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The Globe and Mail

Why corporate Canada's heart now beats in the West

Photo composition: Peter Munk, left, and Bank of Montreal main branch on Saint-Jacques.

In 1962, hip, affluent Canadians, eager to catch the fresh new sounds of the Fab Four from Liverpool, were buying hi-fi systems with turntables tucked into old English-style furniture.

One stereo maker, a brash young Hungarian immigrant named Peter Munk, placed an ad in the first issue of The Globe and Mail's Report on Business, showing components fitting neatly into "an Elizabethan refectory table."

It was a pitch aimed at the anglophile tastes of many business readers, who still saw Canada as an Atlantic nation, with its commercial life centred on the Great Lakes and the St. Lawrence River.

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Fifty years later, it is a vastly different Canada – as we strive to be a Pacific power, to build relationships with China and wrestle with the challenge of laying a pipeline from the Alberta oil sands to the B.C. coast.

Report on Business has chronicled this westward march, from Montreal's waning years as the dominant financial hub, to Toronto's emergence as the northern apex of a continental economy – and now to Calgary and Vancouver as gateways to a surging Asia.

That geographical shift is the symptom of a deeper tension – between a powerful resources economy, now dominated by western energy, and a vital but vulnerable manufacturing sector, based largely in the East. And while we built national champions in mining and oil, we have failed tragically to create and keep a powerhouse in high technology.

All of this drama has been played out over the decades by a rich (in character and finances) cast of players, from bankers and swindlers, to manufacturers and energy tycoons – but the most colourful of all may be that same Peter Munk, whose 50-year odyssey parallels Canada's economic history.

As a Toronto manufacturer of consumer electronics, he crashed and burned in the late 1960s, a casualty of his own mismanagement and Canada's unforgiving treatment of innovation. After a successful foray into real estate, he built a global leader, Barrick Gold , now the largest gold miner in the world and the fifth-largest company on the Toronto Stock Exchange. He has emerged, at 84, as an elder statesman with a classic Canadian résumé: He made his biggest mark by digging stuff out of the ground.

Today, more than half of Barrick's operations are in the Asia-Pacific region and South America – and yet, in Mr. Munk's formative years, Canadian titans, and titan wannabes, were unabashedly Eurocentric.

In the Report on Business of 1962, it was still the goal of any rising plutocrat to be a British lord or to consort with lords – and this was even before Conrad Black. Conglomerate-builder E.P. Taylor announced he would make big moves in Britain, and Anglo-Canadian grocer Garfield Weston was eyeing opportunity in rebuilding Germany.

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Yet the big economic story that year was just how tenuous this link with Europe would become. The idea of a united Europe was in ascendance, not in decline, as today. With Britain trying to join the European Common Market – it would take another decade – and the dawn of a Common Agricultural Policy, Canadian exporters were feeling abandoned.

The Atlantic era of Canadian business was grinding to a close, and the U.S. relationship, always strong and often contentious, had become even more critical. In a world splintering into economic blocs, the country realized where its future lay – and in 1965 forged a groundbreaking free-trade pact in autos and auto parts with our southern neighbour. The Atlantic country was now resolutely North American.

Follow the money

Canadians are easily distracted by resource booms, and one of the hottest erupted in the Timmins region of Northern Ontario in the early 1960s. The Texas Gulf Sulphur strike of copper, zinc and silver dominated the pages of the new ROB. At the peak of speculative mania in 1964, the Toronto Stock Exchange saw a record 28.7 million shares change hands in a day – while in 2012 a normal trading day might see volumes of 400 million shares.

When Canadians find stuff in the ground, they take leave of their senses, unleashing contagions of get-rich-quick thinking. Texas Gulf's strike led to the Windfall affair, named for a company controlled by mining legend Viola MacMillan, who shockingly went to jail for stock manipulation.

The Windfall debacle, which saw a huge runup and collapse of shares, was part of a pattern of penny stock scandals – often perpetrated around mining shells, and often, but not always, on the wild and woolly Vancouver Stock Exchange. They led up to the granddaddy of hoaxes: the Bre-X scandal of the 1990s. Bre-X was both old and new – it continued the pattern of great resource scams and it was a signal of Calgary's new wealth. You have to have money to lose it, and Calgarians, in particular, lost a pile when their hometown hero vaporized.

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The Bre-X scandal was also Pacific-oriented – the phony gold strike, and its salted core samples, were centred on Indonesia. Now in the 21st century, the scandals continue to go global, proving that Canada's sure-fire competitive advantage lies in commodity-stock rigging. Most recently, Sino-Forest, once a high-flying TSX company with forests in China, has become the focus of investigations in the Case of the Missing Trees.

The empires

In Canada of the 1960s, manufacturing still mattered, but the cast of characters was changing. In one of the ROB's early editions, an ad announced the placement of a preferred share issue by an obscure Ontario technology company called Magna Electronics.

Magna is obscure no more. Seven years later, an appointment ad noted that a certain Frank Stronach, a curly-haired Austrian-born tradesman, joined the board, having completed a reverse takeover of Magna by his own manufacturing and engineering company. The rise of Mr. Stronach, like Mr. Munk a refugee from the postwar agonies of Central Europe, was a signal that the old anglophile establishment had to make way for a new breed – aggressive, entrepreneurial, outside the old schools and clubs.

Mr. Stronach was opportunistic, coming on the scene just as economic power shifted from Montreal's St. James Street to Toronto's Bay Street, and as Canada, now rebuffed by Europe, tied itself more tightly into the continental auto economy.

It transformed Canada's backwater auto parts business into a global powerhouse, and made Frank Stronach into one of Canada's richest people. Magna was a master of using its international linkages, while its charismatic founder indulged his love of horse racing and outsized remuneration.

Magna was not the only great Canadian empire whose rise was sketched through the ROB's pages. In the 1960s, a flinty-eyed New Brunswick entrepreneur named Kenneth Colin Irving was building a private empire as he moved from his forestry roots into energy and retail, and to shipbuilding. K.C.'s ship truly came in last year when, 20 years after his death, his grandson Jim captured a $25-billion contract to build warships for the federal government.

It was a triumph for the Irvings, but also a reminder that Atlantic Canada is the least dynamic region of Canada, and among the most dependent on government largesse. It has largely been left behind in the shift to the West and to the Pacific – although its nomadic workers have certainly hopped on that train. Only Confederation's newcomer, Newfoundland, is bucking the trend through its energy bounty, while forests and fisheries succumb to the ravages of overharvesting and global market shifts.

Yet the Atlantic region's entrepreneurs are forced to think big because of the constraints of their home markets. As the ROB began, brothers Harrison and Wallace McCain were building a little frozen French fry business in rural New Brunswick that is now the largest supplier of chips to the world. The McCains had a vision that encompassed not just the United States and Europe, but the Asia-Pacific hot spots. A shopkeeper in Stellarton, N.S., named Frank Sobey harboured his own dream of a grocery empire, which would be taken nationwide by sons Donald, David and Bill.

At the same time, a wide swath of the Canadian economy fell under U.S. control. Even the redoubtable Molson family, brewers in Montreal since 1786, struck an alliance with the Colorado-based Coors clan. And 350-year-old Hudson Bay Company, once a British fur trader, then a Canadian-owned retailer, is now controlled by a U.S. investor. Its journey parallels the Americanization of Canadian retail, underlined by the arrival of Wal-Mart and the death of department store icons Woodward's and Eaton's. It makes the story of onetime basket case Loblaws even more compelling, as Garfield Weston's son Galen and a team of brilliant managers guided its rise from the nadir of a troubled company in the 1970s.

But foreign ownership provides some twisting dilemmas. Could we have developed our energy resources without Imperial Oil? Controlled by Exxon Mobil, it struck oil at Leduc in 1947, setting off the great Alberta oil and gas bonanza, and it has been a pioneer in developing the oil sands.

As the foreign ownership debate raged on, the new nationalist pariah became "hollowing out" – the erosion of head offices, and legions of supporting professional jobs, because of foreign takeovers. It reached a peak in the past decade as foreign buyers invaded the mining sector, snatching away icons such as Inco and Falconbridge. The debate will only intensify as the Chinese, with their model of state-owned champions, make greater inroads into Western Canada.

Toronto on top

From the 1970s, Toronto has ruled financial markets as home to the dominant stock exchange and the five major banks. The 1976 election of a separatist government in Quebec only accelerated those trends. The most critical exodus was not the head offices but the flood of talent down Highway 401 to Toronto from Montreal.

The most important movements have always been the people shifts – from the postwar influx of skilled immigrants like Messrs. Stronach and Munk, to the Atlantic Canadians who flocked to Fort McMurray to build the oil sands, and to Saskatchewanians who founded great energy companies in Calgary. Then, there is the exodus from Hong Kong and mainland China, making Vancouver the most vital city on the Pacific Rim. And now, we are seeing a potential for human talent to travel from the ravaged industrial towns of Southern Ontario – perhaps to Saskatchewan, now resurgent in its potash, canola and energy riches.

Quebec fought back against the Toronto rush with its blueprint of Quebec Inc., nurturing homegrown industry by backing its own entrepreneurs with names such as Desmarais, Marcoux, Péladeau and Dutil. The most heroic was an urbane accountant named Laurent Beaudoin, who married the boss's daughter and built Bombardier from its roots as a snowmobile maker to a homegrown manufacturing champion, with a presence in the global market for commuter aircraft.

The 1970s changed the game in another profound way by ushering in the new age of energy. Headlines were dominated by the emerging Organization of Petroleum Exporting Countries, the Arab oil embargo and the price of oil rising to heights of $35 (U.S.) a barrel. This big global story empowered the energy-rich West and particularly Alberta. Energy became the centrifugal force in Confederation as it set off the political battle, still raging, over the spoils of hydrocarbon wealth, the impact of the petro-dollar and environmental activism.

Turf wars between prime minister Pierre Trudeau and Alberta premier Peter Lougheed escalated to an angry peak with the federal national energy program, a takeover coup by Ottawa that threw energy companies and Albertans into apoplexy. Coming at the time of global recession and collapsing oil prices, it still stokes resentment among Albertans not even born in 1980.

Western alienation was further fed by the creation of Ottawa's energy giant Petro-Canada, which was granted automatic access to vast resource rents. The era saw the emergence of Smiling Jack Gallagher, a brilliant Calgary entrepreneur, whose exploitation of Ottawa's policies made Dome Petroleum the vehicle of Canadian dreams, only to collapse under debt and slumping prices.

Through it all, Canada's history was following a dramatic arc from a commercial empire on the St. Lawrence, when trade moved along eastern rivers, to the age of the transcontinental railway, to the modern wealth carriers, the spider web of oil and gas pipelines that are pushing, controversially, to the Pacific and the Gulf of Mexico.

The precursor of Keystone XL and Northern Gateway was the Mackenzie Valley pipeline proposal, which provided a dress rehearsal in energy ambitions arrayed against native bands and environmental groups. Ottawa punted the decision to an inquiry led by Justice Thomas Berger who, after exhaustive hearings in the late 1970s, recommended the project be delayed. The Mackenzie Valley pipeline, like the national energy program, never went away, having been reintroduced and re-shelved. Pipeline debates are recurring wounds in the Canadian psyche, like winter and the Maple Leafs dashing even the faintest hopes.

During the 1970s, the country divided along East-West fault lines, between the Toronto-Ottawa axis and the Calgary-Edmonton corridor. Each side needed the other, as the West developed from eastern capital, and taxes and royalties flowed to Ottawa for big social schemes. In this regional exchange, the consistent winners were the major five banks. Their grip tightened in the big bang of deregulation, which allowed commercial banks to enter investment banking as well. They shrugged off the crash of 1987 as a one-day wonder and survived the challenge of the trust companies, which took on too many real estate loans and had to be rescued by government and subsumed into the banks.

Indeed, the banks suffered only one serious setback, when Finance Minister Paul Martin said no to mergers in the 1990s. Even that loss was a kind of triumph. Their absence from the big mergers, plus a more stringent Canadian regulatory climate, protected Canada's institutions from the worst excesses of size and hubris that capsized global banks in the financial meltdown of 2008.

The meaning of Nortel

The banks benefited greatly from the globalization of the past 30 years, epitomized by the signing of the Canada-U.S. free-trade agreement, later extended to Mexico. In the long-simmering debate between nationalists and free traders, the free traders seemed to win – for a moment. They argued that free trade actually liberated coddled national champions, giving them licence to thrive in foreign markets.

No company carried those hopes more boldly than Nortel, a stodgy supplier of telecom gear as part of the supply chain of monopoly phone company Bell Canada. Cut loose from Bell, propelled by the Internet and global expansion, it became an acquisition machine that paid its bills in soaring stock. In the mad markets of the late 1990s, Nortel become the most valuable company in our history with a market capitalization of almost $400-billion.

For one brief moment, Canada dreamed of its own technology champion, but Nortel then became its most spectacular collapse, as it plummeted into bankruptcy protection and dismemberment. It was not a lack of engineering or technical talent that ultimately killed Nortel. It was the desire of otherwise sober accountants, engineers and technicians to score like windfall-era mining promoters. The speculative culture of the boiler rooms extended to Internet startups and even to venerable telecom players.

Are we seeing the same sad saga replayed with RIM ? For a while, it too embodied the great technology dream, as Waterloo, Ont., became our Silicon Valley, where startups clustered around a university built on mathematics and computer science. RIM was also part of the relentless miniaturization of technology. One front page in early 1962 proclaimed that computers would progressively decline in size, as they blossomed in functionality. The accompanying photo showed a device the size of a bathroom, suggesting more work needed to be done. Then RIM reduced an array of office functions to a pocket device called the BlackBerry, the brand of choice of global corporations.

But success is fleeting in the high-tech world, built on nimble minds and imagination, not a certain store of oil or gold in the ground. By the end of the first decade of the 21st century, RIM was under attack by new generations of smartphones. It was not a crash like Nortel's but a steady, dramatic erosion of market share. It resurrected the old chorus: We develop great technology, but can we commercialize it to lasting advantage?

If only the speculative spirit of Nortel and Bre-X could be channelled into a brazen brio for building companies. We need more heroes in the fashion of Ted Rogers, who never invented a thing but constructed an enduring enterprise by taking smart bets on the commercial application of new technology – from FM radio to cable TV to wireless.

The challenges of innovation and technology become more complex in an era so utterly dominated by China and by commodities, which drive up the value of our dollar. It is a perplexing paradox because Canada is one of the world's most prosperous countries. But as Ontario and the East falter and Alberta and Saskatchewan flourish, we are still searching for an answer to the historical dilemma: Does this have to be a zero-sum country where one region, one sector, one group, prospers while others feel so abandoned? That tension dominated the first 50 years of Report on Business; with the geographical tables so decisively turned, it shows no signs of abating.

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