Louis Audet is chief executive officer of Cogeco Inc.
As we think about growing our economy, there are many issues to consider.
Let's start with our innovation and productivity deficit. This subject has been analyzed at length, by the Conference Board of Canada, the Institute for Research and Public Policy and many others.
Innovation is hard work and increasing productivity is resource-intensive. Both require investment. So there is a need for owners of capital to be willing and eager to support new ideas and, above all, to take risks in the pursuit of returns. I ask, with all due respect: Are Canadian financial markets really up to it?
For example, I refer to the income trust frenzy that prevailed from 2000 to 2006. Investment professionals loved this form of organization, which encouraged capital expenditures to be as low and so-called tax-free distributions as high as possible. The stock market rewarded companies converted into income trusts with higher trading multiples.
But the frenzy was so intense that it betrayed the pervasively flawed logic behind investor expectations: That returns can be achieved easily without incurring risk. Still, the frenzy lived on until the finance minister rightly abolished the tax advantage granted to income trusts on Oct. 31, 2006.
In my opinion, this story exemplifies an imbedded bias in our investment psyche. Until we change our point of view about the trade-off between risk and return, our innovation and productivity deficit will persist.
Another issue to consider is the strengthening of our industrial fabric. Exports are what creates prosperity for a country. Yet, there is a lot of talk about Canada's shrinking manufacturing infrastructure. Canadians should take notice of the Mittelstand model that has made Germany prosperous. I am talking about the thousands of private, mostly mid-sized, family-owned and – controlled companies that innovate, invest, prosper and export. The secret behind this model is a culture of ownership and tax exemption when a business is passed on to future generations.
Canada's current fiscal regime discourages family continuity in business. Governments tax the presumed capital gain on the shares of family-controlled enterprises passed on to the next generation at the level of 26.7 per cent. Many times, the descendants are forced to sell the business to pay the inheritance tax. This is not conducive to the strengthening of our industrial fabric and causes Canada to gradually lose head offices. This fiscal regime must be changed.
Family ownership brings persistency, long-term vision and investment, and builds prosperity for a country. Family-controlled issuers often get little credit for the unique value they provide to Canadian markets, as the Clarkson Centre for Business Ethics and Board Effectiveness pointed out in a 2013 study on the favourable impact of family control on the share price performance of large Canadian publicly listed firms from 1998 to 2012 as compared with non-family owned companies. A study released a few weeks ago by Ontario's 5i Research came to similar conclusions.
Here in Canada, as a number of reputed institutional investors (including the Caisse de dépôt et placement du Québec and BlackRock) have observed, we have become a country of traders as opposed to a country of owners. The whole financial chain of services is centred on trading and making a profit in the process. This disposition is not in the best interest of our economy and its diversity for the long term.
Furthermore, we need to change corporate laws to adopt certain provisions of Delaware's law empowering directors to resist automatic auctions triggered by unsolicited takeover bids when deemed appropriate.
Investment horizons have to lengthen substantially. And yet, investments bear some risk and mistakes can happen. That's called the risk-return trade-off, and it's normal and unavoidable.
This op-ed is derived from comments made at the Canadian Club of Toronto on April 25.