Bank mergers
All eyes will be on Liberal Finance Minister Ralph Goodale in 2005 as the now perennial Canadian issue of bank mergers drags into yet another year without any meaningful move from the government.
There was minor hope in mid-October when rumours surfaced that the long-promised report on mergers had moved from the House of Commons finance committee to the Prime Minister's Office. That led to speculation on Bay Street, and bank stocks rose. Many thought the Liberals would green-light takeovers by Christmas, as promised by the head of the finance committee, charged with drafting the merger rules. As this magazine went to press, however, there was still no word from the feds, and it doesn't look promising. On Nov. 30, Goodale was asked outside the House of Commons whether he would make the late-December date. “I'm not sure I can meet that deadline,” he told reporters, before saying he had to meet with more bank officials–even though this issue has dragged on since 1998.
That was no surprise to Canadian CEOs, who think the government's new minority status is keeping the issue off the agenda. Considering what little traction bank mergers have with voters, it doesn't make sense for the Liberals to spend political capital getting it through Parliament, or so goes the thinking. And that suggests the issue could get pushed into 2006, when the Bank Act is due to be reviewed.
But that could put off any merger until 2008–which might be too late for Canadian banks, which would find themselves further behind the world's banking leaders than they were five years ago. Turning themselves into even second-tier global players could be difficult. The prospect is so worrying that David Dodge, the governor of the Bank of Canada, recently stepped into the policy debate again and urged the government to resolve the merger question. “To stay competitive in this environment, Canada's financial system must also constantly increase its efficiency,” he said. “If we don't make this effort, the Canadian economy will suffer. The status quo won't cut it.” Consolidation has made banks in other countries more efficient, Dodge said, leaving our institutions in the dust. The issue is ultimately in Paul Martin's hands. Bay Street will be waiting to see where he comes down in 2005–on the side of a healthy, efficient industry or political expediency. J.S.
Governance
Three years after the meltdown of Enron, WorldCom and other members of the corporate rogues gallery, governance continues to be at the top of the agenda for both managers and investors. Scandals that were once confined to boardrooms have moved into the mutual fund and insurance sectors. In 2005, companies looking to stay ahead of the governance revolution–or at least to not become its next victim–will be spending time tackling one of its most challenging aspects: the dustup over CEO compensation.
Over the past year, shareholders and directors of Hollinger, Royal Group Technologies, Nortel and others have been dealing with the aftermath of poorly conceived compensation arrangements that helped propel the companies onto the growing list of governance laggards. “Executive compensation is clearly the No. 1 priority for directors,” says Chris Bart, founder of the DeGroote School of Business's Directors College at Hamilton's McMaster University.
Advocates like the Canadian Coalition for Good Governance have been turning up the heat on execs they consider overpaid–and now they'll have even more ammunition. The Canadian Institute of Chartered Accountants introduced regulations in 2004 requiring companies to account for the cost of stock options. In 2005, those costs will appear in the financial results of just about every publicly traded Canadian company. Previously, option disclosures had to be made in only the rarely read footnotes at the back of an annual report.
The new rules will have little impact on many of Canada's largest corporations. Net income for the Royal Bank, which has been expensing options since 2002, was virtually unaffected by the $6 million in option expenses it recorded last year. At Cott Corp., however, net income in the last fiscal year would have fallen to US$71.1 million, from US$77.4 million, as a result of options.
In the coming year, shareholders need to keep the pressure on companies whose compensation plans reward managers for good performance but fail to penalize them for lousy returns, says Bart. “We are very good at giving managers money, but not very good at taking it away when the returns don't warrant it,” he says. “It's time for that to change.” J.G.
Climate change
For years, legislators and businesses have dragged their feet on climate change. But 2005 appears to be the year in which there will finally be a huge push to deal with the issue in a substantive way.
Why the sudden rush? First off, the European Union Greenhouse Gas Emission Trading Scheme gets underway in January 2005. What's more, U.K. Prime Minister Tony Blair is promising climate change will be high on the agenda at both the G8 summit and in the EU parliament (Blair heads up both these bodies in 2005). Factor in Russia's recent ratification of the Kyoto Protocol–the last step required to bring the treaty combating climate change into effect in February 2005–as well as the dire warnings of the recently released Arctic Climate Impact Assessment, a study conducted by hundreds of respected scientists over the past four years that details the negative impacts climate change is already having in the Arctic Circle, and it's clear pressure to reduce emissions is getting serious.
In response, the federal government is moving ahead with concrete policy initiatives designed to fight climate change. In fact, in the next 90 days we should see a framework announcement on how Canada is going to meet its Kyoto commitment. After all, Paul Martin doesn't want to show up at the G8 summit empty-handed. One key project: the federal government, led by Environment Minister Stéphane Dion, will soon set up a Canadian carbon unit tracking system.
The goal is to have the emissions trading system, which puts a price on carbon, up and running by January 2006; some think January 2007 is more realistic. Ideally, it will mesh with the European and Japanese systems.
Although industry has been consulted about Canada's emissions trading system, Skip Willis of ICF Consulting, a firm that designs corporate-climate-change strategies, suspects the system “is going to be more complex than it needs to be.” He claims that the government, in its effort to make sure the system can't be abused, is giving up simplicity and flexibility in favour of “very onerous rules.” There is also some concern over how companies like Dofasco and Alcan, who have already put significant effort into reducing their energy consumption, will be treated under the new system. Nonetheless, the trading system is a step in the right direction, and one that companies are going to have to get up to speed with fairly quickly.
Another development expected in 2005 is increasing investment from the provinces in alternative energy. Traditionally hesitant to venture into the field, both Quebec and Ontario recently put out tenders for wind-energy suppliers. There's a good possibility other provinces will follow their lead.
Nevertheless, there's excitement surrounding the possible revival of Cape Breton's coal-mining industry–an industry that supports one of the dirtiest energy production methods ever. That could mean many Canadians still aren't thinking long-term on the issue. L.B.
The CRTC
It's been pretty easy to mock the Canadian Radio-television and Telecommunications Commission over the past year. There was the yanking of the broadcast licence held by CHOI-FM, home of Quebec City shock jock Jean-François (Jeff) Fillion. Then came a decision allowing Al-Jazeera, the Arabic-speaking world's answer to CNN, onto Canadian TV sets only under an unworkable series of conditions and denying Italy's RAI access at all. A debate over whether or not to shield Canadian eyes and ears from Fox News host Bill O'Reilly was on the agenda. And finally, it offered Canadian an earnest series of hearings about voice-over-Internet telephone service nearly six years after an equally earnest process at which the CRTC concluded that it can't really control the Internet.
Given all that, it's also pretty easy to conclude that the time has finally come to turn over the CRTC's office space in downtown Gatineau to something more relevant to the 21st century (perhaps a new agency devoted to purging Canadian Tire's smug, bearded pitchman from the airwaves). BCE Inc., the parent of both Bell Canada and CTV, has been leading a cry for reforming the regulator. But don't expect BCE or any of its rivals, including Rogers Communications (which owns this magazine) to completely turn out the lights at the CRTC in 2005. Usually when people examine the agency's actions, they finger actors and musicians as its beneficiaries. But the royalty cheques that have gone Joni Mitchell's way since the introduction of Canadian-content rules are nothing compared to the benefits the CRTC has brought telcos, cable companies, wireless operators and broadcasters. None of those companies may care for the costly and ritualized theatre at the regulator. They might disagree about its rulings, but they all owe the CRTC.
BCE's argument for reforming the commission, while it has merit, hasn't much hope of advancement in 2005. Regulatory reform is one cesspool Paul Martin's tottering minority government can probably safely avoid.
But there are several easy ways for the CRTC to slightly reform its image. Now that Rogers has acquired Microcell and its Fido wireless business, the CRTC has one obvious tool for keeping the cellphone business competitive. Switching carriers is unattractive for many users, particularly business users, because a new supplier also means a new mobile phone number. In the United States, the Federal Communications Commission now allows users to take their cell numbers along with them. The CRTC should follow suit.
There are signs of change. In December, the CRTC mitigated an end to the RAI/Al-Jazeera madness. It's now giving foreign stations that broadcast in a third language easier access to Canadian satellite systems. Hopefully that's just the beginning. Like parking enforcement officers, the CRTC can't make itself lovable. But it can at least stop making itself look foolish. I.A.
