price tag and today’s commodity trough to the “wall of cash” the project will generate once it starts up. But how does the sprawling open-pit mine at Fort Hills, designed to pump ultra-viscous crude for more than half a century, square with Williams’s more recent support for taxing carbon dioxide emissions? Suncor chairman Simpson says Williams’s stance on carbon wasn’t formally vetted at the board level, though it was understood and accepted. “He basically took that position in the company and said, Listen, we’re changing gears,” Simpson says. Williams flatly rejects the view that oil sands reserves will be stranded

Even fans doubt Williams can fully deliver on a pledge to boost reliability at Syncrude. The operation has struggled for years, repeatedly missing production targets because of breakdowns and outages and vowed to fight the takeover in court. The way Williams sees it, however, is that long-suffering COS shareholders face a “stark” choice. The company is saddled with $2.3 billion in debt and faces a “precarious” future, he told analysts in October. A friendly approach was spurned last spring. A rejection this time could trigger a collapse in the share price, he says. (By early November, the stock had shed about 40% of its value in a year.) Williams insists he can leverage Suncor’s size and proximity (the facilities are literally across the street) to drive cost savings at the aging plant. Elsewhere, however, he has been dogged by questions about Fort Hills, a mega-mine the company is cleaving from Alberta’s boreal forests north of Fort McMurray. Suncor inherited the project when it merged with Petro-Canada, and the first drops of oil won’t flow until 2017, leaving some room for commodity markets to recover. “It’s been punted around for

under more stringent climate regulations—“I just think technology solves that”—and says he’s working on an initiative he believes will break the deadlock on major oil sands pipelines, although he won’t provide specifics. He is similarly guarded about upcoming climate talks in Paris, but hopes a framework emerges that goes some way toward removing the target from the oil sands. The Alberta deposits have been unjustifiably branded as climate enemy No. 1, he says, to the detriment of pragmatic solutions aimed at addressing societal consumption habits. Indeed, far from penalizing the industry, he says, an economy-wide carbon tax that funnels cash to promising technologies might just tilt the scales in favour of his company’s long-term business plans— even if he isn’t around to fulfill them. “Lots of people look at it in the short term,” he says. That’s a problem. “It’s like boiling the frog—you don’t even realize you’re dead.” DECEMBER 2015 / REPORT ON BUSINESS 37

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AN ELECTRIC ATMOSPHERE

Th ut

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BY JOHN LORINC

Photographs by Thomas Dagg

The Hydro One IPO is just the start of the makeover of Ontario’s public-power utility, courtesy of Ed Clark (with inspiration from Warren Buffett)


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15-11-09 12:02 PM

OVER THE YEARS, ADAM BECK’S BABY GRADUALLY GREW

HOLDING COURT IN A SUNNY OFFICE HIGH ATOP THE TD CANADA

Trust tower in Toronto’s banking district, Ed Clark is the very picture of corporate sagacity. Yet since retiring as CEO of TD last year, he has spent much of his time doing a very unbankerly thing—helping a bunch of politicians untie a Gordian knot. As an unpaid adviser to Premier Kathleen Wynne, Clark thumbed through a folder of Ontario’s assets, looking for candidates that could be sold off so the province can invest in the sort of things governments do: Build schools, hospitals and transit lines, and address issues like income inequality, about which Clark says he cares deeply. That scrutiny led Clark to Hydro One, the $6.5-billion-a-year monopoly that operates the province’s transmission corridors and also sells power directly to about 1.2 million customers. To Clark, continued public ownership of a utility made no sense at a time when competition for scarce government resources is intense and demographics are driving up health-care and other social-service costs. “If you can only borrow so much money and you [need to] be building a hospital or a school, are you going to not build that hospital or school so that you can supply solar panels to a consumer? I mean, that’s nutso.” Wynne decided to embrace Clark’s advice, flicking the “on” switch on the sale of 15% of Hydro One. The $20.50 shares began trading in early November, and the oversubscribed offering promptly deposited $1.66 billion into provincial coffers. That moment marked a historic reversal of political polarity. In 1906, Adam Beck, a Conservative MPP, persuaded Queen’s Park to keep control of the emerging electricity grid out of the hands of rapacious monopolists. Famously promising “power at cost,” Beck created the Hydro-Electric Power Commission of Ontario (later Ontario Hydro), which gradually took over nascent municipal utilities and transmission networks, and systematically brought electricity to the province’s remote regions. Ontario’s Liberal government believes it must now put control over the grid back into private hands as a means of serving the public weal. “No one’s trying to make money from this thing,” Clark claims, referring to critics’ charge that the change is driven by Bay Street. “They’re trying to do the right thing for the province.” But Ontario’s spotty record in privatization is weighing on the public’s mind, according to polling. “We’re cognizant that we’re in a learning process about why privatizations so often get messed up,” Clark says. “What you’re doing, which is completely normal in the private sector, is abnormal to the [public sector].”

into a headstrong adult that was too powerful for Queen’s Park’s liking. The idea of selling the massive utility was first bruited by Bob Rae’s NDP government in 1993. Bay Street sat up straight at the news: “I can guarantee you that every single investment bank is looking at it,” venture capitalist Andy Sarlos later said, “and lining up their clients.” In 1999, the Mike Harris Tories separated Hydro into segments including a generation company (Ontario Power Generation) and a transmission company, now called Hydro One. A proposed Hydro One IPO died on the vine in 2002, but in 2004 the McGuinty Liberal government introduced a measure of competition, with the new Ontario Power Authority assessing demand and acquiring new generating capacity from private suppliers. Queen’s Park stopped short of selling Hydro’s major generating stations, although Harris turned over the operation of the Bruce Nuclear station to a consortium whose largest partners are TransCanada Corp. and Borealis, the infrastructure arm of OMERS, an Ontario public service pension fund. The larger of Hydro One’s two businesses is delivering wholesale power, via heavy-duty transmission corridors, to municipal electrical utilities, ranging in size from Toronto Hydro on down. Hydro One also directly supplies power to its own retail customers, primarily rural residents not served by a municipal utility. After the Harris restructuring, Hydro One started absorbing municipal distribution companies, acquiring 88 over 15 years. Prior to the breakup, the province had 306 local distribution companies; at the time of the IPO, it had just 72, with Hydro One Networks the largest of the lot (Toronto Hydro is a distant second). Unsurprisingly, Hydro One’s balance-sheet growth has been robust: It invests about $1.5 billion in capital expenditures each year. The utility’s net income has clipped along at a 9.7% compounded annual growth rate since the end of the last recession. Those impressive returns are separate from the charges paid by provincial ratepayers to retire the “stranded debt” left behind by Ontario Hydro’s nuclear-power building binge, which still accounts for a hefty chunk of the government’s payables. According to a provincial electricity financing agency, the debt retirement charges on utility bills have cut the stranded debt from $19.4 billion, in 1999, to $9.8 billion as of March, 2014. The debt points up how Ontario’s nuclear-heavy electricity sector bears little resemblance to many other jurisdictions, whether in Canada or elsewhere. British Columbia and Quebec, both blessed with cheap, abundant hydro power, have kept their electricity sectors public, while some other provinces have long since put power wholly or largely in private hands: Nova Scotia (Emera), Newfoundland (Fortis) and Alberta (TransAlta, which later sold its transmission business to create AltaLink). In the United States, electricity is supplied by both giant government agencies, like the Tennessee Valley Authority, and publicly traded companies. In Europe, the predominant players, including France’s state-controlled EDF and Germany’s publicly traded E.ON, straddle national borders. E.ON, boasting 58,000 employees, could likely swallow Hydro One without breaking stride.


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institutional investors as low interest rates and slow growth became the new normal. As Jim Leech, the former CEO of the Ontario Teachers’ Pension Plan, observes, such investments are excellent proxies for long-term government bonds because they provide cash flow and are hedged against inflation. Ontario’s experience with privatization has been a mixed bag. Everyone in the Greater Toronto Area knows the sorry tale of how the Harris government sold Highway 407, a toll road, at fire-sale prices. Since 2003, the Liberals have opted for a privatization-lite approach, bringing in private firms and capital to build and maintain public facilities—everything from transit lines to hospitals and courthouses—on a fee-for-service model, while retaining ownership. Yet according to a scathing 2014 report from Ontario’s Auditor-General, the province has spent $8 billion more than it would have had it built things on its own. No doubt Wynne thought Ed Clark, expert in both government and finance, was as good a bet as anyone to improve on that spotty record. Clark, who has a doctorate in economics from Harvard and describes himself as a socially progressive executive, worked in senior bureaucrat posts in Ottawa (including on Pierre Trudeau’s National Energy Program) before jumping to the private sector. At TD, he presided over a push to boost customer service and oversaw the acquisition of distressed U.S. banks—a move that propelled TD, once the smallest of the Big Five banks, into a neck-andneck competition for first place with RBC. In its initial fall, 2014, report, Clark and his advisory council veered away from calling for a full sell-off of Hydro One, recommending instead that the government cleave off the local distribution business and merge it with one or more Toronto-area utilities, while also bringing in private investors to the merged entity. By spring, 2015, however, Clark’s committee “significantly revise[d]” its advice, calling on the provFormer TD head Ed Clark NOT LONG BEFORE SHE WON A MAJORITY IN JUNE, ince to sell off a majority interest in Hydro One. may have engineered Hydro One's privatization, 2014, Wynne named Clark to head an adviWhat changed? In a word, Buffett. but it's not about fees sory council with a mandate to look at the Warren Buffett, in recent years, has become for Bay Street, he says: future of three prominent government assets: enamoured with energy. Last year, his Berk“No one's trying to make the Liquor Control Board of Ontario, Ontario shire Hathaway Energy snapped up AltaLink, money from this thing” Power Generation and Hydro One. Unlike prewhich had taken over TransAlta’s transmission vious privatization campaigns, the Liberals network in 2002. Berkshire paid $3.1 billion— were motivated more by a craving for cash than a price that, unusually for a Buffett company, ideological fervour. The Liberals, after all, had to confront was on the high side. With that takeover, AltaLink became an an accumulated provincial debt of about $300 billion, giving asset in a vast energy division that operates 375,000 kilomeOntario the dubious distinction of being, by one reckoning, tres of transmission corridors in North America and boasts the world’s largest “sub-sovereign” borrower. Something $83.4 billion (U.S.) in assets. Not coincidentally, the archihad to be done to mollify the debt-rating agencies. tect of the deal was Greg Abel, the Canadian-born Berkshire As companies like Emera show, private investors have executive who is on the short-short list to some day succeed been buying up public utilities for years. But such incomethe Oracle of Omaha. generating assets have become especially prized by giant The stateside gas and electric utility sector has been DECEMBER 2015 / REPORT ON BUSINESS 41

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The share sale, according to government estimates, will yield about $9 billion. Of that, $5 billion will chop that stranded debt. Residential customers will stop seeing a debt-retirement charge on their bills after this year; business customers, however, will still get dinged. The remaining $4 billion will go into the so-called Trillium Trust, an account with funds earmarked for infrastructure like transit. Clark’s council estimated the market value of 100% of Hydro One to be in the $13 billion-to-$15 billion range. (The underwriting syndicate, led by Scotiabank and RBC, earned a reported $30 million.) The market-value figures could creep up if Hydro One’s share price rises and the government and its investment bankers time the subsequent release of stock so it can share The Hydro One in the capital gain created by increased stock frothy with steep-premium M&A activity in transformation is being prices and pent-up demand. the past year, following Leech’s dictum that led by CEO Mayo Schmidt, Other observers are dubious about the proinvestors seek out the sector’s long-term stabilformerly of Viterra (left), and chairman David jected numbers. The province’s Financial ity and steady cash generation. Denison, who headed Accountability Office, in a report made public Buffett may bring a special buzz to the marthe Canada Pension Plan days before the IPO, calculated the market value ket, but Canadian investors have in fact long Investment Board to be in the $11 billion-to-$14.3 billion range, so a played in the private transmission sector. The sale of 60% would produce a smaller windfall of business has always been part of the DNA of $6.8 billion to $8.9 billion. Of that, the watchdog the Brascan/Brookfield empire. In the past six concluded, about $3.3 billion to $5.8 billion would go to infrayears, OMERS’s Borealis wing has made acquisitions in the structure. (The Financial Accountability Office, however, sector in the U.S., Finland, and Sweden. couldn’t access all documents pertaining to the deal.) For prospective Hydro One investors, however, the other The Accountability Office and other critics also fretted salient recent deal besides Buffett’s took place in Septemabout the impact of the sale on provincial income. Hydro ber, when Emera paid $10.4 billion (U.S.) to take over TECO One sends about $700 million in income to provincial cofEnergy, a utility with operations across Florida and New fers each year. That number is less than 1% of Ontario’s total Mexico. While Emera paid a rich price, the deal doubles the company’s asset base; Emera told investors it will boost revenue, but it is not chesterfield change, either. By selling earnings per share by 10% within three years. that first 15%, Queen’s Park will lose an estimated $84 million David McFadden, a counsel at Gowlings specializing in this year, taking account of both lower interest payments on energy and infrastructure (and a former Tory MPP), believes Hydro One’s debt and foregone dividend income, accordthat Hydro One could some day look and behave like Emera ing to an analysis done for the Canadian Union of Public and Fortis, another acquisitive utility with its roots in public Employees by economist Douglas Peters, who concluded it’s ownership. “not appropriate” to sell Hydro One. Emera (where officials declined to be interviewed) became Once the entire 60% is divested, the net loss to the treasury the privatized incarnation of Nova Scotia Power in 1992. will jump to almost $340 million annually, according to the The $3-billion-a-year company has been on a tear in recent analysis. “There was no business case for privatization and years, snapping up smaller utilities in the U.S. and the CaribI found that startling,” argues CUPE economist Toby Sanger, bean, investing in clean-energy schemes like tidal power, and who points out that governments can still finance large-scale developing a transmission corridor that will link Labrador’s infrastructure projects the old-fashioned way, since interest hydro dams to consumers in Atlantic Canada and beyond. “I rates are historically low. “It suggests they quickly caved in to would not be surprised to see Hydro One go down this road pressure, either politically or from Bay Street.” as well,” says Rob Hope, an energy infrastructure analyst with Macquarie Group who watches the Canadian market. Since going private, both Fortis and Emera have delivered WHILE PARLOUS PROVINCIAL FINANCES ARE THE steadily increasing dividends to their shareholders. Emera’s justification for the privatization, the issue of pubfirst dividend payment in 1992 was pegged at 18.75 cents per lic-sector entitlement is in the air. Hydro One is notoshare; today, that figure has jumped to 47.5 cents. (Hydro One rious for having more than half of its 7,800 workers on the has proposed an initial dividend of 21 cents per share.) so-called Sunshine List of public employees earning more That the sale of the first tranche of Hydro One shares was than $100,000, with pensions to match, and for its indifferent oversubscribed probably indicates that investors are banktreatment of retail customers. ing on the scenario foreseen by Hope. The government The workforce won stock-based compensation as part of a hasn’t been forthcoming about the timing of the subsequent new collective agreement. But some are wondering whether issues, likely for tactical reasons. they’ll be on the payroll to collect the payout. Mayo Schmidt, 42 DECEMBER 2015 / REPORT ON BUSINESS

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the new CEO, has a reputation as a job slasher: The American-born executive turned around, and then privatized, the Saskatchewan Wheat Pool (renamed Viterra) before selling it to Glencore International PLC in 2012. Clark predicts that under Schmidt, who will earn as much as $4 million annually after his first year, and chair David Denison, former head of the Canada Pension Plan Investment Board, Hydro One will see improved productivity, stronger cash flow and disciplined management. Neither Schmidt nor the new CFO, Michael Vels, a Maple Leaf Foods alumnus hired in July, comes from Ontario’s electricity sector, which of course means they don’t know much about electricity. The fact that Hydro One’s former CEO, Carmine Marcello, is staying on (with a base salary of $525,000 a year) as an adviser to Schmidt and Vels underscores their lack of technical knowhow in an engineering-driven organization. But being outsiders also means they aren’t steeped in the utility’s bureaucratic culture. And they do know plenty about mergers and acquisitions. Clark, however, won’t make predictions about potential expansion. “Let’s talk about that three or four years from now,” he says. First, he adds, Hydro One has to “earn the right if [it] wants to play elsewhere.” (Schmidt and Denison declined interviews.) If Hydro One employees are worrying about their jobs, the company’s customers are wondering whether improved service will indeed become job one, as Clark intimates (even as Schmidt reduces overhead), and whether rates will go up. In the run-up to the sale, opposition parties raised the spectre of rising rates as an argument against privatization. Yet rates were going up well before the privatization began, in part because of subsidies to renewable energy producers such as wind and solar farms. Both advocates of the deal and regulatory experts dismiss price-hike fears as “misinformed,” pointing out that the province’s regulator, the Ontario Energy Board (OEB), doesn’t set rates based on ownership. The OEB, in fact, has long regulated private natural gas distributors without incident. “The owner is not relevant,” says David McFadden. Even environmentalists like Jack Gibbons, chair of the Ontario Clean Air Alliance, agree. “There’s no reason to believe that private [ownership] will lead to higher rates.” Others say the Liberals’ partial privatization may actually prevent Schmidt from making the necessary changes. University of British Columbia business professor Anthony Boardman has studied the performance of former Canadian Crown corporations, post-privatization. In the first two or three years, these giants show improved profitability because they shed jobs, he found, but they only later generate real growth through acquisitions or geographic expansion. But, Boardman adds, the most successful privatized Crown corporations are those that have completely cut the apron strings. In his view, Queen’s Park is trying to have it both ways, holding on to an ownership stake that will make it the largest single shareholder even if the government doesn’t retain formal control. (The governance agreement also precludes moving the head office outside Ontario; likewise the sale of regulated assets.) “I’m not a big fan of a mixed entity like this,” says Boardman, adding that the government’s continued presence as a shareholder “creates ambiguity for the managers. It’s a potential problem.”

Clark dismisses such arguments, saying he’s confident that Denison and Schmidt will rebuff any government meddling. “Investors won’t invest in this company if they believe the government will continue to micromanage,” he says. “[The government has] stepped away and said to David Denison, ‘You’re going to deal with these issues.’” Notably, as head of the CPPIB, Denison had to resist political pressure to direct the fund’s billions toward or away from certain asset classes. Clark says he’s never been fond of “ideological” positions, such as the necessity of a 100% privatization. “A world where everything is black or white is where you don’t get a lot of things done,” he says. “To me, ideology is simply a lazy way of making decisions.” Whether Ontario will continue to own part of Hydro One in perpetuity is, of course, a matter of speculation, and Clark won’t go there. But the narrative arc of most Canadian privatization deals, including far more controversial ones, suggests that the 40% stake is merely a way station on the long road to a complete sell-off.

ALL THE MUSCULAR TALK ABOUT MANAGERIAL INDEPENDENCE

and robust regulation won’t be sufficient to ensure that Hydro One shakes off its monopolistic instincts. As Clark and the provincial policy-makers who worked on this file know, the utility needs rivals to ensure that it’s not gouging when its officials submit rate applications to the OEB. “There’s no question it would be easy to fall into a culture that says, you don’t have any choice,” says Clark. “I think that’s absolutely the risk.” The province’s solution to this problem involved cleaving off Hydro One’s Brampton local utility, which produced a $600-million windfall for provincial coffers, and merging it with a consortium comprised of three other Toronto-area utilities—Enersource, PowerStream and Horizon. “The idea is to create a really viable competitor,” says Clark. Gowlings partner Ian Mondrow, a former adviser to the OEB, explains that, with the creation of the new utility, the OEB will be overseeing three large, independent utilities (Toronto Hydro being the third), which means it will have more comparative data in hand while setting rates. “From a regulatory point of view,” he says, “it will be cleaner.” What’s more, it seems that the post-IPO Hydro One won’t be encouraged to continue gobbling up local utilities—or, at least, not yet. Rather, McFadden says, the consolidation around Toronto sets the stage for not just more mergers, but for an influx of private capital as new investors acquire stakes in local utilities. To grease the wheels, Queen’s Park has slashed the transfer tax on the sale of companies in the sector for the next three years. Both Fortis and Epcor, Edmonton’s municipal utility, have


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system is governed,” Stewart says. “The grid won’t work the same way as it has for the last 50 years and those who think it will, will lose a lot of money.” Clark agrees that the next decade will see revolutionary changes. Ontario’s move to phase out its coal-fired generating plants—completed in 2014—has been accompanied by a rapid deployment of renewable energy suppliers and smart-meter technology. With a growing number of homeowners and commercial property owners installing low-cost rooftop solar panels that feed power into the local grid, the transmission system won’t be called on to transport as much power as it once did. Ontario’s peak summer loads, Stewart says, have actually fallen in recent years because all the solar energy now being generated on thousands of rooftops has supplemented traditional generation sources. Ian Mondrow points out that other disruptive technologies, such as electricity storage and electric vehicles, will accelerate the transformation and invite in non-traditional players, like Google, which has a renewable power division. In fact, in a recent lobbying document, the U.S. electricity industry describes the potential hit to transmission revenues as “a death spiral.” With more power from small, far-flung sources circulating in local grids, less power will flow through the heavy-duty long-distance transmission lines. That spells lower toll revenues and even the spectre of stranded transmission assets—that is, high-voltage corridors that no longer connect to operating generators. “One of the challenges is how we manage that transition and change the way we charge for electricity,” says Stewart. Andrew Weisel, a U.S. utilities analyst at Macquarie, also notes that Europe’s giant utilities—some of them public, others not—are well ahead of North America’s in adapting to these technological changes, thanks to policy incentives meant to spur the development of renewable generation. As in Ontario and elsewhere, the shift to clean energy has driven up consumer power rates. Consequently, Weisel observes, some European regulators have actually moved to squeeze regulated rates of return for power companies as a means of offsetting the rising cost of clean generation to customers.

GREENPEACE ANALYST KEITH STEWART SAYS THE POWER INDUSTRY TODAY RESEMBLES THE TELEPHONE SECTOR BEFORE DEREGULATION, CELLPHONES AND THE INTERNET CAME ALONG been poking around Ontario, looking for acquisitions, while other investors, including pension funds and Berkshire Hathaway Energy, are also said to be scouting deals. “There are a massive number of groups talking about consolidation right now,” McFadden says. “It’s all happening below the surface.” Epcor spokesperson Tim LeRiche confirms that the company, which has expanded to Saskatchewan and Arizona, is searching for opportunities in Ontario. McFadden speculates that the Hydro One IPO will also prompt other Ontario utilities to either sell shares on the public markets or invite in private equity partners, such as the infrastructure arms of large public-sector pension plans (OMERS, the most obvious candidate, declined to be interviewed). At the top of the list is Toronto Hydro, which remains a wholly owned subsidiary of the City of Toronto. “Yes, [a Toronto Hydro IPO] is talked about,” McFadden says. “It’s not for me to tell [Toronto mayor] John Tory what to do,” Clark demurs. But, he adds, “I definitely think it’s a prime candidate. If I were John Tory, I would be looking hard at whether that’s a sensible thing to do.” The upshot, McFadden predicts, is that Ontario’s fragmented distribution sector will consolidate into six to eight large utilities owned either entirely or in part by private investors. Only then should Schmidt’s downsized Hydro One turn its attention to an Emera-style border-crossing acquisition run.

ALMOST EVERYONE INVOLVED IN THE HYDRO ONE PRIVATIZA-

tion—boosters and critics alike—assumes that transmission/distribution utilities offer an almost foolproof form of investment stability. Even conservation campaigns meant to encourage end-users to reduce their electricity consumption don’t blow back on investors, because regulators offer gas and electric utilities attractive financial incentives to promote energy-saving technologies. But what if the business isn’t the safe harbour everyone assumes it to be? Greenpeace energy analyst Keith Stewart says the industry today resembles the telephone sector at that pregnant moment a generation ago before deregulation, cellphones and the Internet came along. He says that on a global level the transmission industry is beginning to evolve from the old hub-and-spoke structure—a handful of large generating stations feeding power through high voltage lines to local distributors—into a decentralized “smart grid” system in which energy flows to the grid from many small or intermittent sources: solar and wind farms, homes fitted with photovoltaic roof panels, and other renewable generators. “We’re going to fundamentally change how that

WITH THE FIRST CHAPTER OF THE IPO COMPLETE,

Clark finds himself thinking about his days running a bank that had to distinguish itself in an industry that offered little in the way of differentiation, much less competition. The subject came up regularly as Clark and Denison huddled over the future of a utility that will have to become a lot less complacent before Schmidt et al. can begin to think about pursuing an Emera-style expansion strategy. Clark, however, is no fan of slash-and-burn turnarounds— “it always blows up in your face”—and he also understands that things can go south. Other utility privatizations have backfired politically thanks to rising rates and deteriorating service. “[Hydro One] cannot earn the right to play in this marketplace unless it puts the customer first,” he says. “For now, Hydro One has to prove that it can play the game dramatically better than it has played until now.”


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Photographer Christopher Wahl has shot the Pope, President Obama, Queen Elizabeth and dozens of celebrities. Trying to get media-shy Livingston to relax in front of the camera turned out to be one of his toughest assignments ever

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Chances are you’ve never heard of Kik. But the kids know all about it—240 million people, 40% of them between the ages of 13 and 19, use the free chat app every day. “Even in the U.S., not a lot of people have built that,” says Anamitra Banerji, who sits on Kik’s board and is a partner at Silicon Valley venture capital firm Foundation Capital, an early Kik investor. In a recent Comscore survey, Kik ranked among the top 20 stickiest apps in the U.S., alongside Netflix, Snapchat, Google Maps, Pinterest and Gmail. Translation: Kids flock to Kik and spend a lot of time there. That has helped Kik raise $120.5 million since 2009, $88 million of it in the past two years—huge sums for the Canadian tech scene (all currency in U.S. dollars). All that cash has catapulted Kik into “unicorn” territory, the sobriquet for start-ups with a valuation north of $1 billion (a figure the intensely publicity-shy Livingston only reluctantly confirms). Livingston’s plans extend far beyond chat, however. “Microsoft built an operating system for all the desks in the world,” he tells me as we walk together on a windy day in October. The alwayson nature of mobile computing, he argues, offers a chance to rebuild our relationship with software. And as he sees it, only Facebook and Kik are competing to do that in North America. “This is a race to build an operating system for the world, period.”

L

LIKE FACEBOOK’S MARK ZUCK-

erberg, Livingston prefers the hoodie and jeans to the suit and tie. “I think it comes down to that authenticity thing,” he says as I wander along beside him. “You see somebody in a suit, a flashy office, a flashy car—they’re trying to create an image. Don’t get me wrong, it’s cool to wear a suit. But it’s a little bit manufactured.” His executive suite is also “authentic,” dominated by a wall of cluttered bookshelves and a white particle-board desk where he sits with his back to the door. The only sign of status is that it’s upstairs from the bullpen of workstations that fill the rest of the building, where Kik’s 110 employees—80% of them focused on software and product development—tap away on their keyboards. Livingston’s reluctance to embrace the outward signs of his wealth extends, by his own account, back to high school. His father, Bob, is a lifelong Bay Streeter (he’s now a vice-president with CIBC Wealth Management), and Livingston and two of his three brothers attended the private all-boys Crescent School, whose motto is: “Men of character from boys of promise.” Depending on whom you ask, the 102-yearold school is as exclusive as, or perhaps more so than, its better-known rival for the city’s elites, Upper Canada College. “I was always sort-of-like ashamed of that. I still am,” says Livingston of his private-school pedigree. (Every sentence he utters is loaded with sort ofs and likes; after a while, I stopped transcribing them.) “I saw all these kids with all this money, flaunting it, driving really nice cars,” he continues. “Almost all my friends were from outside Crescent.” Still, he describes it as a school for “smart kids” and humble-brags that one year, he “accidentally” ended up with the highest overall grade average. Accidentally, he explains, because he says he wasn’t exactly

grinding student. “I would “ W E C A M E O U T O F anever study. I was the guy THE FOG AND IT WAS like, ‘Okay, there’s an exam in LIKE, THIS IS GOING one hour—go.’” But still, the came. For his brothers, TO B E B I G . A N D W E As too—the eldest, Michael, is a WERE LIKE, WHO’S GO- doctor; his younger brother, runs a financial-tech ING TO COME OUT OF Blair, start-up in Toronto. THE FOG BEHIND US? It’s his youngest brother, A N D W E R E A L I Z E D Jack, who had the most proimpact on Livingston. I T WA S FAC E B O O K” found Jack was born with a severe form of cerebral palsy. “He never walked—never even crawled. Never talked,” Livingston says in a clear and level voice, like he’s explained this all before, many times. “He had a personality, and we had, like, a relationship, but not like a real relationship. We never had a conversation, for example.” Jack died two years ago, at the age of 19. “This was a kid who was totally dependent for his whole life,” says Livingston. “And I think it really impressed on me and my other brothers just how lucky we got.” With he and his wife, Christine Thayer, a product manager at Kik, starting to talk about having kids of their own, Livingston’s been thinking a lot about the message of his brother’s life. His maternal grandmother likes to remind the boys: “To whom much is given, much is expected.” Assum-


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THE BUSINESS OF IDEAS THE FINANCIAL TECHNOLOGY REVOLUTION

CIBC and its Canadian rivals are eager to innovate in the mobile banking space.

Banking on the digital revolution The rise of disruptive ‘FinTech’ is transforming bricks-and-mortar banking

THE GLOBE AND MAIL

S

tep to the corner of a major intersection in virtually any large Canadian city, and you’ll notice a common feature: a bank branch perched on at least one corner, its presence a symbol of our country’s financial strength and robust global economic standing. Now imagine the same corners stripped of these iconic structures − perhaps in little more than a decade − and you can begin to understand the impact the financial technology (FinTech) revolution is having on the Canadian banking sector. “I think (the financial services sector is) going to be completely revolutionized,” says Adam Nanjee, head of the financial technology department at MaRS Discovery District, a Toronto startup incubator. “We see companies building digital wealth managers or roboadvisors [software that provides customized wealth-management advice], we have banks going strictly digital without branches or ATMs,” says Nanjee. “We’re going to see more digital banks emerge in the future. I think the traditional way of getting mortgages or insurance will change forever. There is so much innovation and disruption happening across the industry, we can’t even quantify it.” The emergence of complex financial software, mobile communications technology and advanced predictive analytics are fuelling the push towards an entirely digitized financial sector across developed countries. Add improvements to digital security and networking to the equation, along with the growing popularity of crowdfunding and peer-to-peer lending – not to mention the Millennial generation’s preference for digital banking − and the stage is set for a transformation. “Millennials don’t want to go into a bank to meet with an investment advisor, who may try to sell them expensive, activelymanaged funds,” says Pauline Shum, founding director of the Master of Finance Program at the Schulich School of Business and an expert on portfolio analytics. “Millennials want simple and low-cost ETF portfolios that they can track on their phones, and hence the rise of robo-advisors that cater to this particular demographic.” Adds Prof. Shum: “Traditional banks are beginning to get into that space too. Investment with robos are probably the millennials’ core portfolios, and then they’ll have some money to play the stock The Business of Ideas


market on the side – don’t forget, this is the generation that grew up with online trading simulations.” Cash may eventually become obsolete, replaced by mobile wallets or barcode accounts, a radical shift that will see capital markets become increasingly democratized. For banks, these changes present risk − namely the disruption of a lucrative, centuries-old business model based on engaging with customers at bricks-and-mortar retail locations − but also new opportunities. Mobile devices allow financial institutions to sell more products and services directly to customers in real time. What remains to be seen is whether these massive organizations can pivot fast enough to compete with technology startups that are already threatening their grip on the marketplace. According to MaRS, global investments in FinTech reached $6.8-billion last year, an increase from $3-billion in 2013, while technology spending across the Canadian financial sector is predicted to jump from $12-billion to $14.8-billion. As such, firms across the technology spectrum – such as digital payments, data collection and mobile security − will see demand for their products and services rise. “I wouldn’t be shocked if, 20 years from now, Apple is the biggest bank in the world,” says Moshe Milevsky, associate professor of finance at Schulich, best-selling financial author and founder of a FinTech startup focused on insurance products, which he recently sold to CANNEX Financial Exchanges. “If most people start doing transactions on the (Apple Pay) platform, they’re one step away from it, but banks won’t go into the night quietly.” Banks are trying to work with technology companies to develop innovative mobile banking solutions, while making the shift to improve digital banking systems. Canadian Imperial Bank of Commerce recently launched

a banking app for the Apple Watch, for example, while Royal Bank of Canada began allowing peer-to-peer fund transfers via Facebook Messenger in 2013. Many Canadian banks are investing in technology companies that can deliver digital solutions to help them remain competitive globally. Meanwhile, government agencies across Canada and around the world are in a constant struggle to understand and regulate emerging financial tools such as crowdfunding. That’s why balancing consumer protection rules with those that can help spur innovation requires a creative approach, according to Prof. Milevsky. DEVELOPING GLOBAL EXPERTISE IN

Financial Services n Schulich’s

Master of Finance offers the option to specialize in one of three streams of study in Financial Risk Management, Capital Markets, and Regulatory Affairs for Financial Institutions – the first program of its kind in the world.

n Schulich

offers MBA specializations in Finance, Financial Engineering, and Financial Services.

n Schulich

is a founding partner, together with the World Bank and the Government of Canada, in the Toronto Centre, an independent non-profit organization with the mission to enhance the capacity of financial sector regulators and supervisors from around the world, primarily from low-income countries and emerging markets.


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F

ing that’s true, Livingston says, “A, you better do FRIEND-TO-FRIEND CHATS ARE JUST ONE PART OF KIK. something with it, and B, you better remember The company has 80 partners—among them, Amathat luck had a big part to do with it. If you’re dealt zon, The Washington Post, MTV, Comedy Central and a good hand, you owe society for that, almost.” Buzzfeed—that use its unique “bots” function. These Livingston headed to the University of Waterbots (pieces of software) are programmed to chat and loo in 2005 to study mechatronics—a blend of behave like real people, and respond to certain comelectrical, mechanical and computer engineermands. There’s a movie bot that tells you about upcoming—and spent three co-op placements at Blacking releases and posts trailers in your feed. Strike up a chat with AmaBerry. At the same time, he set out to build a music zon and the bot will lead you through a simple this-or-that game that app that would let users share songs with friends includes links to Amazon products. via BlackBerry’s BBM chat app. At the start of the Snaps, a New York-based mobile marketing company, has run a 2009 school year, he quit Waterloo to work on the dozen campaigns on Kik—for brands like McDonald’s and Dove app—then called Unsynced—full-time. Within a Soap—and plans to run two to three times that many in 2016. In a camcouple of months, he’d changed the name to Kik paign for Burger King’s chicken fries, Snaps spread a set of chicken-fry and added an instant messaging function. But as emojis via Kik, which tracked how often users shared them in their third-party chat apps like WhatsApp started to gain private chats. A follow-up survey showed that Burger King’s target popularity, Livingston realized he’d need access to audience was 55% more favourable toward chicken fries after seeing a cross-platform chat system. When BlackBerry the emojis and 39% more likely to order them. “We’re able to create opted to keep BBM proprietary, Kik started a compeer-to-peer interactions—that’s the best branding you can get,” says peting app that would work on BlackBerry, iOS Snaps CEO Christian Brucculeri. In other words, getting users to tell and Android. Kik Messenger went cross-platform their friends about chicken fries is more effective than blasting banner in April, 2010, with roughly 50,000 users. ads all over the place. “Brands are fighting for attention,” says BrucculAfter a redesign in October of that year, Kik eri, “and Kik gives them a good amassed a million users in 15 days. Then Whoopi place to do that.” Goldberg talked about Kik on The View—“it was Kik says half a billion messages her new favourite thing or whatever,” says Livingshave been exchanged between ton—and users hit two million in a week. 16 million users and bots; 46% Then came the lawsuit. Livingston’s old emof those users were aged 13 to ployer, BlackBerry, claimed his start-up infringed 19. It’s a key demographic, albeit on its mobile text patents and accused it of co-optone that doesn’t yet have a ton ing BBM’s trademarked logo. of spending power. It’s a long“The suit made it pretty personal,” says Livterm play: The more time these ingston. “Like, ‘We just want to let you know Ted kids spend getting to know these worked at BlackBerry, he signed his employment brands on Kik, the more likely agreements, he signed his non-disclosure agreethey are to turn to them when ment, and he worked with the consumer product they do have cash. management team where BBM was.’ ” The impli“We can convert that time cation, Livingston says, was that he stole the idea into spending power,” says Livfor Kik from BlackBerry, which was then at the ingston. “That’s sort of critical peak of its power. to having this whole ecosystem After reading the allegations, Livingston’s father called “to do the work. Then we could go to Tim Hortons and say, dad thing,” telling Ted: “I know somebody, maybe they can help—but ‘Four out of 10 teenagers who walk in your door before I go talk to them, there’s nothing I should know, right?” Livingsalready have Kik installed—we should build a ton was incredulous; if his own father had to ask, he could imagine really cool interaction together.’” what the rest of the Waterloo start-up scene must’ve been thinking. Eventually, he says, chat could reshape online “I was like, ‘Daaad!’ ” Here, Livingston’s voice shakes with shocked behaviour and commerce, with all sorts of serlaughter, even years later. “Yeah, that’s how effective BlackBerry was.” vices—buying food and clothes, banking—built The lawsuit (which was settled in 2013, the terms undisclosed) didn’t on top of a chat platform. “It could power all the stop investors from pouring money into Kik. A couple weeks after interactions in your life,” he says. BlackBerry sued, Kik closed a $5-million round from Silicon Valley The closest analog for what Kik has planned is investor RRE—cash that would keep it going through the litigation. By WeChat, a Chinese app that is far more than just a early 2011, it had raised an additonal few million, but with a catch: The chat platform. Instead of accessing the Internet via new infusion would dilute the stakes of either RRE or Kik’s employbrowsers or apps like Facebook (which is blocked ees. To keep everyone happy, Livingston sold some of his shares to in China along with most other Western chat RRE instead (though he kept voting control of them), pocketing $1 milapps), WeChat has become the primary online lion in cash at a time when nobody else in the company was anywhere interface for its 600 million active monthly users. near as liquid. The whole thing made Livingston intensely anxious, so Think of it as an all-in-one app, a combination of he donated every penny of the sale’s proceeds to his would-be alma Facebook, LinkedIn, mobile banking, e-commerce mater’s VeloCity entrepreneurship program, which had helped him and so on. In 2014, the Japanese investment bank launch Kik in the first place. Nomura pegged WeChat’s average revenue per When he shared his plan with Union Square’s Wilson, who was leaduser at $7. That’s $4.2 billion worth of spending on ing the new round of financing, Wilson was horrified. “You don’t have coffee, cabs, movie tickets, clothes—all without to do that,” he choked. ever leaving the WeChat app. Analysts have sugLivingston breaks out into his big, jovial laugh just thinking about it. gested WeChat makes up half of parent company “I love crazy win-win-wins.” Tencent Holdings Inc.’s $180-billion market cap.

THE CLOSEST ANALOG FOR WHAT KIK HAS PLANNED IS WECHAT, THE CHINESE APP THAT HAS NOW GONE WAY BEYOND A MERE CHAT PLATFORM. IT HAS BECOME THE PRIMARY ONLINE INTERFACE FOR ITS 600 MILLION ACTIVE MONTHLY USERS


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For WeChat, China represents a green-field opportunity, with millions of people coming online for the first time through their mobile phones, leapfrogging desktops altogether. It’s a chance, says Livingston, to define what being online looks like: “They’re saying, ‘Hey, you’ve never bought something online before? Do it this way. You don’t have a bank account yet? Do it this way.’” Here in the West, he says, “you can’t really do it with adults, because they already shop on Amazon, they already bank at CIBC, they already get clothing at American Eagle or whatever.” The only group that represents the same mostly blank slate is young teenagers. And the 40% of American teens already using Kik represent access to tens of billions of dollars in potential spending. In August, 2015, Tencent became Kik’s most recent investor, leading a $50-million round that will help expand Kik’s service empire. Banerji says the partnership with Tencent has barely scratched the surface. One day, he hopes Kik will have access to WeChat’s users (including its sizable chunk of business accounts), and vice-versa.

L

LIVINGSTON AND HIS TEAM DIDN’T

fully understand where Kik was headed until a year ago. “It felt like we were running through the fog, discovering something new every month, but not really knowing where we were going next,” he says. “Then we came out of the fog and it was, like, this is going to be big. We looked around and were, like, Who’s going to come out of the fog behind us? And we realized it was going to be Facebook.” Facebook’s Messenger launched as a standalone app in April, 2015. Since then, it has amassed more than 700 million users. The company also owns WhatsApp, which has 800 million users, with big concentrations in South Africa, India and Mexico. Analysts have praised Facebook for moving fast to incorporate peer-to-peer payment technology to Messenger; it even poached PayPal CEO David Marcus to lead the charge. Marcus told Wired U.K. that building services onto Messenger is “one of the biggest opportunities in tech in the next 10 years.” It has been slow to introduce ads, however, which are Facebook’s major source of revenue on mobile—78% of $4.3 billion in advertising revenue. By some estimates, Messenger accounts for 10% of the company’s $307 billion market value, even before a single ad has run on the service. But here’s the problem with making money off chat: It might be the killer app of mobile, but it’s a commodity. You send a message to your bestie and she sends you one back. The No. 1 reason Kik’s users are on the platform, and it’s pretty much the same for all the half-dozen global chat players, is because their friends are there. Introduce too many distractions to that core function and you risk losing them. It’s a lot like selling Coca-Cola. Marketers have spent decades building a culture around what is essentially just brown sugar-water. That kind of brand loyalty can last a long time—if you get your customers young. For many American teens, a Kik username is their first “phone number,” logged into the family tablet or hand-me-down phone. As they move up the chain into more modern hardware, they bring Kik with them. The value in that loyalty is that, while smartphones

become the dominant THE ONLY GROUP IN have form of computing, apps are THE WEST THAT REP- losing ground. R E S E N T S A M O S T- “Over half of U.S. adults zero new apps per LY BLANK SLATE IS download month,” says Livingston. That YOUNG TEENAGERS. trend stretches as far back as according to comScore. A N D T H E 4 0 % O F 2014, “App usage is going down, A M E R I C A N T E E N S messaging is coming up. There ALREADY USING KIK has to be a new platform,” says “That was always REPRESENT ACCESS TO Livingston. our thought, and WeChat just TENS OF BILLIONS IN became a convenient way to POTENTIAL SPENDING explain the potential.”

Of course, there’s no guarantee Kik will be anything more than a fad. “We’re an industry where consumers might be bored of something today and love something tomorrow,” says Banerji. Livingston knows that, of course. It doesn’t stop him from suggesting Kik could one day be worth $100 billion. To put that in perspective, he is talking about reaching for the highest market capitalization in the country, on par with TD or Royal Bank. That kind of consumer-technology company has never existed in Canada. Even at its peak, BlackBerry was worth just over $83 billion. That bravado is what Silicon Valley heavyweights love about Kik and its founder. “Not a lot of people understand Ted,” says Banerji. “He’s had a hero’s journey, and I think if he were in the Valley, he’d be celebrated. But he’s not, because he’s up there in Waterloo.”


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SPONSOR CONTENT

THE BUSINESS OF IDEAS LEVERAGING BIG DATA

Big Data could transform commerce as much as the industrial revolution did in its time.

Cracking the code on data Businesses that embrace the advance of data-driven commerce will prosper

ISTOCKPHOTO.COM

O

f the myriad opportunities facing enterprise in the coming decade, few match the potential for radical change that data analytics − or Big Data − will deliver. From point-of-sale transactions to website navigation, manufacturing output to employee performance tracking, data is allowing businesses across all sectors to collect an unprecedented abundance of information about their operations, analyze it to glean the kind of insights that were the stuff of science fiction just a few years ago, then make real-time strategic or tactical improvements to drive bottom-line performance. “(Data) is changing everything and it really doesn’t matter what industry you’re in,” explains Pat Finerty, vice-president of alliances and business development with enterprise software firm SAS Institute Inc. “Analytics and monetizing data is affecting our clients across industry and the public sector. The enterprise and IT folks are realizing this isn’t a science experiment … the movement to (data) being an enterprise asset is huge.” Organizations are now able to fine-tune sales and marketing efforts at a granular level, analyzing customer activities to predict future behaviour in order to customize customer experience and boost satisfaction, brand allegiance and sales. Most companies will now be able to achieve this without ever meeting their customers in person, interacting instead via apps or websites. A 2011 report by management-consulting firm McKinsey and Company predicted that retailers that adroitly leverage data can improve profit margins by as much as 60 per cent, while manufacturers can reduce product development and assembly costs by 50 per cent. Factor in the emerging Internet of Things − in which businesses can process operational data about everything from industrial production lines to consumer appliances via the Web − and the potential for change is massive. Data has the potential to transform enterprise just as the industrial revolution did in centuries past. But that leap forward will come with challenges that risk overwhelming even the most progressive business leaders. “Companies want to continuously collect better The Business of Ideas


data,” explains Murat Kristal, director of the Master of Business Analytics program at York University’s Schulich School of Business. “But someone has to think about how to use it and what predictions to make. Companies have not cracked the code on that yet.” A global study of senior enterprise executives by data and cloud-computing giant EMC Corp. confirms that business leaders are struggling to understand and capitalize on Big Data’s potential. Fully 96 per cent of executives surveyed agree that new technologies have changed the way they do business and expect the process will continue to accelerate. And 49 per cent acknowledge they often struggle to turn data into actionable information. Without exception, executives see the opportunity that data provides, but need further insight to determine how best to leverage it. That process will involve massive organizational change as analytics departments become integral to operations ranging from product development to marketing, changing the way that leaders set strategy and budgets. “In the past, a lot of people would have seen IT as a support function, but now data is starting to be seen differently because it gives a strategic advantage,” Prof. Kristal says. “Now all decisions will be based on data. That changes how you do business. It’s changing people’s processes and perceptions, and that’s a slowmoving process.” He adds that companies need to build data teams proactively. “You need someone who can collect, interpret and analyze data the right way,” Prof. Kristal points out. “The hardest thing is finding people who can do that. If you’re looking for ERP software, you push a button and get the answer. Big Data is not like that. It’s not user-friendly. That’s because real analysis takes time and you need to be trained in that field.” Prof. Kristal predicts that employees such as sales

representatives and marketers will soon act as de facto data specialists, integrating data analysis into their daily work. Even tech professionals who previously were limited to data collection and IT tasks will be called upon to provide business insights that help their organization achieve performance targets. Prof. Kristal stresses that presenting data in a highly user-friendly way with the help of data visualization designers will be integral to helping leaders interpret information, and then use it to shape their business plans. “This is a design and presentation problem, not just a numbers problem.” DEVELOPING GLOBAL EXPERTISE IN

Big Data n Schulich

launched one of the world’s first Business Analytics programs in 2012, profiled by the Financial Times of London in the article “Business analytics takes centre stage at Schulich.”

n Graduates

from Schulich’s one-year Master of Business Analytics Program are hired before they even graduate by companies such as Deloitte and CIBC.

n SAS

Canada furnished the program with a comprehensive package of data analysis software that allows users to efficiently consolidate data and analyze it for use in datadriven decision-making, including statistical analysis, forecasting, econometrics, optimization, scheduling and simulation, quality improvement and seamless data integration.


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Congratulations to these recent appointees Phillip Crawley, Publisher & CEO of The Globe and Mail, extends best wishes to the following individuals who were recently featured in the Report on Business Section of The Globe and Mail newspaper. Congratulations on your new appointments.

John Levac to Senior VP Accord Financial Inc.

Edna Stack, PCP to Chair The Canadian Payroll Association

Kerri-Ann Santaguida Carol Gray to VP & General to Bank Board, Amex Manager, Bank of Canada Merchant Services American Express American Express Canada Canada

Martin Roy to President and CEO Christie Innomed

Dave Filipchuk to Deputy CEO PCL Construction

Michael Denham to President and CEO The Business Development Bank of Canada (BDC)

Jeff Daley, CFA to VP Burgundy Asset Management Ltd.

James M. Dickson Darren Entwistle Heather to Board of Directors to Board of Directors Munroe-Blum Empire Company Gairdner Foundation O.C., O.Q., PhD., F.R.S.C., Limited to Vice-Chair, Board of Directors Gairdner Foundation

Chris Gower to C0O, Buildings PCL Construction

Rob Holmberg to President and COO, Canadian and Australian Operations PCL Construction

Henry Karamanoukian to President P&G Canada

Amir Jafri to VP Burgundy Asset Management Ltd.

Anne Maggisano, CFA to VP Burgundy Asset Management Ltd.

Leo Gesualdo to CFO Greenrock Real Estate Advisors

Christina Kobi to Partner McLean & Kerr LLP

Eduardo Pacheco to Board of Directors Scotiabank

Dr. Valerie Kuehne to VP, Academic and Provost University of Victoria

DECEMBER 2015

To make arrangements for an Appointment Notice, please call 1-800-387-9012 or email [email protected] View all appointment notices online at www.globeandmail.com/appointments


15-11-05 3:38 PM

Guns, furs&traıns by Susan Krashinsky photographs by Aislinn Leggett

LONG WITH THE LEDGERS AND MEETING MINUTES IN A CORPORATE ARCHIVE, YOU’D never expect to find declarations of love. But in among the yellowing, leather-bound volumes lining the shelves in a vault, the Bank of Montreal’s records also tell of men requesting permission to marry — a fairly common policy at a time when employers believed they had a duty to ensure a young paramour could support a wife. ¶ Such vivid snapshots of history abound in the archival collections scattered throughout corporate Canada. Their guardians are mini-museum curators, working to preserve not just company history, but also a broader link to the past. ¶ Some collections are displayed in museums (from 1931 to 1968 Bell had its own, which was at one point called the Panorama of Telephone Progress); some are stored away from the public eye — open to academics or others by appointment only. Others are outsourced to universities or government archives. ¶ Artifacts can become part of company lore (such as the revolver kept in a walk-in safe in the publisher’s office at The Globe and Mail). The Hudson’s Bay collection is so vast that UNESCO has added it to the Memory of the World Register. ¶ Historical collections require significant investment. Bank of Montreal, which is anticipating its 200th anniversary in 2017, currently has four full-time staff. Preventive conservation for just a single document can cost around $600. Documents, photos, films and artifacts all require specific temperature and humidity controls so they are not lost to time. ¶ We took a peek into the vaults and found gold that went down with the Titanic, shades of Downton Abbey, astronauts’ souvenirs and even a taxidermied dog.

Legend has it that in March of 1880, the gun was used by a disgruntled employee to shoot George Brown, the founder of The Globe (he died a few months later from an infection). But that was a different gun: This one was purchased in light of what had happened to Brown, to protect subsequent publishers.


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Today, companies destroy everything very fast. The — Josée Vallerand, the Exporail arch

W

illiam Cornelius Van Horne, then the vice-president of Canadian Pacific Railway, arrived at the ceremony for the driving of the last spike on Nov. 7, 1885, in his own private rail transport. Seventy-three years later, the mahogany car was due to be burned when Leonard A. Seton, a member of the Canadian Railroad Historical Association, spotted it. The car was spared, and CP Rail began donating other antique cars and memorabilia to the association’s Exporail museum, just outside Montreal, for safekeeping. In 2012, CP began handing over its rail archive—some of it has been kept under lock and key. The records include city planning maps, which show the importance of the railway in populating towns across the West, where the station would be among the first buildings to go up. In northern communities—too small for even a one-room schoolhouse—the Ontario Department of Education sent school cars. One of them had the same teacher, W.A. Wright, live on board from 1928 to 1967. He stayed in a small apartment in the car, and at each stop would teach in another that was fully equipped with wooden desks, abacuses, attendance rolls, chalk and erasers. He would leave behind homework that would be done in the weeks between visits. The government paid to refurbish the cars and pay the teachers, and the railways agreed to run them for free. In the 1930s, the program expanded to Quebec and Newfoundland. Exporail also has artifacts from other railways, including a gold watch that belonged to Charles Melville Hays, president of the Grand Trunk Railway, a CP competitor that was absorbed into Canadian National Railways in the early 1920s. Hays was returning from a business trip to England when the ocean liner he was travelling on, the Titanic, sank on April 15, 1912. It was the engraving on the watch that helped identify his body.

Charles Melville Hays’s gold watch

Fully equipped school train car


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ast. They don’t think about their history very much.” orail archivist who used to work at Canadian Pacific Railway


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New employees at Bell who take a tour of our archives are so excited at hearing a dial tone. It was the first time in my career where a dial tone was a heritage moment.” — Lise Noël, archivist at Bell Canada’s Montreal office

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Gold-plated intercom from the Eaton family’s mansion

uspension of disbelief is not an easy feat for Lise Noël, particularly when she watches period movies or shows in which characters use old phones. “They’re very far away,” she says, holding a receiver to her ear, and the transmitter in the other hand, inches away from her face. “You really need to talk within an inch of these things.” Noël is responsible for a history that stretches back to 1876, when Alexander Graham Bell transmitted the very first voice call, to his assistant, saying: “Mr. Watson, come here, I want to see you.” The Bell Telephone Co. of Canada was born four years later. The Montreal collection includes one of Bell’s early wooden transmitters and remnant cables from the inaugural transatlantic telegraph line. (For a while, those scraps became a bit of a craze: Tiffany’s made some of them into watch fobs, pendants, and handles for canes and umbrellas.) There’s a beaten-up blue prison pay phone and an early BlackBerry. A wooden phone booth that stood in a Montreal high school bears witness to erstwhile teen romance, defaced with the carving “Pat + Diane 65.” A gold-plated intercom used to hang at Ardwold, the Eaton family’s mansion in Toronto. “It really was a Downton Abbey thing,” says Noël. On the left are call buttons for “Sir John” and “Lady Eaton,” and for parts of the house, including the dressing room. On the right are buttons for the butler’s room, the gardener and the pantry. She holds up a photograph: one of the classes Bell hosted after dial phones came into use in 1924 because people had to be taught how to use them. Noël also helps care for telecom relics from both World Wars. One resourceful soldier fashioned a chest support out of a shell casing to create a hands-free voice transmitter.


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19th-century cast-iron mechanical piggy bank

Dust is our enemy. When people see dust, they think old. That’s not what we are. Au contraire! We bring things to life. You know the movie Night at the Museum? That’s how we feel when we enter here.” —Yolaine Toussaint, Bank of Montreal

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here are those who’d say a bank has no soul. But BMO’s archivist Yolaine Toussaint would diasgree. She thinks it exists in this vast collection at the bank’s Montreal head office—shelf after immaculate shelf housed in a basement vault that used to hold clients’ money. The treasures include an early bank charter signed by King William IV, as well as some of Canada’s first uniform currency, which BMO issued long before the Bank of Canada existed. Before BMO came along in 1817, businesses had to grapple with a monetary stew that included Hudson’s Bay tokens, pesos, shillings and francs. There are even oddities like $8 bills. Then there were the counterfeits. Unlike today’s masterpieces, some of those early attempts were crude and hand-drawn, designed for trading in darkened saloons. But there were more immediate dangers for the bank than counterfeiters. Toussaint unclasps a wooden box on a back shelf. Inside is a revolver, from the days before security cameras and bulletproof glass. “It was a banking reality,” she says in her singsong voice. “You never knew when Jesse James would come in, you know?” Toussaint has pulled from the shelves some of her personal favourites—cast-iron piggy banks that date back to the 19th century, when automatons and mechanical gizmos were all the rage. She dons white gloves to make one built in 1878 come to life. It’s called the Eagle and the Eaglets. She slips a coin into the eagle’s mouth, lifts the wing and presses a hidden lever. The bird leans forward, opens her beak and the coin disappears as her tiny brood springs up from the bowels of the toy. At one time, the birds even made a peeping noise. Another favourite: a large scale that was used at the branch in Dawson City to weigh gold nuggets. In an old HR file, we learn that Ulrich Friedrich Wilhelm Joachim von Ribbentrop was a “nice boy”—or at least his supervisor thought so. The German lived in Montreal and worked at Molsons Bank (later acquired by BMO), starting in 1910. “Obliging, attentive [and] exceptionally capable for his age,” reads his employee review. Hitler thought so too: Von Ribbentrop went on to become his foreign minister and the first Nazi leader hanged at Nuremberg.


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That was a horrible day. I’ll never forget that day as long as I live.” — Gerry Burns, MacDonald, Dettwiler and Associates, about the Challenger shuttle disaster

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Official seal used by HBC commissioners J. Wrigley and C.C. Chipman

MDA’s training simulator

UNESCO recognized HBC’s documentary heritage to be of world significance. We’re up there with the Gutenberg Bible, Nelson Mandela’s trial records, Egyptian scripts and various other exotic things.” — Maureen Dolyniuk, keeper of the Hudson’s Bay Co. archive


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W THE MANITOBA MUSEUM (HBC 1675)

or Mike Hiltz, an engineer who as a kid watched the moon landing, Spar Aerospace “was like Willy Wonka’s chocolate factory,” a dream world where real astronauts walked the halls. That’s because before they could blast off into space aboard a shuttle, NASA’s chosen few had to make a stop in Toronto to learn to use the Canadarm. A simulator mimicked the reality of operating the robotic arm in space. While the simulator’s outer shell looks like the nose of the shuttle, inside the panels and joysticks were exactly what astronauts would find on the real thing. Each crew of trainees left behind a mission badge sticker—a memento of their stay that was plastered to the outside of the simulator. There’s a badge for Columbia, the first shuttle to take flight with a Canadarm aboard. And there’s one from the ill-fated Challenger mission. Senior engineer Gerry Burns joined Spar (whose robotics division was acquired by MDA in 1999) just before Columbia’s voyage in 1981. He led the final training session for astronauts Judy Resnik and Dick Scobee. Shuttle missions had become so routine by then that Burns recalls joking with Resnik: “If something doesn’t go wrong, you’re not going to get a mention in the news.” It was terrible foreshadowing: On Jan. 28, 1986, Challenger broke apart 73 seconds into its flight, killing all seven crew members. The Canadarm was present for many successful missions, too. In 1998, Hiltz was at Mission Control in Houston when it docked the U.S. Unity node to the Russian Zarya module. “Here was Canada, joining Russia and the U.S. together,” Hiltz recalls. It was the Canadarm’s most daring mission yet, and its heaviest payload. Applause broke out when the two pieces came together. Hiltz’s boss at NASA, John Peck, told him: “Get up and take a bow.” Hiltz demurred, but Peck insisted, and the room broke out in cheers.

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hen King Charles II handed Hudson’s Bay Co. its charter in 1670, with it came a monopoly on trade across onethird of what is now Canada. That kicked off the lucrative fur trade, with male beaver pelts as the going currency. The company’s more than 26,000 artifacts, as well as its photographs and documents (now housed largely at the Manitoba Museum in Winnipeg and the provincial archives, and financially supported by HBC), chronicles not just HBC’s history, but also the lives of First Nations people and European settlers going back 350 years. It includes beaded bandoliers and belts, porcupine quillwork and an Inuit rain suit made from the intestines of a seal. “It’s old-school Gore-Tex,” says Amelia Fay, a curator at the Manitoba Museum. Other oddities in the collection: a taxidermied dog that was part of one of the search missions looking for the Franklin expedition in the late 19th century, a wood desk calendar Franklin left behind at a trading post at Fort Chipewyan in Northern Alberta, and numerous trading blankets. Some of this history is still finding its way back into the archives. In 1919, HBC commissioned a documentary called The Romance of the Far Fur Country, by Harold Wyckoff, to mark its 250th anniversary. The six-month expedition in Canada’s most inhospitable climates, with more than 450 kilograms of film equipment in tow, yielded remarkable scenes of northern life. It was hidden away at the British Film Institute—a good thing, since the BFI was able to preserve the highly flammable nitrate film—until 2011, when the archives requested the film back. In October, Wyckoff’s grandson donated the filmmaker’s diary, photographs and letters from the expedition. The archive serves a scientific purpose, too: Long before Environment Canada, HBC trading posts kept meticulous daily records of temperature, wind conditions and sea ice. In his history of HBC, Peter C. Newman wrote that it’s “probably the best-documented institution in the world, next to the Vatican.” In 2007, UNESCO added the company’s collection to its Memory of the World Register.


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Exit Interview

Station to station

If Canadian TV business journalism has a superstar, it is Amanda Lang, who has spearheaded CBC’s coverage of the economic world for the past six years. Lang, 45, is leaving the public network to host an evening show on the new Bloomberg TV Canada channel. Early this year, she was the target of intense criticism for alleged pro-business bias, which stemmed from her involvement in a story about the Royal Bank of Canada at a time when she was in a relationship with an RBC board member. An internal CBC investigation found her conduct adhered to the network’s standards. Why are you moving on?

It’s part of a thought process that goes back a couple of years. I love the TV-video content I’m creating and I love business journalism, but you get the sense the over-the-top disruption of broadcasting will happen with formidable speed. How do you keep doing what you do on a platform that will survive? Bloomberg was launching in Canada, and that means access to millions of desktops worldwide. We started talking a year ago and here we are.

I was very naive about how private I could be about my life. My sensitivity around what people need to know is higher now. I did not go over the line journalistically. But one thing I regret is that there are a couple of producers I might have disclosed [the relationship] to. We would have talked about whether doing an interview [with RBC’s then-CEO Gord Nixon] was appropriate. I believe they would have said it was. Will it be different working for Bloomberg?

It is more important to bring a critical eye to this stuff, and be heard by the business community. There are big issues around how capitalism is failing and business alone can fix it, in the same way that threatening Lower Manhattan with rising sea levels is our best bet for fixing climate change. They need to appreciate that inequity will come home to roost.

Aren’t you just mad at the CBC for last winter’s tumult?

It was a tough time, but it was always clear to me that I had the backing of the organization, and that mattered a lot. In some ways, it made it harder to contemplate leaving.

But how do you respond to charges you are blatantly pro-business?

I am not a booster. I am not a cheerleader. I have looked bank CEOs in the face and said, “Please tell me why you deserve to make the money you do—it’s way too much.” There are times when it is our job to underline how badly

behaved business sometimes can be. You can only credibly do that—and be heard by the business community and others—if they don’t think you started with the view that they were bad to begin with. I have a non-bombastic, non-aggressive style of interviewing, but it actually elicits a lot of information.

The live sparring was fun. I liked him, but not always what he said. Sometimes I found it abhorrent. We had worked together for 12 years at two networks. When he left in 2014, I had an existential moment: Who am I on TV without Kevin? The numbers for The Exchange with Amanda Lang were really good—better than with him. It was gratifying that the new CBC show reached a strong audience. /Gordon Pitts This interview has been condensed and edited.

PHOTOGRAPH RODRIGO DAGUERRE

Did you miss Kevin O’Leary, your former co-host?

Was there always a cultural conflict—a high-profile business reporter in an organization where business is an anathema?

You don’t have to dig very far to find a real anti-business sentiment among journalists in general. Dare I say more so at CBC? I don’t know. There is a kind of natural mistrust of anyone who is even neutral. But to me, businesses are benign entities that do a lot of good, including employing a lot of us. It is people making things, working hard.

What did you learn from the RBC uproar and how your private relationships became an issue?



15-11-05 9:52 AM

SPONSOR CONTENT

Investing strategies for volatile times There’s no blueprint for investing in today’s ‘divergent’ global economy, says Invesco’s Jason MacKay. But it pays to be discerning and nimble

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ome people may look to history as a guide to future behaviour, but for Jason MacKay, the past isn’t a great indicator for Canadian investors right now. “This is one of those times in history where there are not a lot of blueprints,” says Mr. MacKay, vicepresident, head of global investment strategies for Invesco Canada. “It truly is an unusual time. There is no chapter in financial history where things were exactly like they are now.” Today, the global economy is more divergent than it has been in a long time, with different national and regional economies pulling in different directions. This is leading to a move toward stocks that have relatively stable earnings and away from those whose earnings are more volatile, says Mr. MacKay. “Divergence is the best way to describe today’s global economy.

It’s caused in part by the abnormal policies you’re seeing from central bankers around the world,” he explains. What’s driving this divergence is what Mr. MacKay calls the “velocity of money,” driven by the adoption of quantitative easing (QE) by different countries and regions. QE is a method that central banks have been using to increase their money supplies. While QE is sometimes thought of as simply printing more money, it’s not. Rather, a central bank increases the money supply by purchasing government or other securities from the market to lower interest rates. This has the effect of flooding the market with available capital for lending. It’s an unconventional monetary policy because it’s only deployed when interest rates are near zero – an unusual situation historically, but exactly what is happening now.

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15-10-30 1:13 PM

COVER SHOT EXCLUSIVELY FOR GLOBE INVESTOR NIK MIRUS, SET DESIGN OLIVER STENBERG/L'ÉLOI; SPOT ILLUSTRATIONS LEEANDRA CIANCI

TREND

If the shoe fits In August, Nike’s Converse subsidiary released the Chuck II, an update to the classic American basketball shoe, the Chuck Taylor All Star, which debuted in 1917. Costing about $20 more per pair, the new sneaker keeps many of the same features of the traditional version. After all, if the brand ain’t broke, don’t fix it. Nike bought Converse in 2003 for $305 million in cash. At the time, Converse’s annual sales were an estimated $205 million. Last year: $1.7 billion.

Converse brand VP Geoff Cottrill, a former Coca-Cola exec, told Fast Company that “you better believe” the New Coke disaster of 1985 came up in Chuck Taylor redesign meetings. But the Converse team also figured that some boomer Chuckheads wanted improvements.

800 million Pairs of Chuck Taylors sold since 1917

How do you play this trend?

Nike, Inc. (NYSE:NKE) Annual revenue

The shoe’s footbed now has cushioning, made with Nike’s Lunarlon foam. There’s also microsuede lining inside and more cushioning in the tongue and collar.

$30.6 billion

Nike makes the iconic Jordan shoes as well as Chuck Taylors, and has an estimated 97% stranglehold on the basketball shoe market.

Adidas AG (ADS:DE) Annual revenue

€14.5 billion

Wilt Chamberlain wore Chucks when he scored 100 points in one game for the Philadelphia Warriors on March 2, 1962. Other celebs who’ve sported the shoe: David Bowie, the Ramones, Debbie Harry, Justin Bieber and Drake.

Rather than heat-welded, the patch is embroidered in white-and-blue thread.

E.C. Frederick, Converse’s research and development chief in the 1990s, remembers the customer revolt when the company switched factories and tried to make the shoe more comfortable. “The thing with a fashion icon is, it’s supposed to be exactly like it always was,” Frederick told The Washington Post.

DECEMBER 2015

❘

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This is a stock for soccer fans. Even after buying Reebok in 2005, Adidas remained a pipsqueak in basketball shoes.

GLOBE INVESTOR 1

15-10-29 12:40 PM

Popular is nice, but smarter is better Global small/ mid-cap

Canada small/ mid-cap

Global

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CAD hedged

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15-10-29 15-10-13 12:43 10:05 PM AM

globe investor JUNGLE FEVER IS AMAZON OVERPRICED? HOT PROPERTIES WHERE IS WORTH MORE THAN WHAT OFFICE OFFENSIVE STAPLES’S BID TO CORNER A MARKET

PLUS Chuck’s new look

Fast

Fashion

Is it a fad? Or will the hot returns stay in style?

DECEMBER 2015

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15-10-29 2:14 PM