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APRIL 2019 / REPORT ON BUSINESS 3 April 2019, Volume 35, No.8 Feedback Editorial Editor, Report on Business DEREK DECLOET Assistant Editor DAWN CALLEJA Digging for a solution Senior Editor JOHN DALY In “A long road,” Paul Christopher Webster examined Copy Editor LISA FIELDING, MICHAEL Canadian miners’ long history of wreaking havoc BARCLAY Research CATHERINE DOWLING, in developing nations—and gave us reason for hope ANNA-KAISA WALKER Art if the money created is not needed Art Director DOMENIC MACRI to get the economy up to full Associate Art Director capacity. In most instances, the BRENNAN HIGGINBOTHAM - Why should we stop at seeking spending creates greater capacity Director of Photography CLARE VANDER MEERSCH justice for victims of corporate as well as full employment, so Contributors crimes in developing countries? inflation is not a problem. While STEVE BREARTON, TREVOR COLE, SARAH We could, and should, shine a public banking is an aside, more EFRON, TIM KILADZE, IAN MCGUGAN, brighter light into what has gone states are pushing for public state JOANNA PACHNER, JUDITH PEREIRA, on here. Mount Polley in B.C. banks to provide low-interest ERIC REGULY, RITA TRICHUR, LUIS MORA and Asbestos in Quebec come to loans that retain the money in the Advertising mind, and there are lots more. It state. We are so wedded to the Chief Revenue Officer, VP Advertising ANDREW SAUNDERS goes along with the devastation neoliberal dance of debt it’s hard Managing Director, Creative Studios around abandoned oil wells that to imagine any alternative, but it’s and Ad Innovation owners are either walking away out there. —Curious George TRACY DAY from or selling for a dollar to Senior Manager, Special Products shell companies. —Beans Maroc ANDREA D’ANDRADE We borrow and spend Product Manager RYAN HYSTEAD - The government has promised our way to 5% GDP Production a corporate ombudsman several growth, and guess what? The Managing Director, Print Production times and will no doubt do so SALLY PIRRI again in an election year, but the interest rate on the new pile of Production Co-ordinator thing appears to be stalled by the debt rises to 5% too. Boom! ISABELLE CABRAL efforts of lobbyists to ensure it —Catou1403 Publisher PHILLIP CRAWLEY has no real power, except possibly Editor-in-Chief, The Globe and Mail to embarrass bad actors. Business DAVID WALMSLEY Managing Director, Business as usual: Just apologize and move Green paradox and Financial Products on to the next disaster. —glong234 Chris Turner’s rant lauded GARTH THOMAS our clean hydro grid. But are Report on Business magazine is published - Mining is a dangerous business. we ignoring the downsides? 10 times a year by The Globe and Mail Inc., 351 King Street E., Toronto There should be an international M5A 0N1. Telephone 416-585-5000. standard imposed on all mining - Canada’s hydro grid may be Letters to the Editor: companies regardless of what renewable, but it is anything but [email protected]. The next issue will be on April 26. “home” country their HQ is clean. Those who have to deal Copyright 2019, The Globe and Mail. located in. —ChristopherOldcorn with the destructive legacy of Indexed in the Canadian Periodical Index. hydro power can attest to this. Advertising Offices Head Office, The Globe and Mail, Economics, updated The Peace River generation 351 King Street E., Toronto M5A 0N1 Ian McGugan’s bold system in northeastern B.C., for Telephone 416-585-5111 or toll-free pronouncement: Big government example, was not fully logged 1-866-999-9237 Branch Offices debt isn’t as scary as you think. before flooding, which caused Montreal 514-982-3050 levels of methylmercury so high Vancouver 604-685-0308 - We’re wedded to the idea that to this day the local fishing Calgary 403-245-4987 Email: [email protected] of government borrowing guide recommends limiting United States and countries outside of from private sources and your fish consumption out of North America: AJR Media Group, 212-426-5932, owing them interest. Modern the system. The Site C project [email protected] Monetary Theory explains that a is going to flood very fertile Publications mail registration No. 7418. government can borrow from its land in a province with a limited The publisher accepts no responsibility for unsolicited manuscripts, transparencies or other own country bank at low interest, supply of it. —RickSchlosser material. Printed in Canada by Transcontinental and that interest goes back to Printing Inc. Prepress by DM Digital+1. Report on Business magazine is electronically available the central bank—which the Send us your thoughts at through subscription to Factiva.com from Factiva, government owns, so it is in effect [email protected], at factiva.com/factiva or 416-306-2003. tweet us @robmagca and follow paying itself. Inflation only occurs us on Instagram @rob_magazine tgam.ca/r

4 APRIL 2019 / REPORT ON BUSINESS ILLUSTRATION DALBERT B. VILARINO this month identifies ag ba submit bina re Ac the Coun When co o, ck. co Int tion gnition. I rd Be submit tle ting ernet. If ing cause I of yo ss me wa to job my ur ta s I’m te as And Google my app len app co d fir a one app wo st lo mp ly te as lica ve ing and man, d lica , in I an ly I tions, What build job , to am eight last rh tions y and jobs doe ythmical applic the I’v name—a a billion! it thr pub at sn e onl identifies sometimes tw ough ’t an lic y change o Ar per ts co Bu pr bl abic their ne son es ofi nsulting t in me sing ’s ve le fir in wo the , we it st r as I’m s the and ge rried name bsit not re pa in firms Th t gr wo cruitmen st, a an es at wh e my cur does rl wh eful Ra and a in it d se co name e. te en with nt a tw fo up used in rvie it r o le t the co tha holds the thing ta name? w of my mes ctic ag t ye bec co eas e s: ini- me ar m- to of s, It y aus s it ’s e of to tials: wo re re dida on going of It ce sumé ta wh their uld ’s bias iv ke te H. APRIL widel ed o s be J. to a names, I ar scr of in Ro chanc am. 20 scr be e fe y the derique. 19 een scr rs kno eened le / I REPOR fr ye e eene ft ma hiring om wn and tha t behind few de T both t tha ou I d ON ultima my didn it co ou pr t t BUSINE pa because mp job firms. oc t re ’t ba st sumé anies wa ess can- te SS sed the nt ly 5 . the thing about the “isms” and When Jamal becomes James the phobias around us. They are In a study by Rotman School of Management’s Sonia Kang, researchers sent social, they are structural, and out 1,600 ficticious resumés from Black and Asian applicants to real employers. they lead to these inferences, to Some resumés were altered to hide racial cues, such as first names and ascribing meaning, to gut feel- experience. The results showed clearly that resumés with “whitened” names and experience received much higher callback rates. Even employers that ings. They lead us to miss the tal- claimed to value diversity in their ads showed a similar pattern. ent that’s out there. Orchestras discovered that the lack of female talent they bemoaned was actu- % CALLBACK RATES FOR BLACK APPLICANTS ally right in front of them once ALL JOB ADS 25.5 25 Lamar J. Smith they put up a screen during audi- JOB ADS WITH Vice-president, Aspiring tions and evaluated people based PRO-DIVERSITY LANGUAGE 20 African American 18 Business Leaders on what mattered: the music. 15 Companies can do the same. 13 WHITENED RESUMÉ It’s actually not hard to create 10 11 L. James Smith anonymized resumés. You can hire Vice-president, Aspiring a few people at minimum wage to Business Leaders sit in a room for a day and strike out applicants’ names with Sharp- ies. Or with a few simple lines of NO WHITENED WHITENED WHITENED code, you can tweak your online WHITENING FIRST NAME EXPERIENCE FIRST NAME AND application system so reviewers EXPERIENCE don’t see the names attached to each resumé. There are artificial % CALLBACK RATES FOR ASIAN APPLICANTS Lei Zhang intelligence services that offer ALL JOB ADS Vice-president, Aspiring screening services, but you want JOB ADS WITH Asian American to be careful with those—Amazon PRO-DIVERSITY LANGUAGE 22 Business Leaders 20 21 had to abandon a computer model 18 18 16.5 WHITENED RESUMÉ for resumé screening when it real- ized the system had taught itself, 11.5 11 Luke Zhang Vice-president, Aspiring based on a review of older, mostly Business Leaders male applicants, that male candi- dates were preferable and penal- ized resumés that included the word “women’s.” The legal industry, from which have actually changed their hiring processes to address the problem. I hail, uses a process that is heav- Sure, there’s lots of talk about bringing in diverse talent, but all too ily reliant on resumés. In Toronto, often, it isn’t backed by concrete actions. Changing the way resumés are candidates submit CVs to get screened can be a simple way to ensure your company gets access to the on-campus interviews with large best talent and remains competitive. If you haven’t changed screening firms. Last year, the firm Lenczner practices at your company, ask yourself why. Slaght became the first Bay Street There’s no shortage of research on this subject. Several studies have firm that I know of to use an ano- found evidence of racial discrimination in resumé screening by com- nymized screening process. Shara paring the callback rates for racialized and white names on fictional Roy, a partner at the firm and co- resumés. A 2015 study by Michael Gaddis shows that white candidates chair of the firm’s Student Com- were 1.5 times more likely to get a response than Black candidates, who mittee, told me that reviewers also tended to receive responses for jobs with lower salaries and rank. A found looking at the anonymized 2016 study by the University of Toronto’s Sonia Kang and her colleagues resumés “quite jarring” and that it found that whitening one’s name got Asian applicants 1.6 times as many made people more aware of why callbacks, and Black candidates with whitened names and experience they were connecting to certain got 2.5 times the number of callbacks when compared with resumés of applicants. those who didn’t. If your company is nervous Do I think people are intentionally being sexist or racist when they’re about diving right into this kind screening resumés? In most cases, no. I ascribe to the statistical model of process, try an experiment. of discrimination, whereby employers use cues—such as gender, parent- Dig up all the resumés that were hood and race—to infer other skills and attributes, like language pro- submitted for a position that has ficiency, level of education and productivity. That “gut feeling” about since been filled, put together a someone’s suitability for a particular role or workplace. Because that’s new review panel and have them

6 APRIL 2019 / REPORT ON BUSINESS Check it out this month No longer a novelty, self-checkout machines are increasingly popping up at major retailers and restaurants like Loblaws, Metro, Walmart and McDonald’s. New tax measures allowing corporations to write off capital costs quicker review resumés without gender, could further nudge companies to invest in the technology. The controversial racial or other cues. Then com- machines are poised to drive big changes in the labour market. One report, pare those candidates to the one by Cornerstone Capital, says the coming loss of retail jobs could mirror the who was actually was selected. If drop in manufacturing jobs in recent decades. /Sarah Efron you find a discrepancy, you need to address it, be it via anonymized I THINK SELF-CHECKOUT LANES ARE A GOOD IDEA screening or another method. VALUE OF GLOBAL 3.8 RETAIL SELF-CHECKOUT Of course, changing how you TERMINAL MARKET screen candidates is just a baby ($BILLIONS U.S.) 3.2 step in addressing hiring inequi- ty. Hiring managers need to look STRONGLY 2.7 at who gets judged on poten- AGREE tial versus what they’ve accom- 25.1% 2.2 plished, over-reliance on certain credentials, how requirements 1.9 are applied or waived, and gener- 1.6 alizations about candidates. And 2017 2018 2019 2020 2021 2022 SOMEWHAT that’s just hiring; more problems AGREE abound in performance evalua- 29.6% HOW OFTEN DO YOU USE tions, assignment of work, com- SELF-CHECKOUTS WHEN STRONGLY pensation and meetings, to name GROCERY SHOPPING? DISAGREE a few. But changing the screening OCCASIONALLY 12.9% process is a good first step in a NEITHER SOMEWHAT AGREE OR series of transformations a com- DISAGREE DISAGREE pany needs to take if it really is 12.1% 20.3% interested in drawing top talent. NEVER MY STORE Roy concurs: “It has to be part DOES NOT of a broader commitment and a ALL THE HAVE SELF- TIME CHECKOUT broader change.” UNITS From a numbers perspective, 26.7%54.9% 11.1% 7.2% 626,775 the ratios we see at the top of our Current number of retail salespeople elite organizations can’t be reflec- in Canada, the most common occupation tive of the reality of our talent. If COMMON COMMON in the country (3.6% of all workers) REASONS REASONS they were, and bias weren’t a fac- CITED FOR CITED FOR PREFERRING AVOIDING

T; tor, we would see this reflected SELF-CHECKOUT SELF-CHECKOUT

SUL further down—university classes

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HOPKINS mostly white men. But we don’t. SUR & In Canada, 56% of university AVOID EMPLOYEES PREFER ASSISTANCE CK 30% TO 50% BE graduates and 51% of people with TIONAL Expected retail job losses AL.; NA a master’s are women. Looking once self-checkout ET at my own field, law, we see that and stocking of shelves ARB women have comprised half of are automated EXPERIENCE

GOLDF 83% 80% Y the law graduates for the past 20 M; years in the U.S., yet are only 22% RU OCER FO GR of partners at major law firms. Number of Canadian Tire In this increasingly knowledge- outlets that recently got of Home Depot’s of McDonald’s rid of self-checkouts. One ONOMIC based world, Canadian companies EC 182 Canadian outlets 1,400 restaurants 3 independent operator said UNIVERSITY need to attract the best people have self-checkouts across Canada have

RLD the machines broke down self-order kiosks WO possible if they want to stake frequently and were inefficient LHOUSIE A; their claim here at home and DA NAD around the world. Relying on CA VIO; S only a portion of the available tal- Rise in theft when

TIC customers use self- CHNA IS ent pool isn’t going to cut it. And TE 8.4% scanning technologies. AT A; ST as the battle for the best brains

; Increased amount in sales of Customers can claim

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NIXDORF dian companies’ future survival— S switched to self-service kiosks their payment failed

CE and our society’s ability to thrive— OLD UR depends on it. /Hadiya Roderique SO DIEB

APRIL 2019 / REPORT ON BUSINESS 7 SA NE ILINW SE G CON ADDED! D

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Well, here we are. I’m sorry it took 20 years! Your office is here at CN. What is your role at the company now? None. When I was the CEO of CN, I said, “Listen, I’m not going to be a CEO all of my life, and there are some companies that provide space for their former CEOs TION when they leave. I would really

ODUC appreciate that.” So they put PR that in my contract. When I got O fired from Bombardier, I phoned ODE

/R my successor at CN, Hunter TA

MO Harrison, and said, “Hunter, you’re not aware of this, but you NEIL owe me an office.”

APHS I wanted to ask you about Hunter GR Harrison. You brought him to CN. TO When we privatized CN in 1995, PHO

APRIL 2019 / REPORT ON BUSINESS 9 this month we had to transform from an east- a company like this? Yes. Big time. west railroad to a north-south The clerk of the Privy Council, railroad. So we bought Illinois Michael Wernick, testified Central. Hunter was the CEO. about the justice minister being Funny story: He and I negotiated pressured by the PMO. As a former that deal during the ice storm in Privy Council clerk yourself, why is Quebec, and we shook hands on he in the middle of this? the transaction in Montreal by Over the past 10, 12, 15 years, there candlelight. And Hunter said to has been too much centralization me, “When do you want me to of power in the Prime Minister’s leave?” I said, “Hunter, we just Office. In my days, when I worked paid too much for your company. as a deputy minister under the (1) You’re part of the asset. senior Mr. Trudeau, my minister You’re coming on board.” was not getting phone calls from The Rachel Notley government the PMO. When I worked as Privy plans to lease 4,400 railcars to Council clerk for Mr. Mulroney, ship oil to customers. What are he was not phoning his ministers, your thoughts on the problem and he didn’t have his chief of of moving oil in this country? staff telling them what to do. I deeply deplore, as a Canadian, But there has been an evolution. that we cannot find ways to build Under Mr. Harper, it became the pipelines. They are badly needed. trend that the PMO was involved It’s very unfortunate that Energy in a great many files. I deplore East was not built. 1. CN paid Let’s talk about SNC-Lavalin. that centralization of power. What’s the underlying problem? $2.4 billion You’re a former government What’s the effect of all this for (U.S.) in cash The regulatory burden is and stock insider. Was the Prime Minister’s corporate Canada? extremely heavy. I’m very much for 75% Office right to try to influence the If there is a perception that the for a sound environment. But of Illinois prosecution against the company? buck stops there, corporate Central. we’ve got to create jobs. The other Harrison I’m not going to take sides for or Canada will be calling on the thing I deplore is that we don’t was made against the PMO. But people don’t Prime Minister’s Office. I’ll give seem to think about these issues COO of look at the big picture. SNC- you an example. When I was CN and as Canadians. We think about succeeded Lavalin is not a Quebec company. deputy minister of energy, Arden them as Quebecers or Ontarians Tellier in Last year, it had $9 billion in Haynes was the CEO of Imperial or Albertans. It’s a question, very 2003. revenue and 50,000 employees— Oil, which wanted to build a often, of ignorance. In this part of 2. During that’s a global company! How pipeline from Zama Lake down to the country, people know Florida Tellier’s many does this country have? Edmonton. He wanted access to reign, from better than they know anything January As Canadians, we should feel the Prime Minister to get support west of Ontario. 2003 to very proud that it is competing for this pipeline. I said, “You know You were at Bombardier for a December, with giants like Bechtel, Fluor what? You’re going to talk with the 2004, he cut couple of tumultuous years, and Bombardier’s and so on. Yeah, some mistakes Prime Minister, and he will turn it’s in another bad period. What’s workforce by were made by the previous to an aide and say, ‘Can you follow at the root of its troubles? 16,000. He management, at every level, up on this?’ The aide will not have left with a Laurent Beaudoin is an $5.8-million and they should pay the price. a clue what it’s about. Why don’t outstanding entrepreneur, and severance Make sure the mistakes are not you go to the proper director- he succeeded in making a very package. going to be repeated. But if you general in the department? small snowmobile company into don’t find a way of giving them a You’re going to be well-received, a global company. The rate of chance to continue to compete and you will get action.” But it’s expansion was very fast. And internationally, like the Brits a vicious circle. If word gets out there is always a danger in not and Americans are doing, that that, in order to get your way, you making the distinction between company is going to be destroyed. have to go to the PMO, everybody revenues and earnings. Earnings Shall we try as Canadians to save will converge there. That’s the are sometimes neglected. Secondly, the company had PRIVATIZATIONS when it announced a merger with Agrium difficulty living with outsiders. VALUE OF IPO Current valuation As long as I was focusing on the AIR CANADA $225 MILLION $9 BILLION when it was transportation side, fine. As soon POTASHCORP. $100 MILLION $23 BILLION 2016 PETRO-CANADA $550 MILLION $19 BILLION 2009 acquired as I started to make decisions by Suncor CAMECO $125 MILLION $6 BILLION on the aerospace side, they had CN RAIL $2.2 BILLION* difficulty living with me. (2)

10 APRIL 2019 / REPORT ON BUSINESS culture that has evolved. Looking back on your roles in CIVIL SERVANTS WHO BECAME CEOS government and as a CEO, is there Annette a qualitative difference in the skill Michael Sabia Ed Clark Moya Greene Verschuren Robert Brown required in each field? (3) CEO of Caisse de CEO of Vector Former CEO CEO of NRStor Inc.; Former CEO Not really. When I talk to dépôt et placement Institute; former of Canada Post and former CEO of Bombardier du Québec; CEO of TD Bank the Royal Mail of Home Depot and CAE Inc. management students, I tell former CEO of BCE Canada them, “Whatever you do in your career, you should spend a Among other roles, Held posts at various Was the assistant Helped privatize Was associate he was deputy ministries, including deputy minister Crown corporations deputy minister of couple of years in government.” secretary to the finance and energy responsible for as part of Canadian the Department of In business, when you have a Cabinet of the Privy (where he helped airline deregulation Development Regional Industrial Council Office create the National at the Ministry of Investment Corp. Expansion GUNN/CP beautiful business plan and you under Tellier Energy Board). In Transportation and know what you want to do, the 1982, he was named worked for the Privy FRANK biggest uncertainty in delivering “Outstanding Civil Council Office that plan is what governments Servant”

(BROWN) can do to you through legislation, regulation and taxation. I say to MAIL; young people, “Spend two years,

AND five years, in the Department of Finance or Transportation or GLOBE the Environment to get a feel for the place. You’ll learn a lot about the processes, you’ll develop a

RODAN/THE network of people, and whatever 4. At the someone told me you motivated you were “lethal.” Someone else you do next, it’s gonna be helpful.” Common- through fear. If you see any truth said you were “constantly at war.” GALIT wealth How do you view the working meeting in in that, do you regret it? Well, I am very driven. I’m very relationship these days between Vancouver I cannot think of anything more intense. And my philosophy is Canada and the United States? in 1987, false than this. When I was 27, that if you don’t do your job, Margaret

(VERSCHUREN) I think the government has done Thatcher my boss was Jean-Luc Pépin. somebody else will. But there is a very good job of rolling with the refused (5) His office was next to mine no banging on the table. punches. Chrystia Freeland, in to back on the Hill. One day, Mr. Pépin Maybe it wasn’t your demeanour sanctions particular—I don’t know her, against asked me for a briefing note for so much as your willingness to but I’m a fan. Am I concerned? South Africa. question period, and the assistant make hard decisions. Yes. I’m concerned. deputy minister responsible did Yeah. I remember a very senior

BELANGER/REUTERS; 5. Pépin was How can Canada succeed at a time a Liberal not deliver the note on time. So official who had the bad habit of trade hostility with both the U.S. cabinet I phoned him and gave him shit. of having too many martinis at minister MATHIEU and China? from 1965 The door was open between my lunchtime. I heard that people We have to build relationships to 1972 office and Mr. Pépin’s office. He would avoid raising tough issues and again (CLARK) as much as possible, and we stuck his neck in and said, “Paul, with him after two o’clock. One from 1980 must refrain from lecturing to 1984. I heard you. You just made a fool day, I brought the guy in, and he other countries. Mr. Mulroney’s of yourself. You’re young enough didn’t have a chance to sit down. approach with apartheid—he to learn that 99% of the people I said, “I’m going to be very brief.

BOISSINOT/CP; was not lecturing anybody. He perform much better with a smile If it happens again, before the built support with his colleagues than a kick in the ass.” If there end of the day you’ll be out. Of around the Commonwealth was one point of divergence the government. Meeting is over.” JACQUES table, putting pressure on Mrs. between myself and Hunter, Yeah, this I have done. Thatcher. (4) There are many Hunter never understood that. Thanks so much for your time. (SABIA) countries doing things we don’t There were three guys, and Keith That was fun. I must say, I’m a bit like, but it’s preferable not to use Creel was one, that Hunter did shaken, you know—“managing by the confrontational approach. not scream at. We had a profound fear.” Because I have been trying Back when you were CEO of CN, disagreement on this. But he was to practise just the opposite. PHOTOGRAPHS too old to change. I suppose that This interview has been edited and because I came in and terminated and condensed. three VPs within three months, then the largest IPO the message got out, “The guy is Trevor Cole is the award- in Canadian history serious.” But that’s not fear. winning author of five books, including The Whisky King, Brian Mulroney said that if a non-fiction account of $82 BILLION somebody you were dealing with Canada’s most infamous wasn’t completely above board, mobster bootlegger.

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At the Forefront of a Transformational Journey

How Canadian company HEXO is doubling down on innovation in their pursuit of a global cannabis position

HEXO CORP., A GATINEAU, QUEBEC-BASED COMPANY co- founded by Sebastian St-Louis and Quebec-based HEXO is poised to expand its cannabis brand internationally. brother-in-law Adam Miron in 2013, has carved out a space in Canada with its forward-thinking product In April 2018, it signed a landmark ficult. I don’t believe any cannabis was the goal, but I clearly wasn’t line. Now, in pursuit of a leadership five-year commercial supply brands today, including HEXO or thinking big enough,” he says. position in the burgeoning global agreement with the Société québé- any of our competitors, really reso- “Today, we can see these mul- cannabis market, they are doubling coise du cannabis (SDQC), valued nate with consumers, and that’s tinational companies that will be down on innovation. at more than a billion dollars. It has why we’ve chosen to partner with serving every single product you In Jan. 2019, the company ap- also hosted international digni- great companies that have these can think of with a range of experi- pointed Veronique Hamel as chief taries at their farm in Gatineau, multigenerational brand buildups,” ences and we’re going to see that innovation officer. Over a 25-year including the German Secretary of St-Louis says. worldwide. I think that as much as career, Hamel has specialized in State, and has worked along- “People know they can trust that vision is ambitious, we expect leadership, innovation, and product side every level of the Canadian these brands, they know what to to see over the 10 years that there development for global consumer government, offering constructive expect, they expect a consistency will be two or three hundred- goods and pharmaceutical compa- feedback and insight into Canada’s of experience, and we can pig- billion-dollar cannabis companies, nies like Church & Dwight Canada, cannabis economy. gyback on that brand value until and HEXO intends to be one of Bausch & Lomb and Bausch Health Now HEXO is looking to bring that HEXO and ‘Powered by HEXO’ itself them and I think that is probably Companies Inc. expertise to the rest of the world. means something.” still conservative compared to At HEXO, she leads a team of “Because we’ve been open … It’s a strategy that the company what the reality will bring.” chemists, engineers, doctors, and we’re starting to gain traction as believes will allow for rapid expan- The current trends seem to align PhDs with expertise in food and an internationally recognized brand sion throughout North America, with that prediction. The recent pharmaceutical science. There are that governments can trust,” St- Europe, and Latin America. passage of The Hemp Farming Act currently more than 20 members on Louis says. Ground zero for HEXO’s product in the United States is one example the innovation team, but in the next As part of their European expan- innovation is the former Sears of where the industry is moving. two years, this number will grow to sion, the company has set up in distribution centre in Belleville, Ont. That bill reclassified hemp as an over a hundred. Greece, a location that will allow The plan is for HEXO to bring in oth- agricultural commodity rather than “I’m really excited to see what them to get product approval er leading companies in cannabis a Schedule I controlled substance, we’re going to be able to do with throughout Europe. More recently, science and technology, and work creating new possibilities for the that team. There’s no other com- it has been working in other areas alongside them. “The idea is we’ll use of hemp in consumer goods. pany in the world that has that kind of the world. get this reinforcement effect and “If you tried to start a conversa- of firepower behind their research “The whole idea is to work we’ll really be able to drive top-tier tion five years ago about sourcing and development department,” hand-in-hand with governments,” products,” says St-Louis. cannabinoids from hemp fields, I St-Louis says. St-Louis says. “To ask, what are As HEXO moves forward, it is think that would have been a very “We are at the very beginning your requirements? How can we working with customers to stay difficult conversation to have,” of an exciting transformational help? How can we meet those in tune with demands as well as St-Louis says. journey – in Canada and soon in requirements to make a quality gathering data to drive product The U.S. hemp market is expected many other parts of the world. As product and to adhere to your innovation. to grow to more than $20-billion by a country, we have a tremendous regulatory system while helping The strategy is working. In six 2022. And St. Louis doesn’t see that opportunity to seize a leadership to supply the population with safe, years, HEXO has gone from humble type of momentum slowing down position in the global cannabis reliable, quality products?” beginnings in a basement in Ot- anytime soon. industry, taking this amazing plant However, as a relatively new tawa, to being at the forefront of “I think that the more we learn, that humans have interacted with brand, St. Louis knows it will not the cannabis revolution. During the results that we’re going to de- for thousands of years from stigma- be easy to enter international that transformation, St-Louis has velop, the knowledge we’re going tized and prohibited, to consumer markets and attract new custom- had to reevaluate his own vision for to build—it’s going to blow away packaged goods like any other.” ers. To mitigate these challenges, the company. every expectation we have today.” With the world watching as HEXO is collaborating with other “The full breadth of this industry Canada adapts and evolves its top brands, including Fortune 500 is still to be discovered. Very much This content was produced by Globe Content Studio. The Globe’s approaches to legalization, HEXO is companies. like six years ago, I was thinking editorial department was not in a unique position. “Building those brands is very dif- pretty big, a billion-dollar company involved in its creation.

16 APRIL 20 19 / REPOR T ON BUSINE SS

PHOTOGRAPH cover story

Billionaire Lino Saputo Jr. isn’t exactly a household name outside Quebec, but the scion oversees a global dairy empire. His challenge now? To keep growing in an era of trade wars and falling milk consumption

the cheese

• by Jason Kirby

• photographs by Studio Le Quartier

APRIL 2019 / REPORT ON BUSINESS 17 Saputo, CEO of the giant cheese, milk and yogurt company that shares his name, is sitting in the private locker room he installed in the personal hockey arena he built next to the luxury auto club he owns in Montreal. It’s literally and figuratively as far away from the world of Australian dairy “Ihope farming as you can get. Nevertheless, the “they” he’s referring to are farmers Down Under. Saputo has been spending a lot of time in Aus- tralia lately. Last year, his company acquired the country’s largest dairy processor, a farmer-owned co-op called Murray Goulburn. To seal the deal, Saputo spent weeks criss-crossing thousands of theydon’t kilometres of arid grasslands, making his pitch to farmers at town hall meetings. In some cases, he even drove directly to farms to sit at their kitchen tables and field questions one-on-one. Which prompted my first question: What must those farmers think when Quebec’s richest man— his family’s stake in the company is worth $7 bil- view lion—shows up on their doorstep? “Once you get into a conversation with them, and you talk to them openly and honestly, then I think they get away from the billionaire aspect— you know, the idea that, ‘Here’s this foreigner coming from Canada trying to screw us as much meas as he can,’” he says. “I put on my pants one leg at a time and eat three meals a day just like they do.” Were this folksy sentiment to come from any other 0.0001-percenter, it would be about as easy to swallow as sour milk. But Lino Saputo Jr. is a man of contradictions, able to move back and forth between diverse worlds with remarkable ease. ‘that In one moment, the impossibly young-looking 52-year-old might be decked out in a shimmering suit and Bono-style glasses for the ritzy launch of a new Rolls Royce model; the next, he’s on the ice in his goalie gear, blocking shots from blue-collar plant workers. He has a fascination with 1980s-era Porsches and maintains a constantly revolving col- billionaire lection of around 40 luxury cars that he stores at his Automobiles Etcetera private auto club (“I buy and sell them—I love the hunt”). Yet his go-to family restaurant is Bar B Barn, a Montreal chicken-and- rib institution that boasts cartoon-animal mascots and where the rib options range from Baby Hawg to Whole Hawg. “Lino is someone who can speak to from royalty and then go talk to the janitor,” says McGill University management professor Karl Moore, who regularly invites Saputo to speak to his students. Increasingly, the polarized worlds Saputo must navigate exist within the dairy industry itself. When Saputo thrust himself into the NAFTA trade fight last summer, breaking ranks with Canada’s powerful dairy lobby to side with American farm- Canada’,” ers, it was revealing: Saputo Inc. may be a creature of Canada’s dairy cartel, having benefited early on says Canadian billionaire Lino Saputo Jr. from the protectionism it entails, but its CEO is an insider more than willing to stand on the outside. Saputo’s disarming manner and blunt hon- esty have much to do with how the company got to where it is today. While Saputo Inc. has little name recognition outside of Quebec (the com- pany spends very little on marketing), it has qui- etly grown into one of Canada’s top international

18 APRIL 2019 / REPORT ON BUSINESS The rabid Habs fan hosts a company-wide hockey tournament at his private arena every year. As for his skills in net, he says: “I like to think I can hold my own”

success stories. With 62 plants on five conti- he first rule of dairy club is you do not talk about dairy club. nents—in February, the company announced its For close to 50 years, Canada’s supply-managed dairy indus- latest acquisition, the $1.7-billion purchase of U.K.- try, which shields farmers from international competition based cheese and butter maker Dairy Crest—it is through a mix of quotas, tariffs and price controls, has defied among the largest dairy processors in the world, T every effort at reform. All but the maddest of politicians (see: with 15,000 employees. And with expected sales of Maxime Bernier) have been cowed by the deep-pocketed, more than $13 billion this year, 70% of which comes lobbyist-infested, vote-mobilizing power of Big Milk. from outside Canada, Saputo Inc. has become a The election of Donald Trump changed everything. Trump stock market darling. Since Saputo Jr. took over quickly drew a large bullseye on Canadian dairy, repeat- from his father and namesake Emanuele (known edly flaying the country for “what they’ve done to our dairy as Lino Sr.) in 2004, the company’s shares have farm workers. A disgrace, it’s a disgrace.” Tensions reached soared 680% (including dividend reinvestment), a fevered pitch by June 2018, when Trump attacked Justin handily topping the S&P/TSX Composite Index’s Trudeau as “meek and mild…dishonest and weak” after the 173% total return. Prime Minister swore to defend Canadian dairy farmers. But things are far from idyllic in the land of milk Saputo watched it all unfold and shook his head. He knew and money. The global dairy market is drowning the Americans weren’t looking to dismantle Canada’s entire in a glut of milk, while more consumers bypass the supply-management system. Instead, the sore point was a dairy aisle. At the same time, a world that seemed relatively new pricing rule around ultrafiltered milk, a pro- to be growing smaller thanks to globalization is tein-rich ingredient increasingly used to make cheese and now seeing countries turn inward, leading to geo- yogurt. American dairy farmers had enjoyed a mini-boom in political strife and the threat of trade wars. It’s all recent years by exporting the stuff to Canada, since it wasn’t starting to weigh on Saputo’s financial results and covered by Canada’s existing quota system, and the Canadian stock; over the past three years, Saputo’s share Border Services Agency didn’t even consider the protein price has suffered the indignity of merely match- concentrates to be milk. Then regulators gifted Canadian ing the benchmark index. farmers with a new pricing category (known as Class 7) that Saputo Jr. isn’t sitting still. The recent deal that shut out the Americans while opening the door for Canadian plunged the company into the U.K. market just a farmers to sell their own ultrafiltered milk competitively on month before Britain’s scheduled exit from the world markets. European Union was characteristic of a company The decision was unfair, thought Saputo, and it risked pro- built on bold bets. But this is also an important longing the trade conflict with the U.S. So he took aim. Cana- moment. As the third Saputo to run the company dian dairy farmers, he told reporters last June, “want their after his father and grandfather, he is ever-cogni- cake, and they want to eat it too. Yo u can’t hold onto your zant of the curse of the third generation. “Rags to milk-supply-managed system and have a class of milk com- riches to rags,” Saputo chimes in, referring to the peting with world markets at the same time.” old adage that the first generation starts a business, Against the backdrop of the flailing U.S. trade talks, Sapu- the second builds it up, and the third blows it to to’s message—one he pounded away at in conference calls, pieces—a pattern that played out famously with speeches and media interviews—made for compelling Quebec’s Bronfman clan and its Seagram fortune. headlines. For consumers outside of Quebec, it might have “I’ve been mindful of that since I started in the been the first time they made the connection between the business,” says Saputo. “My father’s motto, ever Saputo on their mozzarella wrapper and an actual person, since we were kids, was, ‘You have to work harder even though the company’s brands—like Neilsen, Dairyland than everybody else because you know all eyes and Milk2Go milk, as well as Armstrong cheese and Frigo will be on you.’” Cheeseheads—fill supermarkets across the country. As Never have more eyes been on Lino Saputo Jr. for the Canadian dairy industry, the sound you might have than right now. heard after Saputo spoke out was the collective thud of

APRIL 2019 / REPORT ON BUSINESS 19 cartel members’ jaws hitting the efficient operators in the food industry. Dino “Fora floor. Dairy executives quickly Dello Sbarba, the company’s former president and denounced Saputo’s comments chief operating officer, now retired, recalls tour- as a “product of confusion,” a ing a Stella plant with Mr. Saputo (which is how he company “wrong attack” and “invalid.” refers to the elder Saputo) and Lino Jr. at the time. “The association representing “We saw how disorganized it was, and it was obvi- likeSaputo dairy processors across Can- ous to us we could turn Stella around and make a ada continues to support both lot of money,” Dello Sbarba says. “We didn’t see supply management and Class the complexity of their systems or their sales, or thatwants 7,” the head of the Dairy Farm- how they were managing their marketing. We just ers of Canada gamely insisted. saw they didn’t know what they were doing from “Thus, the sector speaks with an operating standpoint, and we did.” Almost tocontinue one voice.” immediately after taking over, he says Saputo Except it didn’t. And how slashed the amount of cheese Stella produced by togrow, could it? Saputo Inc. isn’t the 15%, yet was able to boost earnings before interest, same company it was when taxes, depreciation and amortization by 50%. Canada succeeded in exclud- It was a model for the frenzied deal-making to thatmeans ing supply management from come. Since buying Stella, Saputo has spent in the 1988 Canada-U.S. trade deal excess of $7 billion on more than 30 acquisitions, wehave and, later, NAFTA. In just the from tuck-in businesses that complemented its past year and a half, Saputo has existing operations to transformational transac- spent $3.6 billion on six acqui- tions that took the company into new countries tothink sitions. One of those was in and markets. Canada (a small, Ontario-based It’s worth pausing for a moment to reflect on about maker of specialty cheeses and that number: 30. As a rule of thumb, business con- Icelandic-style yogurt), but the sultants will tell you that anywhere from 40% to others were in Australia, the 60% of M&A transactions are considered failures markets U.K. and the U.S. It also oper- because they don’t deliver the promised results. ates two plants in Argentina, Companies overpay, cultures clash, egos get in thanks to its 2003 purchase the way. Which makes Saputo Inc.’s Pac-Man- outsideof of that country’s third-largest like pace of acquisitions all the more remark- dairy processor. According to able. Aside from two small European plants the Canada.” Dutch agribusiness firm Rabo- company bought in the mid-2000s and ultimately bank, which tracks the world’s closed—because they didn’t have the critical mass largest dairy processors, Saputo needed to compete profitably—the company has ranks eighth in the world—and never botched an acquisition. “They’re very dis- that was before the company’s ciplined from a financial perspective, but I’d say most recent deal in the U.K. even more importantly from an operational per- In the end, when the NAFTA- spective, they really take the time to make sure USMCA dust settled, Canadian that the cultures are aligned, or they have a clear negotiators agreed to do away path to making that happen,” says Mark Petrie, an with Class 7. Saputo has no analyst with CIBC World Markets who has cov- regrets about breaking with the dairy lobby on the issue, call- ered the company for the last decade and cur- ing their arguments “propaganda.” rently has a “neutral” rating on the stock. “It was a two-tiered system, and dairy farmers don’t like to Ask any Saputo executive for the secret to the hear that, so I probably didn’t make too many friends at the company’s track record and they’ll tell you it’s the farm level,” he admits. “But I cannot speak from both sides ability to quickly infuse recently acquired busi- of my mouth—I can’t talk to dairy farmers in Australia, in nesses with Saputo’s values of accountability, the United States, in Europe, and tell them what they want entrepreneurialism and its family business ethic. to hear when I’m there, and then tell our dairy farmers what (The mammoth operation even feels like a small they want to hear when I’m here, because they’re often two family company at times—last year, one Aus- opposing views.” tralian journalist begged the CEO on air to hire None of this is to say Saputo opposes Canada’s supply-man- a local spokesperson so they didn’t always have agement system. “I am for the milk-supply-managed system to go to him directly for comment.) Before even because that’s what the dairy farmers want,” he says. “But for beginning to make technology or systems changes a company like Saputo that wants to continue to grow, that to new business units, the company sets out to means we have to think about markets outside of Canada.” determine which employees “get” the Saputo cul- That’s because the artificially high milk prices paid to ture. “It’s non-negotiable who we are, what our Canadian farmers (and then passed on to Canadian consum- culture is and what our expectations are of them,” ers) mean products made from that milk will never be com- says Carl Colizza, president and COO of Saputo’s petitive for export to the rest of the world. That was a driving dairy business in Canada and Argentina, who has force behind the surprise announcement in 1997 that Saputo been with the company for two decades. “Usually (sales: $450 million) would swallow U.S. cheesemaker Stella within a very short window, we know who under- (sales: $800 million). stands us and who doesn’t, and we part ways if we The deal cemented Saputo’s reputation as one of the most have to.”

20 APRIL 2019 / REPORT ON BUSINESS couple of days after Colizza joined the company in 1998, Lino Saputo noticed a new face among his 3,000 employees and stopped to chat with him. The pair discovered a shared love of hockey—a A passion that has played a key role in helping trans- Layingonthefromage fer the Saputo culture to its far-flung plants. To call Saputo a hockey nut would be an under- Saputo’s tasting notes on some of its statement (les Canadiens, bien sûr). In addition to artisanal Quebec cheeses playing in net, he’s also part owner of Quartexx Management, a player agency that represents La Sauvagine Patrice Bergeron, Kris Letang and Bryan Little. A Smooth and rustic: La Sauvagine is a cow few years ago, while playing hockey with one of milk cheese with a moist and supple rind his sons at a crowded Montreal rink, Saputo struck that ripens from the outside in; runny ivory body; fresh butter taste with a hint on the idea of building his own arena. Saputo calls of mushrooms; melts in the mouth and is himself a “closet architect,” so he drew up a design, flavourful; culminating with a rustic taste. complete with executive boardroom and high- performance gym. The three-on-three rink gets Le Cendrillon rented out for $300 an hour, but it also plays home Rich and robust: Crowned Best Cheese to an annual company-wide tournament involving in the World at the 2009 World Cheese hundreds of Saputo employees from across North Awards. Vegetable-ash-covered cheese with a marble-textured rind and a smooth America. Saputo himself also helped create a draft ivory body; acidulous, semi-strong taste so teams would have a mix of players from across that becomes more pronounced with age. the company. “People end up going back to their plants, and they become ambassadors of our cul- Cantonnier ture,” says Colizza. Supple and nutty: Cantonnier is a semi-soft Saputo plays in the tournament as a goalie, pressed cheese, uncooked and surface ripened and Colizza says that on the ice, he’s just another with a washed rind. It distinguishes itself with its effervescent flavour, reminiscent of fruity player. No one holds back. In fact, Colizza still cream and fresh apples. likes to recall the year his team defeated Saputo’s in the semifinals. “I was fortunate enough to score Bleubry three goals on him that game, and I wasn’t shy Rich and pronounced: A smooth version of about reminding him, either,” says Colizza, who the blue cheeses; frank and delicate; creamy, notes the boss’s goaltending has improved with not too salty; a product of the marriage age. Says Saputo of his skills between the posts: “I between brie and blue cheeses. like to think I can hold my own.” La tentation de Laurier The company has since created baseball, bas- Buttery and delicate: When young, this cheese ketball and soccer tournaments. (Two employees has a creamy texture like that of whipped came up from Argentina for the latter, one who cream, with a fresh cream flavour and a slighty had never left the town where he lived and worked acidic aftertaste. The whipped texture becomes at the local Saputo plant.) smooth and spreadable when it reaches Whenever Saputo visits any of the company’s its peak, thus bringing out the pronounced butter flavour. It melts in your mouth. plants and sees players from one of the tourna- ments, he stops to talk. But he just as easily builds rapport with employees he hasn’t faced on the ice. Mitch Garber, the Montreal businessman and chair of Cirque du Soleil, has known Saputo he Saputo empire owes a lot to that most exotic of dishes, for close to 15 years—their children attended the pizza. In the mid-1950s, the Italian staple was just starting to same school—and he considers Saputo a close catch on in Canada (the first pizza ovens weren’t imported friend. He occasionally visits Saputo plants as until 1957), and early stories about this miraculous new food part of fundraising efforts for Montreal’s United T included instructions on how to pronounce the word. Way Centraide charity. (Saputo’s family has been Giuseppe Saputo and his eldest son, Frank, arrived on a major supporter of the charity over the years.) Canadian shores from Sicily shortly before pizza did, in 1950. “I’ve watched him walk the floors, and Lino Two years later, the rest of their family, including Emanu- will stop with almost every employee, shake their ele (a.k.a. Lino Sr.), joined them in Montreal. Back in Italy, hand, know their name, look them in the eye, know Giuseppe had been a cheesemaker, but in Canada he took a when they joined the company, what their family job as a labourer. Emanuele convinced him to return to the situation is,” Garber says. “We’ve never discussed cheese business, and with a $500 investment and a bicycle to it, but I feel he knows that with the name Saputo, make mozzarella deliveries, the business was soon expand- there potentially comes intimidation or nervous- ing alongside the pizza boom. ness on the part of people, because of the wealth Eventually Lino Sr. (now 81) took over the business, which and the brand. There’s a cognizance he could have continued to expand. In the early 1970s, however, the Mon- that effect on people, and he disarms it right away.” treal Police Department’s organized crime squad raided

APRIL 2019 / REPORT ON BUSINESS 21 the company’s factory, accus- would allow us to think about things more stra- Ricottahaveit ing the Saputos of having ties tegically.” (Unlike many other family-controlled Lino Saputo Jr. is to a New York crime boss. All companies in Canada, Saputo doesn’t have a dual- that resulted from the raid was class share structure, which gives founders dis- a ricotta fanatic. a $350 fine for violating the proportionate control through multiple-voting Here are his five health code, but for months shares. A holding company controlled by Lino Sr. favourite ways to newspapers were filled with owns 33% of Saputo; a separate one controlled by eat the stuff, which stories about the incident. “For his brother Frank owns 10%.) is made from the some reason, being Sicilian and The IPO meant a lot of Saputos had to go. “It dregs of the cheese- having success wasn’t normal,” was clear to all family members, including to making process Lino Sr. said later. “It was very myself and my brother, that if we wanted to put tough and cheap, what they did in the time and be part of this organization mov- • Spread it on toast to me in 1972.” ing forward, we could,” says Saputo. “But we have with a drizzle of honey Lino Jr. was around five at the to deliver on the deliverables just like everybody time, and says he and his sib- else.” His older brother, Joey, held various senior • To p it with fresh fruit lings were completely unaware management positions but left a decade after the and crunchy granola of the raid and its fallout. IPO to oversee the Montreal Impact soccer club, for a snack or dessert “God, my mom was a champ,” which he’d launched in 1992. (He stepped down as he says, noting his father was president of the club this past January.) • Add a creamy layer rarely home because of work. Lino Jr. took up his father’s challenge, but the under the tomatoes “She completely protected my relationship between father and son was often when preparing brother and sister and I from tense. While Lino Sr. was famous for his hot Sicil- bruschetta that. We only learned about it ian temper, Dello Sbarba says he would unleash when we got older and started his harshest criticism on Lino Jr. in front of other • Blend it with reading the papers.” executives and employees. Afterward, Dello powdered chocolate As a child, Saputo Jr. knew he Sbarba and others, feeling the father was being drink mix wanted to join his father in the unfair, would offer their help, but Lino Jr. refused. company. At 10, he was sweep- “He was always very private,” says Dello Sbarba. • Enjoy it as the star ing floors and hand-wrapping “He’d say, ‘Guys, this is my issue. I’ll deal with it.’” ingredient in a classic cheese, and by 13 he began help- By 2003, Lino Sr. was ready to retire, and the Italian cannoli ing with deliveries. Lunches board formed a committee to find a successor. involved scooping ricotta out of Though Canada has no shortage of entitled scions vats and putting it on baguettes. who’ve been handed the keys to the CEO’s office To this day, that workhorse sta- no matter how unqualified they were for the post, ple of Italian kitchens remains Saputo insists that was never the case with him. Saputo’s favourite cheese—he eats it every day—even though Growing up, he says, he’d have settled for a posi- his company’s Le Cendrillon goat cheese by Alexis de Port- tion as supervisor or plant manager, if it came to neuf won best cheese in the world in 2009. that. “I’ve been very fortunate to have been guided Throughout Saputo’s teens, he learned in detail the process by some very good people who saw more potential for turning milk into cheese and continued working his way in me than I saw in myself,” he says. In the end, he through the company during summers while completing uni- won the job. “I think they understood that I knew versity. He’d originally planned to attend St. Francis Xavier the business and the industry very well, and that University in Nova Scotia, but he met and fell in love with culturally there was a strong connection between his future wife, Amelia, and ended up staying in Montreal, the way I live and the way the company operates.” where he earned a political science degree from Concordia. Will another Saputo replace Lino Jr. when he The couple married when they were in their mid-20s, and eventually retires? That’s far from certain. Of within five years they had two sons, Emanuele (Manny) and Saputo’s two sons, one is a musician in Nashville Giordano. By his early 30s, Saputo had moved from managing and the other plays professional hockey in France. plants to overseeing the company’s rapidly expanding manu- The latter has expressed an interest in joining the facturing operations. company, and Saputo says he would welcome that, For all Saputo’s growth, however, Lino Sr. saw trouble but he would have to prove himself. “There’s no ahead if it remained a family-owned business. obligation that the next generation of leadership Large family businesses are notoriously difficult to man- at Saputo has to be a Saputo,” he says. “We’ve got age, particularly when it comes to transferring power from a pool of very talented leaders, and as long as the one generation to the next. At the time, the board of directors culture stays alive, it doesn’t have to be a Saputo.” was filled with Saputos—Lino Sr.’s brothers and sisters all As for his father, Lino Jr. says their relationship had smaller stakes in the company, and many of their chil- has “inverted,” and now he draws comfort from dren were on the payroll too. “My father would have these consulting Lino Sr. when times are difficult, as monthly meetings with his family, but the challenge for him they are now. “He is the calming influence in my was that a lot of the discussion was more emotional than stra- life, where historically my dad was the guy put- tegic or logical,” says Lino Jr. So, Lino Sr. decided to take the ting most of the pressure on me,” Saputo says. “My company public in 1997. “My extended family recognized that dad will say as long as you wake up every morning they would no longer be owners but rather shareholders, and and ask yourself ‘Have you done the best you can there’s a big difference between the two,” says the son. “Hav- do?’ and the answer is yes, don’t worry about the ing that corporate governance structure of a public company results, because they’re going to come.”

22 APRIL 2019 / REPORT ON BUSINESS arly in 2018, bushfires raged across Australia’s Victoria state. Caught in the middle of some of the blazes were several dairy farms that supplied Warrnambool Cheese and Butter (WCB). Four expected. All told, he says, between the replacement trade E years earlier, Saputo had emerged from a bid- deal with the United States and Mexico (USMCA), the ding war for WCB, beating out Murray Goulburn trade deal with Europe (CETA), and the Comprehensive Co-op, and Lino Saputo Jr. was in Australia for and Progressive Agreement for Trans-Pacific Partnership meetings at the WCB plant. (CPTPP), roughly 12% of Canada’s dairy market is now Wanting to help, but not wanting to intrude, open to foreign imports. Saputo had his staff reach out, and once he got the It’s unclear how Saputo and the rest of Canada’s dairy all-clear, he visited five of the farms. Some were industry will be affected by these changes. But with its ever- burned to the ground, and other farmers were expanding international reach, the company may be well- rallying to help. “There was this great chemistry positioned. In a research note after its purchase of the U.K.’s and camaraderie among the dairy farmers, which Dairy Crest, CIBC’s Petrie noted it could position the Cana- I loved to see,” he says. One farmer who’d been dian-based company to ship dairy products to Canada from hit told Saputo all his fencing had burned so he its international operations. “We expect Saputo to leverage couldn’t contain his cows. Saputo had his people this new production, likely focused on accelerating [Dairy bring new fencing over that afternoon. Crest’s] limited export business, including to Canada.” The CEO has never talked publicly about the Still, tastes are changing in North America as consumers visit, and he’s caught off guard when asked about turn away from conventional milk. Even the recently updated it now. (Another executive had mentioned it ear- Canada Food Guide downplays milk and cheese consump- lier in the day.) “I don’t know how you know that. tion—staples since the guide’s advent in the 1940s. Per-capita We weren’t trying to get mileage—it wasn’t a mar- fluid milk consumption has shrunk by nearly one-quarter keting ploy,” he says uneasily. “It was just a ques- since the end of the 1990s, and the pace of the decline is accel- tion of doing the right thing.” erating. From 2016 to 2017, consumption fell by 4%. Saputo could easily have used the visits to his Saputo’s answer is to go premium. So-called “value-added” advantage. At the time, the company was in the milk products are growing fast—things like the single-serve process of buying Murray Goulburn (MG), the flavoured milks offered by Saputo’s Milk2Go label. Another co-op he’d beat out for WCB in 2014. MG had made area where Saputo sees growth is in high-protein, low-lac- some terrible decisions that left it deep in debt tose milk, such as its Joyya brand, an ultrafiltered milk that it and losing suppliers. After attending dozens of launched last fall. However, the company is going up against town halls with the co-op’s farmer-shareholders, Coca-Cola’s Fairlife brand, also a high-protein, low-lactose Saputo clinched the deal last spring. He needed milk that’s available across the country. Coke is in the process one vote more than 50% to win; he got 98.1%. of building an $85-million plant in Peterborough, Ontario. Saputo and his father had been stalking Austra- In the meantime, the beverage giant received a temporary lia for 12 years before making their first deal there. licence from Ottawa to import all of its milk from the U.S. The allure was clear: its proximity to Asia, where Then there’s that small but growing slice of the population dairy consumption is low but growing fast. China, that’s cut out dairy altogether. In Saputo’s most recent con- for instance, consumes just 36 kilograms per ference call, he specifically mentioned plant-based protein person of fluid milk, one-third the annual world drinks, like soy, almond and coconut milk, as a competitive average and just one-10th the level consumed by threat. Asked if the company plans on moving into that sec- people in developed countries. tor, Saputo says it’s definitely something he’s looking at. “We Australia is perfectly positioned to serve that can’t deny plant-based beverages are a threat to the fluid milk market, not just because of its geography but category,” he says. “We’re not going to create our own brand. because of its trade agreements with Asian mar- However, if there is an opportunity for us to make an acquisi- kets. Still, the industry is struggling at home tion of a company that already has a great following, that’s because of low domestic prices and an oversupply something we would consider.” of milk, with a growing number of farmers getting Saputo certainly has the room to make more deals. For out of the business. That’s just one of the chal- months before buying Dairy Crest, Saputo had been saying lenges facing Saputo. “Without strong milk pro- the company had roughly $3 billion it could spend on acqui- duction, we don’t have an industry. All we have sitions without having to tap equity markets, and that it had is brick-and-mortar and stainless steel plants,” five or so potential takeovers in the pipeline. That means it he says. “So we’ve got to take care of our farm- still has more than $1 billion to spend, so expect the deals to ers. It doesn’t mean we can say yes to all of their keep coming. requests, but we’ll take the time to explain why it’s “From an evolutionary perspective, you need to be moving yes or why it’s no.” forward. Otherwise you’re moving back,” says Saputo. “So, Here at home, Saputo the company faces its own the potential for us to go beyond the $13 billion in revenue set of challenges. While Canada agreed to scrap we’re at is very good. Could we be at $15 billion? Could we be Class 7, the pricing system for ultrafiltered milk $17 billion? Could we be $20 billion? I think the answer is yes, Saputo came out against, negotiators also dealt because the opportunities we’re seeing for potential acquisi- away greater access to the Canadian dairy mar- tions is very real.” ket under the new trade agreement than Saputo The only question, then, is how big this big cheese could get.

APRIL 2019 / REPORT ON BUSINESS 23 24 APRIL 20 19 / REPOR T ON BUSINE SS

PHOTOGRAPH ACTIVIST INVESTORS WERE ONCE A NOBLE BUNCH, FIGHTING FOR THE RIGHTS OF REGULAR SHAREHOLDERS. THESE DAYS, IT’S HARD TO TELL THE ALTRUISTS FROM THE RAIDERS BY TIM KILADZE

ILLUSTRATION BY MICHAEL BYERS It’s been more than four years since Jim Pantelidis fought off his most recent attack from an activist shareholder, but the memory still makes him angry. As the chair of Enercare Inc., defending the company became a full-time job. “It was all-consuming,” he says. The battle became public at 9:36 a.m on July 17, Brookfield Infrastructure bought the company for $3.1 2014, when an obscure American hedge fund known billion, in a friendly deal worth $29 a share—double as Augustus Advisors released a blistering letter to Augustus’s bid. shareholders, declaring its intention to take Enercare Enercare may have gotten the last laugh, but the private. Augustus said its buyout partner had been activist trend has only accelerated. In 2018, activist working behind the scenes for a full year, pleading funds broke the record for number of campaigns in with Enercare’s board to submit to a takeover. The a single year—922 globally (75 of them in Canada), company had once been a promising, albeit boring, according to Activist Insight, compared to just a business, renting water heaters in Ontario, but its handful in 2003. Most of their targets were small- and stock had floundered, down 35% from its peak seven micro-cap companies. But giants like eBay, Manulife years earlier. Because Augustus controlled the single Financial, Campbell Soup and others all came under largest block of Enercare’s shares, the fund felt justi- attack in the last year, with varying results. fied in shaking things up. Why the explosion? In part, it’s because passive This wasn’t Pantelidis’s first tussle with activists. In investing has become an existential problem for asset 2011, New York-based Octavian Advisors had launched managers. Thanks to the longest bull market on record, a public proxy contest to install four new directors on index investors in Canada have enjoyed average total Enercare’s board and take on roughly $140 million in returns of 10% over the past decade and paid next to debt to fund a special dividend. “There was nothing nothing in fees. Hedge funds, meanwhile, have deliv- short of capitulation that they would accept,” says ered about half that, while charging much more—often Pantelidis. “They were trying to hijack the company.” 2% a year, plus 20% of any extraordinary profits. To bat Octavian away, Enercare spent millions of dol- With the industry under siege, activism is seen as lars on legal and public relations advice, and endured one of the few remaining ways for fund managers months of cross-Canada meetings with institutional to deliver alpha—returns that beat the broad mar- investors. It worked. In April 2012, shareholders voted ket—without deploying a huge amount of capital. By down the activist’s proposal. acquiring, say, 10% of a company and agitating for sub- But the peace was short-lived. Augustus began man- stantial changes, they can affect the share price and aging Octavian’s stake, and just two years later, it went net a tidy profit. (Private equity firms, meanwhile, usu- public with its own plan for a buyout of Enercare. ally have to buy entire companies, for a premium, and There had been plenty of similar battles in the wake are stuck holding the bag if their revamps go awry.) By of the 2008 financial crisis, when activist investors mid-2018, the activist sector had amassed $128 billion stepped up their efforts to dismantle stodgy boards (U.S.) in assets under management. and toss out incompetent leaders, all in the name of Not long ago, the activist mission was to call out poor shareholder profits. They’d won some early acco- governance, excessive pay and outright fraud. Lately, lades in Canada after improving results at two iconic the motivation behind many of these campaigns has companies, Canadian Pacific Railway and Maple Leaf grown murkier. With so much money sloshing around, Foods. Yet those victories had spawned so many copy- sometimes it’s hard to tell who’s truly out to fix a com- cats that the crusaders were looking much less altru- pany and who wants to make a quick buck. At the same istic. In fact, there was a growing fear that activists time, the sector is struggling to justify itself. Over the were using their influence to manipulate stock prices past decade, activist funds have, at best, matched the for short-term gains. performance of the S&P 500, according to Activist Pantelidis outmaneuvered Augustus by acquiring a Insight. “Unless a board is absolutely incompetent,” sister company to give Enercare extra heft. Soon after, says Pantelidis, “activists seldom, from what I’ve seen, its stock price eclipsed the $13.50 to $15 a share the come up with any new ideas.” activists had offered. With the pressure off, Enercare Do these new-age barbarians at the gate actually put together a multiyear turnaround plan that included create value, or have they simply corrupted the market expanding into the United States. This past August, they set out to save? wo strains of modern activist inves- crash of 2008, and when it did, two campaigns put tors emerged in the mid-1980s. In one Canada close to Ground Zero. T corner of the market, corporate raiders The first was the 2010 battle at Maple Leaf Foods. like Carl Icahn and T. Boone Pickens began to shake In August of that year, a small but powerful Canadian up stagnant companies, often by borrowing boatloads fund called West Face Capital, led by Greg Boland, to fuel hostile takeovers. Then there were the institu- acquired a 10% stake in the company. Maple Leaf tional investors intent on cracking down on bad gov- had finally come through the listeria crisis, during ernance—which sometimes meant punishing boards which 22 people died, and it planned to spend $1.3 for giving in to the raiders too easily. Although they billion to update its meat-processing facilities. But could be at odds, these two strains shared a common before the company could start, West Face launched a vision: As shareholders, they were owners, and they proxy contest that pitted Boland against Maple Leaf’s wanted to use that power to make changes. CEO, Michael McCain, and its powerful board, which Over the next decade, activists took on blue-chip included veteran corporate lawyer Purdy Crawford players like Kodak and General Motors. At IBM, CEO and a number of friends of McCain’s father, Wallace. John Akers was booted after the company lost its way, Boland’s aim was to install hand-picked directors who leading to a $5-billion (U.S.) loss in 1992 and 100,000 were independent of the McCain family and to cur- job cuts over three years. When pushing for his ouster, tail the expensive revitalization plan, which Boland California’s largest pension fund circulated a 14-page thought was unlikely to boost the company’s fortunes. indictment of the company’s governance: “IBM was Boland eventually won a board seat and used his once the most respected company in the world,” it position to persuade Maple Leaf to slash its modern- said, but “now looks to the future with shareholder ization plan in half. The company’s shares soared, satisfaction and employee pride reduced to contempt and by the time Boland sold his stake in 2014 for $300 and shame.” million, he’d doubled his investment. McCain, mean- By 1994, the activist movement had made a signifi- while, held onto his job. cant mark. Directors knew they could no longer act Fred Green wasn’t so lucky. As West Face was wrap- like monarchs; shareholders had proven they were ping up its campaign at Maple Leaf, Ackman and his the ones in charge, and boards had started listening to fund, Pershing Square Capital Management, were tak- them. “A ll-out war is no longer needed,” John Pound, ing aim at CP Rail, whose board (led by former Royal who led a shareholder research group at Harvard, told Bank CEO John Cleghorn) had allowed Green to post The New York Times that year. poor operating results for years, along with the worst But in the ashes of the dot-com bust, activists started operating efficiency of the Big Six North American rumbling once again. In 2005, Bill Ackman bought a railways. Ackman spent $1.4 billion to amass a siz- sizable position in Wendy’s International and urged able stake in the Canadian giant that grew to 14.2%. the chain to spin off Tim Hortons. A year later, he The plan was to take control of the board and replace pushed for changes at Canadian Tire that included Green with Hunter Harrison, the former chief of CP’s spinning out its Mark’s Work Wearhouse chain. archrival, Canadian National Railway. The activist renaissance picked up speed after the The campaign turned nasty quickly. In January 2012,

APRIL 2019 / REPORT ON BUSINESS 27 Ackman sent Cleghorn an e-mail with the subject line, up playbooks for how to engage with activists if they “War and Peace.” In it, he darkly wrote that his cam- ever came knocking, often relying on an emerging cot- paign could turn into “nuclear winter.” tage industry of strategists to counsel them. The com- Ackman had just come off a humiliating defeat in his mon advice: Do everything CP didn’t. campaign against Target Corp., which he called one of Money started to pour into activist funds. In 2003, “the greatest disappointments of my career to date,” there was about $12 billion (U.S.) invested in the and his reputation was wounded. But CP’s board failed sector globally, according to HFR Industry Reports, to see that its own shareholders were fed up and des- which does research on hedge funds. By the end of perate for change. Two pension funds—the Ontario 2014, that figure had multiplied almost tenfold, with Teachers’ Pension Plan and the Canada Pension Plan most of the growth coming after 2009. Investment Board—sided with Pershing, and in an As the market grew crowded, it became harder to astonishing capitulation, six of CP’s directors, includ- decipher each fund’s motives. Were they in it to kick out ing Cleghorn, agreed not to stand for re-election. Har- do-nothing boards, or did they care more about quick rison was installed as CEO a few months later, and wins and profits? In a research report early in 2015, over the next two years, CP’s stock more than doubled. bankers at JPMorgan warned that the influx of money The optics of both victories were powerful, because could force funds to manufacture campaigns just for they showed that even Canadian giants could be the hell of it: “This significant inflow of capital into the shaken up. Activists came out looking like altruistic asset class comes with immense pressure to put capital warriors, battling for common shareholders. “This is to work quickly and in ever-larger campaigns.” about restoring the balance of power back to the own- That speculation proved to be bang-on. ers,” Ackman told The Globe and Mail in 2012. “The activist acts as the tip of the spear and is willing to take the body blows.” Boards were forced to do some soul-searching (or at least some balance-sheet-scouring). They also drew ill George has long been among the most vocal critics of shareholder activ- B ism’s underbelly. The Goldman Sachs ACTIVIST CAMPAIGNS director and former CEO of medical device-maker GLOBALLY Medtronic is all for activism in principle, but he wor- ries that many investors are in it for a quick payoff and 2013 607 nothing else. “If a company is moribund and not going 2014 645 anywhere, I say go in and shake it up,” George says 2015 775 by phone from Minneapolis, where he is based. What he sees, though, are activists “almost intentionally 2016 887 attacking well-run companies.” 2017 856 2018 922

ACTIVIST CAMPAIGNS IN SELECT COUNTRIES (2018)

75 CANADA 47 UK 13 47 1 CHINA MEXICO JAPAN 7 11 491 FRANCE SOUTH KOREA UNITED STATES

8 INSIGHT 7 SWEDEN BRAZIL 15 GERMANY 78 ACTIVIST AUSTRALIA SOURCE

28 APRIL 2019 / REPORT ON BUSINESS His career path helped fuel this skep- THE ORIGINAL ACTIVIST ticism. George rose through the ranks Benjamin Graham, the granddaddy of value at Litton Industries and Honeywell investing, was perhaps the first activist investor. International, determined to become In 1927, he launched a proxy battle to gain a an executive. By the late 1980s, how- seat on the board of Northern Pipeline, hoping ever, “I looked at myself in the rearview to force the company to distribute more of its mirror, and what I saw was a miser- cash hoard to shareholders. “Here was Northern able person,” he told a Minneapolis Pipeline, selling at only $65 a share, paying a magazine in 2017. It had been too easy $6 dividend—while holding some $95 in cash assets for each share, nearly all of which it could distribute to its stockholders without the to boost profits by firing workers and slightest inconvenience to its operations,” Graham recalled in his closing divisions. “I realized I was more memoirs. “Talk about a bargain security!” After a long battle, Graham focused on getting the top job than on won (with help from fellow investor the Rockefeller Foundation). the work I was doing,” says George. “I wasn’t building anything—I was just taking things apart.” A similar argument can be made about activists, and George has been making it for years. In 2009, he even called out Ackman live on CNBC, lam- basting him for his failed campaign against Target, on iding high on his CP Rail victory, Bill whose board George had served until 2005. Lately, Ackman followed up with a campaign though, George has grown incensed. Around 2014 the Ragainst Herbalife, an American multi- market for activism exploded and major funds started level marketing company that sells vitamins and pro- holding serious sway. By the end of that year, more than tein bars. Ackman’s thesis was that Herbalife was little 10 activist funds each managed over $10 billion (U.S.), more than a pyramid scheme, with the company push- according to HFR. Executives dared not irk them for ing often low-income clients to sell the stuff to their fear of being targeted. friends. He shorted the stock and tried to persuade What really bothered George was that some activ- regulators to intervene. ists wouldn’t even acknowledge what they were up to. The battle turned ugly through 2013 and into 2014, It all seemed like a game. In 2014, Dan Loeb of influen- and Icahn—who had never been a fan of Ackman’s— tial activist fund Third Point floated the possibility of took the other side of the trade, saying Herbalife had “a dismantling drug giant Amgen, “which seemed to me legitimate business model, with favourable long-term like a ridiculous idea,” George says. He said as much opportunities for growth.” The pair sparred publicly, publicly. Soon after, the two men met for the first time including during a now infamous segment on CNBC, at the World Economic Forum in Davos, Switzerland. during which Icahn called in to counter Ackman, the “A re you Bill George? How could you say that? I didn’t show’s guest. “Ackman has done pump-and-dumps. say to break them up—I just said they should consider He’s got one of the worst reputations on Wall Street,” breaking up,’ ” George recalls Loeb telling him. George Icahn argued on live TV. was gobsmacked. “Come on,” says George. “You go But Ackman was on to something. In 2016, the U.S. out and make a public statement about that, you go out Federal Trade Commission fined Herbalife $200 mil- and buy [some] of their stock? Don’t kid me.” lion—though it stopped short of classifying it as a Activists also had a habit of glossing over the chaos pyramid scheme. Nonetheless, the stock continued to they could create. In the summer of 2012, New York- climb. By the time Ackman finally unwound his short based Jana Partners started spending more than $1 position last year, he was deep under water. After he billion to amass a 7. 5% stake in Agrium Inc, and over first bet against the company, the stock plunged below the next nine months the two fought bitterly, with $25 (U.S.) per share. By the time he exited, it had Jana hoping to install directors on Agrium’s 12-person jumped to $94 (U.S.). Pershing investors got crushed. board. The fund went so far as to suggest that Agrium The failure was even more spectacular at Valeant consider splitting into two companies—one for fer- Pharmaceuticals, which was first targeted by activist tilizer production and another for retail agricultural ValueAct Capital way back in 2006. ValueAct helped products. Ahead of the pivotal annual meeting in April install Michael Pearson as CEO, and he turned Vale- 2013, Jana head Barry Rosenstein took some nasty ant into a serial acquirer with a habit of jacking up the public shots at Agrium, arguing that dismissing activ- prices of drugs it now owned. Under scrutiny in 2015, ists like him amounted to corporate governance from the company nearly collapsed, and the stock plunged the 1960s. “It’s like watching an episode of Mad Men more than 90% from its $346 peak. ValueAct had where all the doctors are smoking,” he told The Globe. cashed out $1 billion (U.S.) right before things went In the end, Agrium prevailed. But the company’s bad, so it didn’t fare so badly, but other activists had CEO, Michael Wilson, was so disgusted by all the piled in on the way up, including Ackman and John energy and money the battle had sucked up that he Paulson. Ackman and his fund lost $4 billion (U.S.). gave a warning about the state of activism: “Based on In a recent investor presentation, Pershing disclosed what I’m seeing, this is the new wave—people who are its annual gains and losses. Anyone who invested at looking for short-term gain versus long-term gain.” the end of 2012, in the wake of the CP Rail victory, had

APRIL 2019 / REPORT ON BUSINESS 29 almost the exact same amount at the end of 2018. Put- dossier during a meeting with directors that purport- ting that same dollar into the broad S&P 500, mean- edly contained dirt on them and their families, and while, would have nearly doubled their money. Ack- unearthing the old divorce records of a CEO it was man declined to comment for this story. hoping to get fired and allegedly leaking them to Many rival funds have also suffered in the last few the media. (Elliott has denied these allegations and years. Jana Partners, which went after Agrium, hasn’t declined to comment.) beaten the broad stock market since 2013. The fund’s This unscrupulous behaviour has encouraged some assets under management peaked at $11 billion (U.S.) investors—including short sellers, a subset of the in 2015, but investors have since fled, and at the end of activist movement—to test the boundaries. Carson 2018, Jana managed less than half its record total. Block and his fund, Muddy Waters LLC, is generally This all seems to lend credence to a 2015 report by respected for exposing fraudulent companies; Cana- the Wall Street Journal, which set out to assess the mer- dian investors will remember him for calling out the its of the activist boom, studying 71 campaigns against sham that was Sino-Forest in 2011. Yet, last October, companies worth $5 billion (U.S.) or more. The result: Muddy Waters released a scathing report on insur- “Activism often improves a company’s operational ance giant Manulife Financial. results—and nearly as often doesn’t.” The campaign was unusual for Muddy Waters, INSIGHT because it had nothing to do with fraud or bad gov-

ernance. Instead, it revolved around a lawsuit against ACTIVIST Manulife (filed by a fund called Mosten) that was

launched to exploit a potential loophole in decades- SOURCE old insurance policies. As Muddy Waters claimed, the espite a number of colossal disappoint- contracts allowed their holders to deposit an unlim- ments, activists are, somewhat miracu- ited amount of money with Manulife and receive a Dlously, a bigger force than ever—and guaranteed annualized return of at least 4%. Block they’re only getting more aggressive. predicted the losses “could reach the billions” if Elliott Management, founded by Paul Singer, has Manulife were to lose the court battle and be forced NICHOLSON/REUTERS;

become the most feared activist fund in the world, a to adhere to these terms. Asked why he had taken on LUCY reputation it earned when it bet on Argentinian debt this cause, given that it didn’t match with his history, and tried to seize one of the country’s war ships after a Block told The Globe this past October: “Sometimes (SMITH) government ruling hurt its investment. More recently, the fraud thing gets a little bit old.” Elliott has been accused of flashing a six-inch-thick Block stands by the campaign against Manulife,

BUSIEST BUSIEST MCDERMID/REUTERS; ACTIVIST SHORT INVESTORS SELLER BRENDAN OF 2018 OF 2018 (ICAHN) Paul Singer Barry Rosenstein Carl Icahn Jeffrey Smith Ted WhiteAndrew Left MACDOUGAL/CP; LARRY

Elliott Jana Partners Carl Icahn Starboard Value Legion Partners Citron Research Management Urged Apple Waged a successful Gained 18 seats at Gained seats on Andrew Left’s Shook up to put parental proxy contest six companies the board of Barbie Citron launched six (ROSENSTEIN) ThyssenKrupp and controls in with Xerox maker Mattel campaigns against

Whitbread its iPhones pot companies, FORUM; and bet against Netflix and Twitter. It reversed short calls against Roku, ECONOMIC $253.1 Tesla and Facebook BILLION WORLD $25.7 BILLION $17.9 BILLION AVERAGE TARGET

$11.4 (SINGER) MARKET CAP BILLION $5.1 BILLION $1.6 (U.S. DOLLARS) BILLION NO. OF COMPANIES 24 3 9 9 71TARGETED 4 PHOTOGRAPHS

30 APRIL 2019 / REPORT ON BUSINESS arguing in an email in early March that it’s an impor- markets that tend to be overlooked by watchdogs. In tant type of activism “because management has that way, activism is a bit like democracy—sometimes actively concealed this information, or has made out- maddening, but perhaps the best option we’ve got. right misrepresentations, or even told lies.” “Making broad, general statements about activ- Manulife sees it differently. “The Muddy Waters ism or those who engage in it is a mistake,” says Zach report was a short seller’s attempt to spread misinfor- George, a Canadian who runs FrontFour Capital in mation and confusion in order to profit at the expense Greenwich, Connecticut, and whose recent targets of our long-term shareholders,” the insurer wrote in include small Canadian real estate companies. “Each an email. “We believe that Muddy Waters’ continued situation and strategy should be assessed on a case- exaggerated characterization of the Mosten matter is a by-case basis.” textbook example of unrestricted behaviour by a self- The criticism that irks him most is the claim that all acknowledged short seller.” activists are out to make a quick buck. “The notion that Even West Face’s Boland, who still firmly believes activists are only focused on short-term results and activists have an important role to play in policing thinking is a tired and false narrative,” he argues. “It is companies, says their tactics can be overused. “When commonly used by defence advisers during campaigns your investment strategy is to be a hammer, then and by corporate leaders who are incentivized to defer everything looks like a nail. That pressure leads to ill- accountability for their own poor performance.” founded campaigns,” he says. “Activism is a tool, not That’s the rosy view. In reality, there’s a huge role an investment strategy.” for institutional investors to play. Some of the world’s He hasn’t given up on the idea because far too often, largest money managers have already joined forces the only way institutional shareholders can voice to preach the value of long-term investing, with the their frustrations with management is by selling likes of BlackRock Inc. and CPPIB coming together their shares, even though they might see potential for to create a not-for-profit called Focusing Capital on improvement. That’s where activism can be useful—if the Long Term (FCLT). In a recent report, BlackRock it’s done thoughtfully. CEO Larry Fink warned that “we’ve become mesmer- The trouble is that thoughtfulness is a rare com- ized by the possibility of short-term, one-off gains.” modity these days. Given the state of activism, compa- Activism, at its worst, has exploited this failure. nies sometimes focus too much on making themselves To counter this fixation, the group emphasizes the activist-proof. This worries Marty Lipton more than power of incentives, especially with compensation. anything else. The veteran corporate lawyer is widely “If you’re paid to be short-term, you’ll be short-term,” viewed as a dean of Wall Street and has been dealing says Sarah Williamson, who runs FCLT. Before joining with disrupters for decades—he created poison pills the organization, Williamson ran alternative invest- in the 1980s to thwart that era’s corporate raiders. ments for Wellington Management, which oversees $1 After defending these types of attacks for so long, he trillion (U.S.) in assets. has concluded that the biggest threat activists pose is The harder task is retraining investors to think a cumulative one. As activism expands, he says, “all years, or even decades, out. Williamson says behav- companies look at their strategy and their portfolio ioural economics has shown that humans aren’t good of businesses as an activist would. They adjust their with trade-offs, “and we really don’t do a good job with operations and strategy to try to minimize the expo- trade-offs over time.” That makes it tough to persuade sure to an activist attack, which is far more important investors to forgo some short-term profits. than the attacks themselves.” But she’s optimistic. “I don’t think this is an impos- “There are companies that are not well managed, sible problem to solve,” she says, “because the long- and every now and then an activist comes along and term companies actually do better for their share- points that out, and actually does improve it,” he con- holders. The long-term investors actually do better.” cedes. “But most of activism is financial engineering.” Recent research from Willis Towers Watson calcu- lated that investors leave 0.5 to 1.5 percentage points of returns on the table each year by focusing solely on short-term results. That might not seem like much, but it’s a lot in an era where money managers are com- peting with index funds, and it’s even more when com- fter watching activists rack up some pounded over multiple years. early wins, the advice given to boards Already there’s been some progress. Last year, behe- A of directors was to embrace them— moth money manager T. Rowe Price published its show some love, maybe even offer a few board seats. “Investment Philosophy on Shareholder Activism,” a It helped—a lot. Many campaigns are now settled pri- key element of which reads: “The time frame we apply vately, with the public never even hearing of them. It’s for decision-making in activist campaigns is a multi- much less disruptive for everyone involved. year view.” The firm has let it be known that it has little But that strategy only works if the activists give a interest in quick profits. damn about the ultimate fate of the company. What The hope is that more managers speak up in the if they don’t? Regulators can’t simply ban activism, same way. Because if investors with real sway starve because for all the trouble it might cause, these inves- the bad activists of oxygen, the mess might just sort tors can play a crucial role, particularly in small-cap itself out.

APRIL 2019 / REPORT ON BUSINESS 31 As the first major Western country to legalize marijuana, Canada is at the forefront of the international cannabis industry.

But as other jurisdictions move toward legalization, the competition is WEED getting fierce.

by JOHN DALY CONTROL

Can Canadian companies maintain their lead and become dominant players in the global photograph by JUSTIN POULSEN cannabis market?

32 APRIL 2019 / REPORT ON BUSINESS PHOTOGRAPH but only its fifth-largest grow operation. The biggest is a 1.3-million-square-foot greenhouse complex in the Vancou- ver suburb of Langley. Of course, Canopy’s largest Canadian competitors also have huge facilities of their own. Aphria Inc. has vast green- houses in Leamington, Ontario, the tomato-growing capital of Canada. Toronto-based Cronos Group Inc. is building a huge greenhouse in neighbouring Kingsville. Last fall, Edmonton- based Aurora Cannabis Inc. opened a new 800,000-square- foot glass-roofed growing and processing facility near the city’s airport, and it’s completing a 1.2-million-square-foot operation in Medicine Hat. Linton and his rivals picture their Canadian headquarters as bases for global cannabis empires, and they sketch out grand visions of rapid expansion. Even though they’ve barely begun to tap the newly legal recreational market at home, they’re using their first-mover advantage here to establish beachheads abroad. “It’s not very often that you see Canada leading the creation of a brand new global industry,” says The CEOs of just about all of Canada’s leading can- Aurora chief corporate officer Cam Battley. nabis companies now have really big things to show But how realistic are those ambitions? A lot of lingering off. In the case of Canopy Growth Inc., the largest questions remain. Can Canadian producers build brands that publicly traded weed company on the planet, the boxy clump are popular around the world? Will Canada remain a leader of windowless 1960s industrial buildings near the Rideau in cultivation and become a major exporter? Will Canadian River in Smiths Falls, Ontario, that houses its headquarters stock markets remain a hotspot for cannabis listings? Can and main processing plant still doesn’t have the wow factor legal frameworks and professional expertise be exported? of, say, the Googleplex in Silicon Valley or Elon Musk’s Giga- Most important, is time running short? Much of Canada’s factory in Nevada. But as you drive closer, the continuing first-mover advantage is based on the Trump administra- transformation of the old Hershey Co. chocolate factory that tion’s refusal so far to legalize cannabis nationwide in the Canopy bought in 2013 gets more impressive United States. What do Canadian companies have to do to The intense weed smell is the first surreal thing to hit you solidify their lead before the window of opportunity closes when you get out of the car. Canopy has now renovated the for them and another opens wide for U.S. giants? entire 470,000-square-foot factory. Across the street, cranes are at work on a new 150,000-square-foot bottling plant for cannabis-infused drinks, which will become legal in Cana- da’s second wave of legalization of marijuana for recreational use this October. Inside the main complex, the smell gets even stronger, and Can Canadian companies to anyone who has only seen pot in a small Ziploc bag or a create dominant global plastic bucket in a black-market dispensary, the quantities cannabis brands? are also surreal. There are 47 grow rooms, with hundreds There’s no Budweiser, Marlboro, Coke or Prozac of plants that yield an average-sized crop of 65 kilograms of of cannabis yet, or even a Tim Hortons. But Cana- flower five or six times a year. A one-kilo clear plastic bag of dian companies think they have a real shot at cre- buds is roughly the size of a pillow, and the entire factory now ating consumer brands as big as those ones. They produces more than 15 tonnes of cannabis a year. There are started building brands years before they had three machines that roll 1,800 joints an hour and an encapsu- significant sales, and Olivia Mannix, co-founder lation room that produces 37,000 gel caps an hour. and CEO of Denver-based marketing agency Can- A window in one hallway looks into a secure research lab, nabrand Inc., says the strategy makes sense. Cor- where two dozen scientists wearing blue coats, goggles and porate producers have to push beyond old stoner orange gloves are developing drinks, hard pills, edibles and stereotypes to win over mainstream consumers other products that aren’t yet legal in Canada. In the middle and investors. “It’s education about the product of the complex, workers are installing machines to make can- to prepare the market,” she says. nabis-infused chocolate. Under national rules for medical weed that took There’s also a visitors’ centre that opened last August, with effect in 2014, the biggest producers all introduced exhibits that review 5,000 years of cannabis history, and a brands that promoted wellness and fun, rather Tokyo Smoke café, a cannabis-themed chain Canopy bought than a wicked high (Canopy with Tweed and last summer. Just about the only thing you can’t do is actu- Spectrum, Aurora with grand-sounding strains of ally buy weed, because of Ontario’s still-restrictive rules on flower such as Thor and Ambition and the Can- retailing recreational cannabis. niMed and MedReleaf families it acquired, and “Remember, this is just No. 5,” Canopy chairman and CEO Aphria with Canadian-inspired names such as Bruce Linton boasts later in his dark cubbyhole of an office. Mohawk and Champlain). “Once Grandma and The Smiths Falls factory is Canopy’s main processing plant Uncle Ted are using cannabis to manage arthritis

34 APRIL 2019 / REPORT ON BUSINESS AMERICA GOES GREEN The number of American adults with legal access to recreational pain, it isn’t nearly so scary,” says Aurora’s Battley. cannabis is expected to more than double over the next few Now the licensed producers are trying to extend years. Currently, there are seven states, collectively home to some of those brands into the recreational market. more than 67 million people, with established pot-store networks that have been operating for at least one full year. Fourteen They’ve also introduced new ones with similar additional states have either recently legalized recreational upscale images, such as Aurora’s San Rafael ’71 and cannabis and are still in the process of setting up sales regimes, Aphria’s Solei. or are expected to make recreational pot legal in the very near By contrast, U.S. markets in states that legalized future. The population of those 14 states totals nearly 82 million medical and recreational cannabis early remained people—including some of the largest, such as New York, New Jersey and Illinois—suggesting substantial growth opportunities fragmented for years. Producers and retailers for existing companies in the United States’ legal cannabis still can’t move product across state lines. “It’s market will be coming soon. /Jameson Berkow really difficult to expand nationally,” says Beth- any Gomez, managing director of Chicago-based Brightfield Group LLC, a leading cannabis con- sulting firm. “You have to recreate your entire supply from one state to the next.” U.S. producers aren’t allowed to export either, and retailers can’t import from Canada. The U.S. federal laws against cannabis have pre- vented multinational giants in alcohol, tobacco, and pharmaceuticals from investing in the sector, so they have turned to Canada for their first initia- tives. Cannabis is a disrupter to those three indus- tries, as well as consumer packaged goods, yet it also provides all four with alluring new interna- tional growth opportunities. LEGAL NOW LIKELY TO BE LEGAL BY 2022 (WITHIN 3YRS) The inevitable big question: Isn’t it just a matter ALASKA ARIZONA MINNESOTA of time before giants of pharma, booze, tobacco CALIFORNIA CONNECTICUT NEW HAMPSHIRE and consumer products take over Canada’s early COLORADO HAWAII NEW JERSEY leaders or drive them out of business? Some say MASSACHUSETTS ILLINOIS NEW MEXICO NEVADA MAINE NEW YORK it’s already happening. OREGON MARYLAND RHODE ISLAND Last August, New York State-based drinks WASHINGTON MICHIGAN VERMONT conglomerate Constellation Brands, maker of Corona, Robert Mondavi Wines and more than 100 other brands, invested $5 billion in Canopy. In December, tobacco provider Altria poured $2.4 billion into Cronos. That month, British Colum- Countries around the globe are embracing medical marijuana. These are just bia-based Tilray Inc. announced joint ventures some of the nations that are moving with Anheuser-Busch InBev SA/NV, the world’s toward legalization. /Jameson Berkow biggest brewer, and Swiss pharmaceutical leader Sandoz International GmbH. THAILAND | In late 2018, lawmakers in Thailand legalized Both Cronos and Canopy say they are still running the use of medical cannabis, becoming the first country in Southeast Asia to make the move. Thailand also legalized the show from Canada. “It’s all us,” Linton insists. kratom, a locally grown plant traditionally used as a Canopy will develop, produce and market drinks stimulant and pain reliever. itself. Constellation will provide money, advice on PHILIPPINES | Despite Philippine President Rodrigo formulation, and expertise in branding and analyt- Duterte publicly offering to personally murder drug users, ics. “We are their cannabis world,” he says. the country’s House of Representatives is in the process of Linton may be calling the shots today, but it’s passing legislation that would legalize cannabis for a wide variety of medical users. clear that Canopy’s fate is now controlled from south of the border. Constellation has warrants, SOUTH KOREA | Starting in March 2019, South Korea will which, if exercised, would boost its stake in Can- begin allowing cannabis to be imported to the country for distribution to authorized medical users. However, their opy to over 50% from its current 38%. The alcohol numbers are quite small, given each patient must receive company also has the right to nominate four of individual approval from the national government. the seven board members, giving it effective con- FRANCE | Back in 2013, France legalized cannabis-based trol. Similarly, Altria has the option of boosting its medicines, but it’s still next to impossible for doctors stake in Cronos to majority ownership. to actually prescribe them. That could change as a Even with deep-pocketed international inves- government committee recommended in January that access be substantially expanded. tors, cracking into U.S. markets won’t be easy for Canadian companies. Brightfield’s Gomez and TURKEY | After decades of attempting to eradicate cannabis cultivation, President Recep Tayyip Erdogan other analysts say that when federal legalization announced in January the country would resume comes in the United States—something many production, starting with a pilot program in 19 provinces. expect to happen by 2021—Canadian brands will stand little or no chance of competing there.

APRIL 2019 / REPORT ON BUSINESS 35 FOREIGN AFFAIRS A large number of multinationals from outside the cannabis space have bought stakes and formed partnerships with Canadian growers in the past 18 months. Canada is one of only two jurisdictions where recreational cannabis is legal at a national level (the other is Uruguay), so foreign corporations have been forced to partner with Canadian pot producers if they want exposure to the product category. Two of these deals, involving Canopy Growth and Cronos Group, amount to acquisitions. Other partnerships involve joint ventures, allowing non-cannabis players to experiment with pot without fully committing. /Mark Rendell

CONSTELLATION ALTRIA and CRONOS AB INBEV, SANDOZ AG MOLSON and HEXO SCOTTS MIRACLE-GRO and CANOPY In December, U.S. and TILRAY The Molson Coors and FLOWR CORP In October 2017, cigarette maker Altria Rather than marrying Brewing Co. followed Although it has Constellation Brands Group Inc. became the a single multinational, Constellation into received less attention Inc., a Fortune 500 first major tobacco firm Tilray Inc. has the cannabis space than the flashier, alcohol maker from to go all in on cannabis, opted for a series of last summer through consumer-facing the U.S., bought a with a $2.4-billion partnerships. Last a joint venture with deals, one of the 10% stake in Canopy investment in Cronos spring the Nanaimo, Gatineau, Quebec- most interesting for around $245 Group. Altria now owns B.C.-based firm, which based Hexo Corp. The partnerships is million. Last August, 45% of the Toronto- is mostly owned by companies formed a between Hawthorne Constellation invested based company, with U.S. venture capital new firm called Truss, Gardening Co., the a further $5 billion options to acquire a firm Privateer Holdings, of which Molson owns cannabis-focused in Canopy, by far the further 10% stake. partnered with Sandoz 57.5% and Hexo owns subsidiary of U.S. largest cannabis deal Canada, a subsidiary of 42.5%. Molson has gardening giant Scotts to date. Constellation pharma giant Novartis not taken a direct Miracle-Gro, and Flowr now owns 38% of the International AG, to co- stake in Hexo, but has Corp., a small cannabis Smith Falls, Ontario- brand and sell medical 11.5 million share- grower in Kelowna, based grower, and marijuana products. purchase warrants in B.C. Hawthorne is has warrants which, In December, Tilray the company. Truss building a research and if exercised, would announced a joint is led by a former development centre bring its ownership venture with Anheuser- Molson executive and on Flowr’s property in level above 50%. Busch InBev to develop is developing cannabis- Kelowna, where it plans Constellation also cannabis-infused infused beverages. to test everything from gained the right beverages, with each lights to fertilizers to to nominate four partner committing ventilation systems of Canopy’s seven up to $50 million to for cannabis growing. board members. the project.

That’s because, despite the highly restrictive state-by-state be legal even after the next phase of recreational rules, strong national U.S. brands have already emerged. legalization this fall. “Black market weed is still Among suppliers of vaporizers, “OpenVape has really the best, unfortunately,” Looi says. nailed it and Pax has done really well,” Gomez says. “In topi- The legal selection is already far greater in many cals, Mary’s Medicinals has done very well. In edibles, there’s U.S. states. “We’re tracking more than 400 differ- quite a few, like Kiva.” ent vape pens in California alone,” says Gomez. To There are multistate retail chains as well, including three compare Canadian and U.S. providers, she says, that went public on Canadian stock markets: Curaleaf Hold- “go online and look at the Ontario Cannabis Store, ings Inc., Green Thumb Industries Inc. and MedMen Enter- and then look at the products that are available in prises Inc. “It’s not as if there are huge companies in Canada any dispensary in Las Vegas.” The restrictive pack- and just mom-and-pop operations in the United States,” says aging mandated for recreational product in Can- John Hudak, a senior fellow with the Brookings Institution, ada also inhibits branding—much of the space on who co-authored a study about the prospects for Big Mari- labels is taken up by health warnings. juana in 2016. Gomez and other analysts say that the best hope Selection is another problem hampering Canadian brands. for Canadian producers is to continue to move So far, Canada’s providers have only been allowed to sell into regulated foreign medical markets early. dried flower, pre-rolled joints and low-potency oils. That has That means signing deals with governments to allowed them to build capacity at home and start distributing become one of a small number of official suppliers or producing in countries where medical cannabis is legal. to patients. In the United States, Gomez says, “it (Uruguay is the only other country where recreational can- doesn’t make sense for them to try to sell a Canopy- nabis is legal.) But the only big competitive advantage Cana- branded flower or a Tweed flower. It makes more dian companies have been able to promote is the near-phar- sense to pick up a U.S. brand that may have more maceutical quality of their products, says Steve Looi, director awareness and more sophisticated branding.” of origination for Toronto-based White Sheep Corp., a small producer that also invests in other cannabis companies. THE VERDICT Meanwhile, black market brands and unbranded products Canadian Tire’s push into the United States continue to flourish. Illegal suppliers have been providing failed, Tim Hortons hasn’t made much a much wider and more potent range of products in almost headway, and BlackBerry ultimately flamed every country for decades, and a lot of them are very good out. Global prospects for Canada’s leading pot at it. In Canada, those products include gummy bears, hash brands look limited at best. oil, shatter (a hash concentrate) and others that still won’t

36 APRIL 2019 / REPORT ON BUSINESS Will Canada become a global leader in cannabis cultivation? It’s a snowy January day in Toronto. Pick up the The United States also beckons, of course— phone and ask Anna Shlimak, Cronos’s head of though there, too, it’s easier to set up separate investor relations and communications, if it makes operations or partner with local growers, rather sense to grow cannabis in Canada, and she laughs, than exporting from Canada. Linton points to pauses and then delivers a very deft response: Canopy’s reaction to the Farm Bill that President “From a geographical climate perspective, no.” Donald Trump signed into law last December. But as Shlimak and other industry executives The bill legalized the growing of hemp. Hemp explain, there are many other factors that influ- yields CBD—which is non-psychoactive, and has ence where they grow cannabis and how much. health and wellness applications—but not THC, One of the biggest so far has been politics. Gov- the stuff that gets you high. Three weeks later, ernments that want to legalize cannabis also want Canopy announced it planned to spend up to $150 to regulate and tax it, and create jobs and other million (U.S.) to build a hemp industrial park in economic benefits. This means that Canada’s big- New York State and lauded New York Senator gest producers will likely continue growing and Chuck Schumer, who pushed hard for the bill. processing large amounts here. Over the even longer term, prospects for grow- There are economies of scale in growing in- ing cannabis in Canada appear to be limited at doors and processing, which is why most of the best. “We’ve always looked at this industry from big producers raced to buy or build huge green- a global perspective,” says Tilray CEO Brendan houses and factories in advance of recreational Kennedy. “Cultivation will migrate south, closer legalization in Canada. In doing that, Canopy and to the equator.” others also looked to save money and win sup- port from municipalities by locating in depressed THE VERDICT areas. “That’s why we love Smiths Falls and York- Canada will have a healthy market for locally ton, Saskatchewan, and empty greenhouses in grown cannabis, but we won’t be a big exporter. Niagara-on-the-Lake,” Canopy’s Linton says. However, Canadian companies will have But in expanding globally, executives say they substantial cultivation facilities abroad. won’t be exporting much from Canada. Broadly speaking, growing in greenhouses is cheaper than growing under artificial light in factories, and growing outdoors in warm climates can be even cheaper than greenhouses. Linton and other exec- utives also doubt that governments will permit a large-scale international trade in cannabis any Will Canada remain a global hub time soon. for cannabis stock listings? Combine politics and economics, and cannabis Three years ago, MedMen was a cannabis dispen- will likely be produced and distributed within sary in West Hollywood with a small growing oper- countries or regions in the early years after legal- ation in nearby Sun Valley, California. Last May, it ization. “We plan to be your local producer,” says went public on the Canadian Securities Exchange Cam Battley of Aurora, which is now active in 22 (CSE) in Toronto through a reverse takeover of a countries. shell company and raised $143 million, giving it an All of Canada’s biggest producers have moved implied enterprise value of more than $2 billion. fast to set up foreign growing and distribution Dozens of other new Canadian and U.S. cannabis operations, mainly through joint ventures. Medi- companies have also hit the jackpot on Bay Street cal cannabis became legal in Germany in 2017, over the past five years. Canadian stock markets— for example, but the country had no large-scale the TSX and its Venture Exchange, and the smaller production of its own, so Canopy, Aurora, Aph- CSE—have become the hottest cannabis venues in ria, Cronos and Tilray quickly established local the world. According to data from New York-based operations and began exporting there. Viridian Capital Advisors, which specializes in The trans-Atlantic shipments won’t last, how- cannabis financings, public and private cannabis ever. Denmark allowed bulk exports beginning companies raised $14 billion (U.S.) worldwide last this past January, making it a front-runner as a year, four times the total for 2017. Of that, almost production hub for the European Union. Canopy, two-thirds was raised by Canadian companies. Aurora and Aphria had already formed joint ven- That surge has also brought notoriety. There are tures to produce there. still plenty of mainstream portfolio managers and Tilray chose a different entry point. It set up analysts who dismiss the boom as a bubble. And outdoor growing fields, greenhouses and a factory many American companies have trekked north in Portugal in 2017. Cronos established a joint ven- to raise money because they couldn’t conform to ture in 2017 with Kibbutz Gan Shmuel in Israel, U.S. federal law and the listings requirements of which will be able to ship to Europe. All five of American exchanges. those Canadian producers have already estab- Yet, in many ways, that notoriety has helped mid- lished beachheads in Australia and Latin America, tier Canadian investment dealers become lead- as well. ing players in global cannabis finance. Canada’s

APRIL 2019 / REPORT ON BUSINESS 37 THE CANADIAN CANNABIS RED CARPET Big Five banks and Wall Street’s largest dealers Many cannabis companies are tapping wouldn’t touch cannabis for years, and are now into international and homegrown arriving late to the game. According to a ranking celebrities to boost their brands by Dealogic, a London-based global provider of financial data, in 2018, three of the top five firms in cannabis mergers and acquisitions worldwide When drug-and-booze-free Kiss bassist were Canadian, led by early cannabis backer Gene Simmons became a partner in B.C. cannabis company Invictus, it changed Canaccord Genuity. It was also the top firm in can- its stock ticker to GENE nabis IPOs, followed by BMO Capital Markets, the first of the Big Five to embrace the sector. But Dea- logic’s rankings also show that several Wall Street firms are catching up, including established giants Goldman Sachs and Lazard Ltd. Is Bay Street’s lead in cannabis sustainable? His- tory offers some encouragement. Canadian stock markets were established in the late 19th century in large part as forums for mining companies to Newstrike Brands Inc., the parent of Up raise money. Many of the smaller issues were and Cannabis, is partially still are sketchy, and Bay Street has been tarnished owned by members of by plenty of mining scandals over the years. Since the Tragically Hip 2000, much of Canada’s mining industry has been hollowed out, as giants such as Noranda and Inco were swallowed by foreigners. Even so, in 2017, 59% of global mining financings were done on the TSX or the Venture Exchange. Tilray’s Brendan Kennedy, however, is skepti- cal that Canada can remain a centre for cannabis financings. He created a sensation in the industry last July when he took his company public not in Toronto, but on Nasdaq. U.S. markets would not allow suppliers who did business in violation of federal law to list, but they have allowed Canadian companies with no U.S. operations, like Tilray. It was the hottest cannabis IPO of the year. The Atlantic Canadian company raised $153 million (U.S.) by selling a hash lovers the Trailer minority stake at $17 (U.S.) a share. The stock WONG Park Boys have a then skyrocketed to a peak of $300 (U.S.) one day branding partnership with OrganiGram in September. Tilray briefly surpassed Canopy, JOHNNY Holdings Inc. which has a market cap of about $16 billion, and

established corporations like Barrick Gold Corp. DENETTE/CP; (SHEBIB) Snoop Dogg has a Since then, Tilray’s share price has drifted back Cooking and decor partnership with Canopy guru Martha Stewart and levelled off around $70 (U.S.). HO/CP;

Growth and has made NATHAN is developing a new venture investments in Kennedy deliberately steered clear of Toronto to line of products with vape hardware company raise money. He says Bay Street’s cannabis market (SMITH) Canopy Growth (BOYS) Green Tank Technologies now seems to be dominated by speculators, rather and cannabis inventory platform Trellis than savvy and patient institutional investors.

Watching Toronto’s pot stock boom from a dis- BASTEDO; tance—Kennedy is based in Seattle, and commutes Kevin Smith and Jason Mewes, who played pot DAVID

to Tilray’s Nanaimo, B.C., headquarters by plane— NACION/STARMAX; dealers Jay and Silent Bob in various movies and he’s felt alarmed. “Frankly, I was surprised so many (HIP) TV shows, have a licensing deal with Beleave Inc. Canadian companies went public so early on the JOHN TSX,” he says—at an earlier stage in their develop- ment than new companies in Silicon Valley. (STEWART)

Noah “40” Shebib, Kennedy also thinks the boom is turning into WINTER/GETTY; co-founder of Drake’s a zero-sum game. New investment is drying up, OVO Sounds, recently KEVIN co-founded cannabis which will slow deal flow, and investors already company BLLRDR in the game are trading among themselves. He expects more leading cannabis companies will NEW/REUTERS; M C shift south to raise money. (SIMMONS)

U.S. markets offer natural advantages, such as DAVID the opportunity to pitch to more blue-chip portfo- lio managers. Another point in favour is being reg- (SNOOP) PHOTOGRAPH

38 APRIL 2019 / REPORT ON BUSINESS A soft power in cannabis ulated by Washington’s Securities and Exchange If you’re a flag-waving Canadian, you might feel a bit disappointed to Commission, rather than a patchwork of Canadian hear that we are unlikely to build giant global cannabis brands or export provincial regulators. mass quantities of our bud around the world. The Toronto pot-stock While cannabis companies that do business in boom may indeed run out of gas soon, as will the lucrative spinoffs that violation of U.S. federal prohibition can’t raise go along with it. But that’s no reason to cry into your foreign-controlled money there using the Wall Street banks, new laws Molson or Labatt beer. making their way through Congress are expected National legalization of medical and recreational cannabis gave Cana- to lower and in some cases even eliminate those dian companies a lock on the domestic market and a real head start abroad. hurdles. The Secure and Fair Enforcement (SAFE) Many countries are adopting similar rules, and Canada will continue to Banking Act, as well as the Strengthening the have outsize influence in the regulatory and political worlds as more Tenth Amendment Through Entrusting States jurisdictions examine the Canadian model. Already, Canada has seen vis- (STATES) Act, have support in both the House of its from Mexican government representatives and shared information Representatives and the Senate, and are expected with several U.S. state governments. Our experts and consultants are to pass both chambers of Congress at some point also uniquely qualified to help other countries set up cannabis markets. before the end of the decade. Asked whether such “You have national acceptance and a regulatory framework that can legislation would slow the rapid pace of American be followed around the world,” says White Sheep CEO Hamish Suther- cannabis companies going public in Canada, GMP land. Prior to founding his own company, Sutherland was chief operat- Securities analyst Martin Landry said, “Yes, abso- ing officer of Bedrocan Canada, one of the first big licensed medical lutely—they would dry up overnight.” producers in Canada, which Canopy bought in 2015. These days, he’s So, does this mean Bay Street’s window of spending a lot of time in Australia and Lesotho, advising on the con- opportunity for becoming a global cannabis finan- struction of two huge growing and processing facilities. cial hub is closing? “I think it’s already closed,” Sutherland argues that Canadian consultants and companies will ben- Kennedy says. efit if other countries continue to open up their legal cannabis markets in similar ways to what Ottawa did. This would give Canadians time to THE VERDICT keep replicating abroad what they have done at home. For the moment, Once legislative changes make it easier he says, “We have such a lead, no one else can touch us.” for cannabis companies to list in the U.S., Our cannabis companies might not be destined to be global giants, but new foreign listings in Canada will dry up. we are still likely to punch above our weight on the world stage. With files from Mark Rendell and Jameson Berkow. Congratulations to these recent appointees

Michael Stoyan Yasir Naqvi Erin Tait Todd Craigen Phillip Crawley, Publisher to Managing Partner to CEO to Managing Partner to President, & CEO of The Globe and Fuller Landau LLP Institute for Koffman Kalef LLP Eastern Canadian Canadian Citizenship Buildings & Mail, extends best wishes to Civil Infrastructure the following individuals who PCL Construction were recently featured in the Report on Business Section of The Globe and Mail newspaper. Congratulations on your new appointments.

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PHOTOGRAPH PHOTOGRAPH scr not wa helped inclu sumption RW clima we te timent sust of designs with sust gr a po sting Bu Si No ound Co te ’r aper DI nc be ainab ainabilit e in t r w ding clima lin te RW re fr e t al as is wo of s, RW in Jac a se Bridge; Ta of a Irwin (to CE the om chang of sponding building to Wi re model hand-made wo bu co ns DI’ se le-building the to Wa O p) its rk ob and the dif te asons, DI Lak ener lliams, or ma Michael xy we t rk sho Wi s shingt fo y Squir tu ther herit s fe chang e. clima te te is ing gr rs r as fo nnel Narr nd CO with e re ” ws chnician RW gy st, s r ex Ont oup ar ” e’ its ntia e Tu to te ac ag on with 2 off ows the sa s ex br To of str building building cube. 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To “C ansport mped design car is ements by at the y so seemingl ve While as thr pa er th. , rt abou the t ” ex or along wo be shingt ther a wind-tu lima ro ad Fo go lop wo we sit re ly in ss sa the of use RW ough CO wo fir s, pa Be ws in nt and ove ded str r rl wo es tr ys y 40% fr 20 wh t rk up ar st e can nding vo En d’ cause and a te go rk o fo ofi 2 . of om DI dr po at ear might be es and ar with -e rl Mik 15 “Labor e s r onl on, emis deep-lak building at rmanc fo lve to wa pr a -t ion y af and has tt d, ama sed at we mine-is-bigg e To . yo ve ener is nnel of find ly co o unding les da “Sno Cl smaller we ing es te onl y opportunities designing ve, d sa D.C e the nd r wind ro sk r by glob its and co hea much fo glob ga “M and go ing mor tions ing Re has Wi nst sions r ima sur y fo led by s micr in clima ticall seem Wi fe gr do gy y nt yl wa RW Fo at otprint mor hea ther te indi RW e ntr and ve r sear helping w- CO gu .—in lliams Si et antl ids 20 t mor e ines clima is co o ories, lliams, ,” curt te pub e the sting an al al to e curr ys s. r hog wa rnment ckKids engineering eor of ar acts fo pa lo to oclima ting 0 DI re demand in sa to de DI demand vidual Wi co 2 y s e Zone te imp ener fa ch minor “W to y mor ding to r ad ong pa ve and e emis co rtner duc ys lic uches: en than in cu ain re the ological the s, iling -r oling changing building ent building bought morr to te pr lliams, er-than- than Co fr to design . rk ” pu fo with in oling e’ esiliency duc studies lica Wi vir the t or tr Th gy e om oing ov ed, hea sa chang include app its re wa ing pr r the 5 ne urb re uncil sions. t wint ansit te pr clima , tha ga clima policy of 10 onment, because lliams, ys a e to bu mostl ided tions, e co oc ow 19 sear sys ow fo fo 1, looking xt ll ojects. the Fo behind d niz is a To scienc lies, 0 spots—“t and ener an RW APRIL t 000 building’ t 90s Zone Wi nsumption, es r r co ra fo Wi to re of er tha ,” firm. s co r 20 yo on building e n bec te ev to use ro co at co and cit te te ch pl tha s. Wi the ther r pl da . n co sust and ntr Wi lliams, y m me DI. pr RW ev ur hea because ions lliams’ ery as gy nt ad laid upda ol is a 20 ye anet oling the pr t anning ys of da co oming ,” bridg ta rd to It e lliams t edictions of wa notion 4—the s en using ses o act 2, 19 the lliams bu wind apt wh air ar ojects. re cape ainabilit he with co “Bu and at ta ting wh nsulting we equipment ma than DI’ s sk tha bit 000 son or / to the ad rming o s, on quir t go te benefits. sment REPOR s n- y- abilit sho ho sa at during s, wh in with r, o y at also enc e s s “so t t apt he co Va ener da the ing a a ys ’s wh is wh scien- wh w floor- the those e eel sa sa glas local w unts, of nc ta One our- . sa most also T les yo to y. y— the er curr pl me ich fo ba en ys and the ON gy ther the ys ou of in influencing fu of u anet. a e a s s r ck , RW the BUSINE tur le pr ve his ent Na co pr ex e ve 50 olong r e, DI will carbon escrip- mp citing. Vo l, tional build- build- ” ye SS ha sa also an lvo. ar be ed 43 ve ys y s - Our online business is very strong, particularly in the Last Word drugstore business. It is growing by double digits, but surprisingly, even our brick-and-mortar business is growing. Brandt Louie We must offer something the consumer likes. - We get letters all the time saying, “We used to shop with Third-generation owner and CEO of H.Y. Louie Co., you when we lived in the West. When are you coming to parent of Western stalwart London Drugs. Toronto?” Our businesses are very well known in Western Employer of thousands. Father of two Canada, and we know it would be a tough fight going east.

- I was the third generation to run the business, and last year - My grandfather came to Canada in 1896, and in 1903 I transferred it to my sons, who are joint presidents—though he started a general store in what is now Vancouver’s I’m still chairman and CEO. They’re married with children, Chinatown. It originally served Chinese immigrants, so I see the fifth generation being developed. Hopefully, but eventually he developed it into a wholesale operation. we can continue to be a successful family business. It continued like that until 1926, when he incorporated into H.Y. Louie Co. Ltd.—the company that survives today. - It’s very difficult, if you’re the founder of a business, to let go. But being the third generation, I’ve merely inherited that - We got into retail operations with the IGA franchise and responsibility, and I’m quite prepared to give it up to the next expanded that into a second banner called Fresh Street. generation when I think they’re ready. In 1976, my father purchased a small chain of drugstores, London Drugs. For the next 25 years, he grew those 10 stores, - My sons were brought up to be each other’s best friend. and today we have over 80 stores in Western Canada. We’ve They know their own strengths and weaknesses. They rarely bought into a number of other businesses over the years, have disagreements, but when they do, they actually sit and we now have about 10,000 employees. down and talk it through.

- My father didn’t believe anybody should come into a family - I come into the office every day. I’m in charge of running the business as soon as they finished school. He believed they two family foundations—I take my role in philanthropy very should go work for somebody else—let somebody else seriously. I also like to see what direction my sons are going. train you, where there are no safety nets. I trained as an I’m not afraid to speak up when I believe we’re going in the accountant. My son Gregory is a doctor, and my younger son, wrong direction, but I’m also not afraid to admit they may be Stuart, is the lawyer. doing something I couldn’t do. O LIA

- We don’t make short-term decisions, because we’re a - I recognize that maybe I’m not so much in touch with private company. We’re not having to show every quarter the millennial shoppers today, so it’s nice to have younger GUOMAN that we can increase profits and sales. And we don’t believe people provide that input for me. /Interview by Sarah Efron APH in using public money. We prefer to do our expansions with GR TO our own funds. It’s a lot slower, but you sleep better at night. This interview has been edited and condensed. Read more at tgam.ca/r PHO

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TIME FOR MY CAREER

TIME FOR MY MBA

I wanted to get my MBA to focus on business - First Nations are lacking in science, law, and business assistance. With my MBA, I could get out there and see more, spread my wings more, and most importantly, be able to help First Nations in any capacity.

Carter Yellowbird, MBA ‘12 Based in: Maskwacis, AB 2019 1994 1995 1997 1999 2000 2004 2006 2009 2012 2014 2015 2018

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