Dominic D'Alessandro wants to make one thing clear: “I'm not some rabid nationalist.”
Such is the label one risks when publicly toying with the idea of economic protectionism and doubting the wisdom of the market and the CEO of Manulife Financial Corp. (TSX: MFC) has more than a few doubts. “It's almost childlike, the belief that people have in the market sometimes, thinking that somehow the market is efficient,” D'Alessandro says. “Well, it isn't.”
That may sound surprising coming from someone who has aggressively transformed Manulife from a bit player into the second-largest insurance company in North America by market cap. Yet it was no less surprising to hear D'Alessandro put forth the idea of implementing foreign ownership restrictions on resource companies at Manulife's annual general meeting on May 3. An endorsement of protectionism isn't something you expect from a CEO whose company has expanded largely by acquisitions, let alone from a self-proclaimed “internationalist.” D'Alessandro was born in Italy, grew up in Montreal and has lived everywhere from San Francisco to Paris to Saudi Arabia. And one of his first moves after becoming CEO of Manulife in 1994 was to announce expansion plans in China.
Such globe-trotting helps D'Alessandro put Canada's place in the world in perspective, and the picture he's drawn isn't pretty. Corporate Canada is doomed, he says, unless something is done to address the flood of foreign takeovers, particularly in the resource sector. His idea? Ownership restrictions, but it's a controversial suggestion. Coddling corporations and turning executives into homebodies afraid to venture outside their home turf is often considered the real reason Canadian companies are falling behind in the global economy. That's nonsense, according to D'Alessandro. “There are those who say the only role of government is to stand out of the way. I don't agree. I think good policy can have fruitful results,” he says. And, for D'Alessandro, “good policy” means legislation that fosters growth in key areas of the Canadian economy, not blanket protectionism.
But for all the talk about the evils of the hollowing-out of corporate Canada, there has been surprisingly little research done. What little data there are suggest these concerns might be overblown. Indeed, Canadian corporations have been on a “buying spree” in the past two years, having purchased 790 foreign companies, according to KPMG research released earlier in May. In contrast, 660 Canadian companies were sold. However, Canadians tend to buy much smaller companies, as evidenced by the US$51 billion they spent on acquisitions, compared to the US$99 billion foreign companies plunked down on some of Canada's corporate crown jewels, such as Inco and Falconbridge. Statistics Canada's foreign direct investment numbers for 2006 trumpet the fact that FDI in both directions recorded the highest percentage increases in six years. And the Conference Board of Canada in March reported that the number of head offices in Canada actually increased up until at least 2005.
D'Alessandro isn't convinced. “If ABC Mega Corp. opens up a Canadian head office for its Canadian business, is that really a head office?” he asks. “A head office is where your decision-makers are.” Take a closer look at the FDI stats, and you'll see the depreciation of the dollar against the Euro and the pound boosted Canada's outward FDI, and the country had a $50.5-billion investment deficit with the United States.
What worries D'Alessandro most isn't so much the economic impact of disappearing head offices but the less measurable effect it has on the nation's pride and self-esteem. Living next to the U.S. has already made Canadians “a less exuberant people,” he says, and it's more important than ever to develop a sense of national identity in this time of rapid globalization. But if the country's largest corporations continue to fall, developing such an identity becomes impossible, and D'Alessandro fears an exodus of some of the country's most innovative and ambitious people to more vibrant centres of business. “Why would you stay here if there are no leading-edge companies to work for? How would you sustain schools and arts and cultural life if you don't have these enterprises?” he asks.
Good questions, but fretting over Canadian identity is as old as Canada itself, and the same concerns expressed by D'Alessandro are partly what led to the creation of the Foreign Investment Review Agency, in 1973. Designed to screen foreign takeovers, FIRA was replaced in the 1980s with Investment Canada, whose mandate is to encourage foreign investment in the country. (Although the institution has the power to veto foreign takeovers deemed to be not beneficial for the country, it doesn't.) D'Alessandro isn't suggesting Canada return to the days of FIRA. Instead, he's advocating an ownership policy for resources companies similar to what already exists in the financial services sector.
When insurance companies demutualized in the 1990s, the government legislated that companies with more than $5 billion in capital had to be widely held, thereby preventing a majority takeover. Smaller companies were acquired, whereas Sun Life Financial Inc. and Manulife were allowed the time and protection necessary to expand and become the dominant players they are today. “Had we not had the restrictions on our ownership, I'm quite certain we would have been swallowed up by somebody,” D'Alessandro says. The same thing could be said about Canada's major banks. But the banking industry is often cited as an exampleof how ownership restrictions have gone awry. Only competitive domestically, the banks have scant presence abroad. Former EnCana CEO Gwyn Morgan wrote recently in The Globe and Mail that ownership restrictions have “seen our banking sector left in the global backwater.”
D'Alessandro counters that such poor international performance is more likely because of a lack of leadership, a problem extending back to the less-developed-country debt crisis of the late 1970s, when many developing countries defaulted on their bank loans. That wiped out massive amounts of capital for Canadian banks operating in those countries, causing them to come crawling back to Canada. “It traumatized a whole generation of leaders,” D'Alessandro says.
Good government policy, on the other hand, can help businesses flourish. For example, the Nordic countries' forestry industry and Japan's automakers have both grown into powerhouses in part because of support from their governments. Take a look at Manulife, too, safe from a foreign takeover, while it is free to acquire businesses as it pleases. Indeed, it was the US$11-billion acquisition of U.S. insurer John Hancock Financial Services Inc. in 2003 that helped cement Manulife's current status as a major industry player. That deal was different from the foreign takeovers of Inco and Falconbridge, D'Alessandro says, because Hancock was a relatively unimportant player in the U.S.
Other nations certainly haven't been shy about protecting their valuable assets. The U.S. threatened to block the takeover of oil giant Unocal by the China National Offshore Oil Corp. in 2005; and when a merger created mega-miner BHP Billiton in 2001, the Australia government made sure the head office was located in Australia, not Britain. The absence of ownership restrictions leaves Canadian resource companies ripe for the picking, and also means Canada is playing by the rules of the free market far more than everyone else, D'Alessandro says. “Why would we as Canadians be embarrassed about adopting a policy that says these assets are important to our sense of nationhood, and we want there to be significant ownership by Canadians?” he says.
D'Alessandro doesn't blame the government for not reacting sooner. A combination of excess capital, low interest rates, aggressive investors and a minority government have quickly made corporate Canada a breeding ground for takeover. For all of D'Alessandro's suggestions, his outlook for change isn't entirely optimistic. “I'm often struck by how incredibly difficult it must have been for the settlers in Canada. They must have really wanted a country,” he says. “I don't know if we're willing to make the same sacrifices and the same efforts.”