The Social Cost of Alberta’s Economic Downturn

The COVID-19 pandemic has significantly impacted Alberta’s previously weakened economy. The closure of non-essential businesses, travel restrictions, physical distancing measures, and the latest crash in oil prices has negatively impacted businesses and contributed to a surge in unemployment. In May 2020, Alberta's unemployment rate rose to 15.5 percent, up from 6.7 percent in May 2019. At the same time, Canada's unemployment rate was 13.7 percent, up from 5.4 percent in May 2019. According to ATB Economics, almost no sector of Alberta’s economy was left unscathed. Such a rapid increase in unemployment adds to the economic insecurity many households in Alberta are already facing. Further, the unemployment rate in the province is expected to be one of the highest in the country next year.

“According to ATB Economics, almost no sector of Alberta’s economy was left unscathed. Such a rapid increase in unemployment adds to the economic insecurity many households in Alberta are already facing.”

Though the pandemic has exacerbated social distress in Alberta, the fall of oil prices in 2014 and the ensuing recession kickstarted the deterioration of Albertans' social well-being over the last six years. Since 2014, the economic trajectory of Alberta has been stark, and the correlating distress, as captured by data from social conditions for the 2014 to 2019 period, exemplify why significant jobs lost, bears more weight than we may realize:

• The number of unemployed individuals not covered by employment insurance has risen 53 percent;

• Unemployment among young men is up 156 percent;

• Food bank usage is up 80 percent;

• Suicide hotline calls have increased by 85 percent;

• The number of individuals seeking counselling support in Calgary has increased 46 percent;

• The percentage of Alberta households relying on social assistance has nearly doubled;

• Incidents of domestic violence in Calgary have increased by 150 percent;

• Non-violent crime is up 34 percent;

• Business insolvencies have increased by 58 percent; and,

• Consumer bankruptcies are up 101 percent.[1]

It's common to conceptualize a business' contribution to society through economic factors such as the unemployment rate or GDP growth rate, however, it’s evident that the impact extends far beyond such quantitative factors. As exemplified by the data, the worsening of Alberta's economy and the loss of approximately 100,000 jobs in the energy sector, has had effects on the social well-being, and ultimately, the quality of life for Albertans. The rise in suicide hotline calls, incidents of domestic violence, and the number of individuals seeking counselling, exemplifies the dire and long-term consequences that accompany economic hardship. In turn, the healthcare system, the non-profit sector, and government agencies are strained by such increased social distress.

“Though less visible than empty corporate offices, these longer-term, and often less cited aspects of economic hardship on individuals and their families, compound over time.”

Though less visible than empty corporate offices, these longer-term, and often less cited aspects of economic hardship on individuals and their families, compound over time. Such consequences are not always resolved when the economy recovers, and “jobs come back.” As a result, it's imperative that we acknowledge the deeper and more meaningful cost of the approximately 100,000 lost jobs in Alberta, as it's not only about income loss for corporations and individuals. The reality is that the hardship – which permeates the lives and homes of Albertans following the sudden loss of employment – may be everlasting. 

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About the Author

Flutra Kacuri is an incoming second-year law student at the University of Calgary, Faculty of Law and a summer research associate at Viewpoint Research. Her research focuses on ESG, energy governance, and policy.

Economic Underperformance, Excessive Indebtedness, and Our Constrained Future

With last week’s federal deficit announcement, it is now more important than ever that we acknowledge our current realities with detail and clarity. We otherwise will be unable to develop a believable and effective path forward in the post-COVID world. The problem is that our current realities are uncomfortably negative. Many of us just don’t want to see this or believe it. We were in a slow-moving crisis of competitiveness, investment, and productivity prior to the COVID lockdown. Now, we have both stagnant productivity and excessive levels of debt. This feels negative as most of us understandably want to feel positive and optimistic about our future.  However, for optimism to be real it must be grounded in reality. It is only then we can develop a believable and inspiring vision, and the appropriate strategies to recover and rebuild our economy.

Prior to the COVID lockdown, the economic fundamentals in Canada were already grim:

• Growth in GDP per capita since 2013 was less than one-half that of the United States (US), and Canada had the worst performance of all G7 countries.

• Business investment was about 20% below peak levels of 2014. Even outside the resource extraction sector business investment was below 2014 levels.

• According to the World Investment Report, the stock of foreign direct investment in Canada had grown at half the global rate since 2015.

• The World Bank ranks Canada 23rd in its quality of trade and transportation infrastructure – ports, rail, and highways – with Germany ranking first and the US seventh.

• 2019 per worker investment placed Canada 15th among the 17 OECD countries. In Switzerland, businesses invest twice as much per worker as Canadian businesses.

• Canada’s labour productivity has significantly lagged that of the US, our main customer and competitor. In 2019, Canada generated US$55.00 per hour of labour compared to US$76.50 in the United States.

• Returns on equities in Canada (including dividends) have been horribly inferior to global and US returns. Over the past ten years, cumulative returns on global equities have been over 3x that of Canada’s, and returns on US equities have been almost 6x greater than in Canada.

As a Canadian, if you were fortunate enough to accumulate savings, the last thing you should have done is to invest in Canadian companies on Canadian stock exchanges.

We were in a state of investment, competitive, and economic underperformance before the pandemic-related collapse. “Going back to normal” or “the way things were” is going back to a set of conditions that were compromising the future for all Canadians.

And now, we have the added reality of excessive debt. The inevitable consequence is a loss of financial flexibility, less capacity to spend, and more financial risk in the event of an extended recession, additional intermittent lockdowns, or some other new, unforeseen crisis.

Although the financial position of our federal government was reasonable going into the COVID lockdown (debt to GDP ratio was 35%), this has all changed seemingly overnight.

With a $350 billion deficit, we are now adding about 15% to the debt to GDP ratio. Maybe this still doesn’t look too alarming, however, we are missing a large part of the picture if we ignore the provinces.

We have learned in crisis that the national government will be called upon to backstop the credit demands of all provinces, and to a certain extent, even corporate and household debt.

Ontario’s debt is now about $400 billion, Quebec $200 billion, and then there are the other provinces. The Western provinces, including Manitoba, are now close to approximately $150 billion. The Atlantic provinces represent another $50 billion in debt. If you’re keeping track, that’s $800 billion of provincial debt combined with now over $1 trillion of federal debt. Total “all in” government debt is now at least $1.8 trillion and heading towards $2.0 trillion which would be 100% of GDP – that represents over $50,000 for every man woman and child in Canada, or $200,000 for a household of four.

Analysts and economists tend to look at debt solely on the basis of decision-making authority and responsibility at the entity level, as this is where insolvency would occur. This is why most don’t aggregate debt. But aside from insolvency risk, the key problem with debt that’s often overlooked is how it constrains choice and optionality. The aggregation of choice and commitment drives our overall economy. Understanding our economic outlook requires accounting for the burden of debt across all decision-making entities.

The government debt described above is layered on top of consumer and corporate debt. Total consumer debt in Canada is at a record $2.3 trillion which includes $1.6 trillion of mortgages. Household debt to disposable income is now at a record high of 181%.

Corporate debt in Canada is also at record levels of about $2.4 trillion and based on the Bank of International Settlements, our corporate debt service ratio is among the highest in the world.

Total household, corporate, and government debt is about $7.0 trillion. This is 350% on a $2 trillion economy.

The one thing we know about debt is that if you can survive through a downturn, it will constrain choice; it will constrain the scope and flexibility of decision-making commitments. This will be the new reality for many decision makers across the entire economy.

You can reasonably expect that consumers and corporations will be spending less and repairing balance sheets, and governments at all levels will be forced to be more accountable and discerning in spending and borrowing. All of this will likely be a net drag on the economy for years.

Unfortunately, this is all happening at the same time that Canada’s GDP per capita and labour productivity have been lagging.

The issue of productivity must be emphasized. To quote Nobel Laureate economist, Paul Krugman:

“Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker.”

Canada is now in an era of both stagnating productivity, low competitiveness, and excessive levels of indebtedness. In the corporate investment world, we often describe this as a “strategic straightjacket” – with less choice and less freedom to move. All of this should encourage a reset in priorities towards fiscal constraint, incentivizing investment, and pursuing more business-friendly policies and strategies that will tilt towards increasing innovation, productivity, and prosperity.

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Author

Mac Van Wielingen

What Drives Organizations? Applying Maslow’s Hierarchy of Needs to Corporations

In 1943, Abraham Maslow published his theory on the hierarchy of needs. You have probably come across it at some point in your life. Maslow used the terms "physiological," "safety," "belonging and love," "social needs," and "self-actualization" to describe the linear ascension of human motivation. According to Maslow, human beings are motivated to satisfy basic physiological needs such as food and water before they can progress to the next level of needs for safety, belonging, social acceptance, and self actualization. The further removed the individual is from simply obtaining the necessities of life, the less anxiety and tension is present as they seek to fulfill higher functions of personal growth. The pursuit of these functions is critical to the advancement of innovation as the individual is liberated to focus on the needs of others once their own necessities have been fulfilled.

The arc of Maslow’s theory closely aligns with the needs of corporations.  From a legal perspective, American corporations have been granted many of the same rights as individuals under the 14th amendment of the Constitution (See 1886 Santa Clara County v. Southern Pacific Rail Road). Over the past 130 years, corporations have evolved into legally distinct beings that enjoy many rights normally reserved for individuals such as the right to own property, enter into contracts, or pursue legal action. If corporations possess many of the same legal rights that individuals do, it stands to reason that corporations also share a hierarchy of motivations that begin with their basic need of survival.      

The International Monetary Fund is forecasting that the U.S. and Canadian economies will shrink by 8.0% and 8.4% this year because of COVID-19 related shutdown. As these effects hit corporate balance sheets, many executives have been forced to take extraordinary measures to keep their businesses solvent. corporate leaders are shifting their focus to satisfy the company’s basic ‘physiological’ needs for cash flow, liquidity, and debt coverage at the expense of higher corporate aspirations. The abrupt departure of these aspirations is particularly problematic when viewed in the context of environmental stewardship. As Maslow’s work highlights, the greatest advancements in corporate innovation are likely to occur beyond the base levels of sustenance. As corporations mortgage future development to sustain existing operations, critical ESG commitments, research, and technologies are less likely to come to fruition.

According to Bloomberg, climate change-related talk on S&P500 earnings calls fell from 33% in Q1 to just 17% in Q2 as Companies re-tooled their corporate strategies to focus on the fiscal necessities of survival. This is strong evidence that higher corporate functions are a luxury of choice – ones that are only possible if the basic corporate needs of survival are met. Therefore, stakeholders should celebrate Companies that remain steadfast in their commitment to environment, social, and governance standards in the face of a global pandemic. This praise is warranted because corporate ESG commitments confirms the importance of these factors to the survival of their business. These corporate leaders do not view ESG as a luxury of choice or a higher corporate function, but rather as a fundamental cornerstone to the success of their business.

As noted by Bloomberg, discussions regarding the acceleration of the climate crisis dropped by 50% on average across every industry in the S&P 500 earnings call transcripts from Q1 to Q2 2020. The largest pull back was seen by Technology Companies (53%), Financial Services (69%), and Energy Companies (58%). Energy Companies touted their energy transition goals earlier this year, but unsurprisingly this rhetoric has dwindled and has been replaced with urgent discussions regarding production cuts, liquidity, and plummeting demand. What may be surprising are the industries that have managed to keep ESG commitments front-of-mind during coronavirus-dominated earnings calls. As noted by Bloomberg, “Sustainability talk in the utility sector did decline in the first quarter, but only by 31%. The drop at industrial companies was just 10%”.

Earnings call transcripts are a way for management to communicate corporate priorities directly to shareholders.  While a pull back of long-term initiatives is inevitable as Companies focus on the short-term realities of survival, the degree of pull back could signal the level of commitment of Companies towards environmental stewardship in the long-term. The next time you are looking through the earnings call transcripts of Companies you have invested in make a point to quickly scan through previous transcripts prior to the pandemic to see which Companies are still including language outlining their ESG ambitious and what resources they will be dedicating to achieve those objectives.

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Author

Michael Hebert, Viewpoint Research Team

Report: Alberta CEO Survey on Shutdown Impacts and Future Recovery

What does the road to recovery look like for Albertan businesses?

In collaboration with the Business Council of Alberta, we surveyed 61 CEOs to find out the impacts of COVID-19 on business, and what barriers and challenges lie ahead.

HERE'S A FEW HIGHLIGHTS

1 in 4 companies are unsure if they will make it through the pandemic until a vaccine is developed.

61% have engaged in layoffs, and 18% do not expect to refill these positions.

34%  anticipate needing continued or additional government support to mitigate downsides like stimulating demand, providing clarity on health and safety regulations, and maintaining liquidity.

To read the full results, download the report below.

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Author

Viewpoint Research Team in collaboration with Business Council of Alberta

What Does Canada Need to Jump Start Innovation?

Despite having one of the most diverse workforces in the world, Canada was ranked 14th in the 2019 OECD Global Competitiveness Report; dropping two spots from the previous year, and scoring below the United States, Denmark, and Korea. Although we receive strong rankings in macro-economic stability (1st), sound financial system (9th), and labour market (8th), we have lagging performance in innovation (16th) and adoption of technology (35th). What is Canada missing? 

To start, we could look to the country who has lead on innovation and start-up culture, earning themselves the title of “Start-Up Nation” - Israel. Though there are many different factors that may contribute to its success in innovation, one large factor is Israel’s government initiatives focusing on developing knowledge, supporting research and development, and prioritizing the creation and long-term survivability of start-up businesses. In the past, government initiatives were created to subsidize research and development projects, and to bolster venture capital interest through tax incentives and matching investments, hoping to share and mitigate the risk to investors. This fostered collaboration between not only academic institutions and private organizations, but also across local and global organizations. However, it should be noted that these initiatives are not without flaws, as the policies have been geared to high-tech industries, and consequently “other sectors seem to have been left out.” 

These initiatives paved the way for the creation of the Israel Innovation Authority, an independent publicly funded agency, which provides support and incentives to entrepreneurs across different divisions like technological infrastructure, international collaboration, and societal challenges. The reverse innovation model is used, whereby organizations are encouraged to pitch real issues to entrepreneurs, and these entrepreneurs come to solutions by “understanding the challenge first, and then working backwards…[t]his promotes the formation of joint ventures (sometimes between competing firms) to address them.”  

Overall, the takeaway is that government-led initiatives signaled confidence to investors and laid the groundwork for a venture capital friendly environment that both corporations and research institutions were able to participate in. For Canada to break through as a powerhouse in innovation and remain competitive on a global scale, we need thoughtful government-led initiatives that promote innovation across industries.

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Author

Viewpoint Research Team

What Surprising Factor is Behind Canada’s Economic Growth?

Family enterprises play a crucial role in the Canadian economy. A recently published report suggests that family enterprises are the most powerful driver of economic growth in Canada, generating $574.6 billion – which is almost half of Canada’s private sector GDP – and almost seven million jobs in 2017. This “first-of-its-kind” study in Canada was a collaboration between the Conference Board of Canada and Family Enterprise Xchange. This research helps us to better understand “[t]he economic impact of family owned enterprises in Canada.”

Family businesses exist in all sectors and communities, from the local farmer and restaurant owner, to international companies in agriculture, communications, and retail. “Family enterprises produce nearly 7 million jobs in Canada. Empirical research also confirms that these businesses account for approximately 65 per cent of the output and 90 per cent of the jobs generated by small and medium-sized companies, which are frequently described as the backbone of the Canadian economy and are essential to our supply chains.” Additionally, “[n]early 2/3 of all private sector firms in Canada are family owned.” 

Not only do family enterprises create jobs, invest in their communities, and give back to society, but it seems that they may experience more success than other firms. Family enterprises were also found to have longer growth and longevity than other firms, with total revenues growing 14.6 percent on average from 2007 to 2013. In contrast, other firms grew 13.9 percent on average during this same period. Of the firms that were operating in 2007, around 70 percent of the family enterprises were still in operation in 2013, compared to 65 percent of the other firms. Moreover, a  2018 study by the National Bank of Canada suggests that “family-controlled businesses demonstrate an ability to yield long-term returns over the span of generations.” They concluded that their sample of “family-controlled businesses from different industries and regions across the country outperformed the S&P/TSX Composite Index by 120.3% over a 10-year period.” 

Although the reasons why family firms achieve these successes are not well understood, experts believe that enduring family firms share common traits – such as long-term orientation and an ability to adapt – that allow them to stand the test of time better than non-family companies. 

“Over time, greater knowledge of family firm dynamics will help us to understand the unique challenges that these businesses face, and by extension their consequences for the broader economic base. And that in turn will facilitate improved educational support for family enterprises themselves.” Further, perhaps by identifying what enables these family enterprises to experience increased success, other organizations can also benefit from focusing on these same characteristics. 

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Author

Karen Macdonald and Viewpoint Research Team

Is Strategy Only As Good As Its Execution?

“Good idea, bad execution” is a saying all of us have heard on more than one occasion, but recently, we've been curious about understanding and defining what moves great ideas into great companies, or project, or achievements - i.e. what defines successful execution.

Largely attributed to Michael Porter’s work in the 1980s, there is now a clear and widely accepted definition of strategy. It is not surprising that organizations spend a vast amount of capital and time devising strategies to improve performance. However, an often overlooked extension of strategy is execution, of which, far less is known about in a practical sense. There is often some confusion surrounding what strategic execution involves, and how to enhance capabilities. Execution involves assessing firm capabilities, synchronizing people with strategy, and linking rewards to outcomes, making people accountable for the delivery of strategy.

While strategic execution is seemingly linked to “doing” in an organization, our client experiences support the notion that there is a need to go beyond simple understandings or productivity, efficiency, and the emulation of best practices. Evidence reveals that roughly two thirds of organizations struggle to implement strategy. In a study of 275 portfolio managers, the ability to execute strategy was found to be more important than the quality of the strategy itself. The inability to execute strategy has also been named a key reason for executive and company downfalls, with many observers recognizing that strategy gets you to the starting line, but it's execution that gets you to the finish line. It was T.S. Eliot who acknowledged the ‘knowing-doing’ gap in 1925, citing that “between conception and creation falls the shadow.” The best companies don’t necessarily always have the best ideas – they are good at implementation, converting the process of doing into an opportunity for learning. While it is not surprising that organizations spend a vast amount of capital and time devising strategies to improve performance, there is far less known about how to execute successfully.

Execution is best defined as the systematic process of rigorously discussing the ’hows’ and ‘whats,’ and tenaciously following through. In a sense, execution is the carrying out of a strategic plan, going beyond operational effectiveness and improvements, and subsequently linking strategy to all aspects of a firm’s activities. However, every organization can succumb to barriers of execution, particularly:

1. Lack of flexibility: When asked about the greatest challenge companies will face in executing strategy over the next few years, a third of managers cite difficulties adapting to changing market circumstances.

2. Ineffective leadership: A 2013 HBR study of nearly 700 executives found that only 8 percent of leaders are effective at both strategy and execution. This is also supported in our own work, whereby we studied successful characteristics of CEOs at a financial firm. Findings revealed that the top 10 CEOs by company returns across 20 years, were those that excelled in both strategy and execution.

3. Fear of failure and rejection: As “ego and fears of embarrassment prevent an objective and honest appraisal of performance”, execution can be hindered by team members’ insecurities and lack of confidence.

In order to better understand strategic execution, Viewpoint has teamed up with Mount Royal researcher Simon Raby and BIG, to research strategy and execution. If you are an organizational leader, entrepreneur, or somehow involved in strategy in your organization, consider participating in our survey. We'd love to learn more about your strategy and execution experience, and in return, you will have access to our findings and execution understandings.

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Author

Kelsey Hahn, Viewpoint Research Team

What is The Role of Business in Society?

Whenever we think about the concepts of business, finance, markets, competition, and trade, they often seem disconnected from the rest of society. Successful businesses are believed to be purely driven by profit, separating them from societal views and interests. 
 
In reality, however, social institutions can exercise a profound amount of influence on businesses. Different politics and perspectives exist within every industry due to the customers, suppliers, employees, regulators, and financiers that comprise the organization. “Individuals within each stakeholder group have ideas about how they want their lives to matter in the world...[T]hose connections to the world outside of business are often strong motivators for decision-making.” 
 
Understanding the role that businesses play in society is critical. Today, the “decreasing public popularity of business leaders and the now familiar erosion of trust in business and government institutions” has led to the belief that “democratic and civil society institutions and democratic ideals are under attack.”  Societal freedoms and business are not irreconcilable; economic freedom is directly related to economic growth, and “democratic freedom provide[s] the basis for capitalism and sustained economic growth.” Historically, most businesses only engage in politics for their own gain, lobbying the government and cultivating relationships with policy-makers in order to protect their own interests. To the younger generation, “this seems inadequate at best and corrupt at worst,” widening the dissonance between business and society. Businesses should preserve democratic institutions not only when it is convenient, but for their own sake as well, as “democratic institutions ensure the basis for the development of capitalism and a healthy system of business.” By preserving the societal rights inherent to democracy, including the right to privacy, labour force participation, and the pursuit of economic opportunity, communities and businesses are allowed to “freely communicate and collaborate, and thereby flourish together.” 
 
Businesses must move beyond shareholder profit and focus on the creation of value for all stakeholders. Solely maximizing profits has had a toxic impact on society, leading to “growing inequality, periodic massive financial crashes, declining corporate life expectancy, slowing productivity, declining rates of return on assets and overall, a widening distrust in business.” As we have discussed in a previous issue of Sagacious, the purpose of business should be “not only to provide needed products to a market, but to make a difference in their communities and for their employees, too.” This has already begun as 181 CEOs of different corporations across several industries signed the “Statement on the Purpose of a Corporation” earlier this month in an effort to refocus on inclusive social and economic prosperity. Included in these 181 are names like Amazon, Apple, BlackRock, Chevron, EY, Pepsi, and Xerox.
 
By retiring the old model of shareholder profit and moving forward with shareholder value, businesses can begin to repair their reputation in the eyes of the younger generation. “Business is about how customers, suppliers, employees, financiers, communities, and managers interact to create value,” and is an important part of societal institutions. “No business is perfect, and every business can improve, but it is time to end the myth that Wall Street is disconnected from Main Street.”

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Author

Stephanie Law, Viewpoint Research Team

Is Organizational Purpose Just a Buzzword?

Over the last few years, there has been a growing interest in organizational purpose, which can be partially attributed to the increasing emphasis on sustainable business practices and efforts to curb climate change, declining trust in organizations, as well as younger workers searching for meaningfulness at work. With this increased focus on purpose, some organizations have been quick to incorporate it into their tagline or mission statements. But is purpose just a buzzword? And what is the difference between the seemingly similar terms of purpose, vision, or mission?

We know that purpose is important at both employee and organizational levels. On average, people spend over 90,000 hours at work over the course of their life, so it’s not a surprise that many are searching for meaning in their work. Consequently, purpose has been found to have a tangible impact on key employee outcomes. Research finds that those who perceive their work as higher in significance (job purpose) also tend to demonstrate higher performance. At the organizational level, having a clearly defined purpose can lead to a stronger firm financial performance, specifically in shareholder returns over a 10 year period, or in venture growth.

So, what exactly defines organizational purpose?

Organizational purpose has many definitions, including being “a concrete goal or objective for the firm that reaches beyond profit maximization”, or simply as “a company’s core reason for being.” However, all of the definitions point to an emphasis on the creation of value for all stakeholders, including shareholders, customers, and society in general. While some use the terms mission or vision somewhat interchangeably with organizational purpose, there is a distinct difference. Organizational purpose helps to guide and inform a company’s mission or vision. In other words, while a company’s mission statement or vision might shed light on what the organization is trying to accomplish, its organizational purpose explains the why.

If you are looking for a starting point for fostering organizational purpose, a recent article in Harvard Business Review has a few tips for how you can build in purpose to align your organization. First, consider your employees; with modern workplaces having unique compositions of full-time and part-time employees and contractors, it’s important to think of how each employee experiences their work. Second, consider how your organizational purpose is communicated and embodied in actions throughout the organization. Finally, consider the bigger picture when thinking of a purpose. In the modern workplace, broader societal impacts and sustainability are things that need to be considered.

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Author

Viewpoint Research Team

Why Do Businesses Fail, And How Not To Be a Victim

Around 20 percent of small businesses fail within their first year, with roughly 50 percent failing by the end of their fifth year. What makes these statistics interesting is that despite shifting economic factors, business failure rates remain relatively consistent. After surveying 101 failed startup businesses, a recent analysis revealed that 42 percent reported that the main reason for their failure was a lack of marketability. Businesses fail when they are not solving a marketable problem, or, “not solving a large enough problem that could be universally served with a scalable solution.” But what causes this so called lack of marketability? 
 
A business’s marketability is directly tied to its adaptability - its willingness to alter its models and operations in order to keep up in today’s rapidly changing and unpredictable global environment. Marketability also relates to the way in which a business balances its forces of exploration and exploitation, with exploration referring to the search for knowledge and innovation, and exploitation referring to capitalizing and expanding upon these new ideas found through the exploration process. Too much exploration can lead to a business becoming obsolete, while too much exploitation can result in a business falling behind the technological curve and losing its competitiveness.  
 
A good example of too much exploitation can be seen in the downfall of Sears due to its refusal to innovate and change its business model, ultimately leading to the end of Sears. At its peak in 1965, Sears was worth $92.1 billion in today’s money. That same year, its sales were 1 percent of the entire U.S. economy, with two-thirds of Americans shopping there in any given quarter and half the nation’s households owning a Sears credit card. Now, more than 50 years later, Sears has been fighting a losing battle against insolvency and erasure. Despite having the skills and resources necessary to adapt to the world of e-commerce, Sears lacked the foresight to anticipate and the willingness to adapt. This behaviour is often attributed to the “success trap”, in which companies stop exploring once they have reached a certain level of success, turning to exploitation - “becoming less innovative as they become more competent.” 
 
In contrast, successful businesses are those that strike a balance between exploration and exploitation, adapting to market changes by adjusting their balance accordingly. This balance can be seen in the incredible story of Viciki Hollub, the first female CEO of a major international oil company, and how she managed to turn around a company that had lost $1 billion in 2016 to a profit of $4.1 billion in 2018. Despite intense pressure from shareholders, Hollub’s company, Occidental Petroleum (Oxy), beat out Chevron to acquire Anardarko Petroleum for $38 billion. In addition to the dramatic Anardarko deal, Hollub has also proven herself committed to exploration, pledging to make Oxy carbon neutral through carbon capture technology. While Oxy’s investment in a carbon-neutral future may seem at odds with its recent deal, the balance between exploitation and exploration that Hollub has struck will serve the company’s marketability well in the long-term. By investing in exploration as well as exploitation, under Hollub’s leadership, Oxy is securing a social license and, “regaining society’s trust to operate with the approval of employees, shareholders, and the broader public”. 

Ultimately, the companies that succeed in 2020s will be those that prioritize learning and innovation: “Companies don’t fail because of changes in the environment, they fail because their leaders are either unwilling or incapable of dealing with said change.” 

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Author

Viewpoint Research Team

The Path to Economic And Social Prosperity in Canada

Last week, members of the expert panel on Sustainable Finance released their recommendations on mobilizing Canada’s financial sector, hoping to secure both economic prosperity and better environmental practices. The main takeaway from the panel is that Canada stands poised to become “a decision-maker rather than a decision-taker in a world where sound environmental stewardship is intersecting with market access and becoming critical to competitiveness.” Currently the fourth-largest exporter of oil and the fifth-largest exporter of natural gas, Canada has the potential to become the world’s safest and cleanest producer. Yet for this feat to be accomplished, the energy sector must focus on accelerating innovation, transparency, and market access. 
 
To further innovation, the panel recommends that the federal government “fund an oil and gas clean innovation cluster to pool capital and expertise,” helping to expand the next generation of innovative ventures, and consequently encourage the development and commercialization of cleaner energy-saving solutions.
 
Global perceptions of Canada’s environmental record and the carbon-intensity of oil sands extraction have caused investors in the energy sector to avoid Canada, or demand better data and evidence about the risk to their firms. “If we want to attract global capital back to Canadian resources, it will take an industry-wide commitment to report more comparable and complete data on climate-related financial risks.” Providing this type of transparency is exactly the kind of leadership that investors are seeking from Canada’s industry. 
 
In regards to market access, it is vital that Canada's market more responsibly produce oil and gas. Yet Canadian producers can only invest in cleaner technology if they are able to sell their products. “Though counter-intuitive to some, solving Canada’s market-access stalemate is fundamental to Canada’s ability to contribute to lowering emissions in the world’s global energy supply by displacing higher emissions and less transparent sources.”
 
Our founder, Mac Van Wielingen, strongly argues that this is an opportunity for Canada to be a leader in energy. Having used his decades of experience in the investment management business in capital projects all over the world, Mac’s own recommendations for the future of the energy sector align with those of the expert panel on sustainable finance. In his recent speaking event at the Calgary Petroleum Club, he states: 
 
“The industry must remain passionately committed to innovate and further improve its environmental performance, in the context of a global transition to a low carbon environment...There are two competing visions. One involves a dismantling and diminishment of our leading global industry with enormous financial and social costs. The other is to support the development of a “Clean, Canadian Energy Brand” and strategy to bring more of ourselves into the world, not less. This is Canada’s global leadership opportunity in energy and environmental stewardship.”
 
In addition, Bill Gates, chairman of the board for Breakthrough Energy Ventures (BEV), an investor-led, $1 billion fund committed to funding clean energy innovation, emphasizes the complexity of the issue of climate change. In a recent sit-down with David Rubenstein, president of The Economic Club of Washington, D.C., Gates stated that creative solutions are the key to combating climate changes; projects that utilize “the lens of innovation” are what investors should be focusing on. 

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Author

Viewpoint Research Team

Of Purpose and Profit

This month in Davos, Switzerland, CEOs from around the world were talking about one thing: a letter sent by Larry Fink, CEO of BlackRock. It stirred controversy among many attendants at the World Economic Forum, proselytizing that pursuing purpose over profits is the key to unlocking the full potential of any business. Why should businesses need to worry about anything other than profit? Many would argue that financial growth is all that should drive a business. What could be more important?

It’s a question that’s been asked many times by our founder, Mac Van Wielingen, most notably in his 2017 speech at the Fraser Institute, where he proposes that long-term success depends on much more than just profit. “We are not maximizing one variable, we are combining, making choices, trading off and optimizing among four variables: profit, risk, time, and human experience.”

In a recent study by Deloitte, 40 percent of millennials “believe the goal of businesses should be to ‘improve society’.” As millennials will soon make up about 40 percent of all consumers, it is imperative that organizations examine how long-term sustainability, purpose-driven business decisions, and community investment fit into the bigger picture. Nothing states this louder than the fact that “64% of people globally expect CEOs to lead on social change rather than waiting for government intervention.”

Society needs corporate champions to lead the way down this untested, unfamiliar path. In his letter to CEOs, Larry Fink talks about the intimate relationship between purpose and profit in business. “Purpose is not the sole pursuit of profits but the animating force for achieving them. Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked.”  He then encourages CEOs to lead the charge on making a positive impact on society. “One thing, however, is certain: the world needs your leadership. As divisions continue to deepen, companies must demonstrate their commitment to the countries, regions, and communities where they operate, particularly on issues central to the world’s future prosperity.” More and more leaders are realizing the interdependency of purpose and profit. If you need proof, read Baupost’s Davos letter orSeth Klarman’s interview regarding the leaders at Davos.

How can your organization prepare itself for a world that increasingly scrutinizes purpose? As Mac Van Wielingen proposes, corporate strategy is the key driver. At every turn in the strategy, ask if unnecessary short-term risk, social value, and environmental sustainability have been taken into account. By infusing the core of your organization with a culture of long-term thinking and social awareness, purpose-driven decisions will be made unconsciously, and social license will come naturally to your business.

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Viewpoint Research Team

State of the Nation: Canada’s 2019 Outlook

With trade wars, polarized politics, and big business shakeups across the world over the past year, many observers would opine that the political and economic state of many nations is in flux. With this in mind, it’s time we step back and take a big-picture view of Canada from a political and economic standpoint, as well as theorize what could be in store for 2019.

According to Edelmen’s 2018 Trust Barometer, Canadians' trust in institutions (government, business, media, and NGOs) did not change between 2017 and 2018, staying at a relatively low level of distrust from the general public (49 on a trust scale of 100) and a low level of trust from the “informed” public (62 out of 100). The US saw the steepest drop in trust by the informed public, from 68 in 2017, down to 45 in 2018. Canadians also have an increased trust in authority figures compared to 2017, choosing to believe academic experts, technical experts, and financial industry analysts above “people similar to themselves”.

On the business side, Canadian companies are the most trusted globally, beating Switzerland, Sweden, and Australia to claim the number one spot. However, trust in most business sectors within Canada is declining, except for the energy industry, which actually saw a 4 percent increase between 2017 and 2018, reversing a three-year downward trend. The top trust-building mandates for businesses in Canada is to drive economic prosperity, invest in jobs, and innovate, whereas the top trust-building mandates in the US are to safeguard privacy, investigate corruption, and ensure equal opportunity.

As for Canada’s 2019 economic outlook, the Business Development Bank of Canadafocuses on five analyses: 1) the Canadian economy is expected to grow by 2 percent, 2) trade tensions won’t affect the global economy with US-imposed tariffs expected to be removed, 3) the US is expected to lead most countries on economic growth, 4) a strong US economy will put downward pressure on the Canadian dollar, and 5) Canadian businesses will continue to struggle in hiring the people they need, stifling growth.

Additionally, a study by the International Institute for Sustainable Development shows Canada’s economy on shaky ground, with the growth of the nation’s “comprehensive wealth”, composed of five different types of capital (produced, natural, human, financial, and social), to be drastically behind other developed countries, and is in fact the only G7 nation undergoing a contraction of comprehensive wealth per capita. The risks to Canada’s economy include unprecedented levels of household debt, over-dependence on market-sensitive industries, zero growth in human capital, and climate change events (floods, wildfires, and storms).

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Viewpoint Research Team

Massive Retailers Are Failing, Could They Have Been Saved?

The sudden wave of retail bankruptcies this year have been startling for shoppers and analysts alike. Whether they’re electing to pursue online-only retail strategies or shutting up shop completely, the “retail apocalypse” may have finally descended upon us. With Sears announcing its Chapter 11 bankruptcy to restructure, President Trump has come out publicly claiming that Sears “has been dying for years” due to mismanagement (which is ironic, as the US Secretary of Treasury, Steven Mnuchin, was also on Sears’ board of directors).

Sears was once the USA’s largest employer – the Walmart or Amazon of yesteryear. Toys R’ Us was once the Mecca for children’s toys. How are such high-profile retail outlets succumbing at such an alarming rate? Are shoppers simply moving online? Although ecommerce is an easy scapegoat for many retailers, it is likely not the main culprit. The evidence points to something deeper – systemic flaws within the culture of these retail monoliths that leave them no ability to adapt or re-invent their businesses, short-sighted management with little strategic planning, and huge debt levels from unmotivated private equity owners. “If you are going to run your business like most businesses, it is only reasonable to expect that you will end up like most businesses” – most likely out of business within five years.

This leaves us one question: where does the responsibly lie? Could the boards of these organizations have ultimately prevented these performance failures?

As we’ve seen, in their current state, it is too easy for boards of directors to overlook deep-rooted performance issues. This point is something Mac Van Wielingen has drawn on multiple times in his work – that the board needs to take a more active, vigilant approach to guiding the performance of their companies, escaping the gravitational pull that leads to“most directors [playing] a role akin to spectators…versus real players in the game, sharing in the responsibilities for outcomes.”

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Viewpoint Research Team

Are We Heading Towards Another Financial Crisis?

Our founder, Mac Van Wielingen, often refers to the 2008 financial crisis as a critical point, as it “exposed significant corporate governance failings and led many to question the role of business in society.” There was a failure in strategic risk management and oversight due to a loss of focus on client interests, obsessive short-termism, and excessive financial leverage. In 2010, Viewpoint Research Partners was founded to explore the challenges through conducting and curating research. A decade has passed since Lehman Brothers filed for bankruptcy, launching the world into a global financial meltdown. In a single day, more than $600 billion USD in assets were wiped out, and 25,000 employees lost their jobs.

So what has changed since then?

The road to recovery has been a tough one. It has taken years for unemployment to return to pre-recession numbers, which has increased disparity in wealth. Middle-class income in the U.S. has only recently reached $61,000 USD, the level before the recession. Policy changes and new regulations have been implemented in response to the instability and the abundance of financial fraud that occurred, resulting in more global bank stability.

Are we at risk of stepping down the same path again?

It seems that there are similar conditions brewing, with increasing public polarization, and the increasing trade tensions and corporate debt. “Ten years on from the 2008 meltdown, the global banking systems seems more resilient to shocks, corporate profits are generally strong, and the bull market trudges along. But that in itself is a dangerous situation.” While there is no punchy one-line answer, organizations can protect themselves from repeating history by focusing on long-term performance and sustainability, and being open to new ways of governing business.

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Viewpoint Research Team