“These are extraordinary times. Our government is taking extraordinary measures”, Prime Minister Trudeau said recently. “The measures we’re announcing today will provide up to $27 billion in direct support to Canadian workers and businesses, plus $55 billion to meet liquidity needs of Canadian businesses and household through tax deferrals to stabilize the economy.”

$82 billion – in other words, the federal government is proposing to spend upwards of 4% of Canada’s GDP to counter the economic fallout of COVID-19. It is fiscal stimulus that is warranted by the economic conditions in which we find ourselves.

Unfortunately, the headline number is more impressive than the impact it will have: the policy as currently designed will fail to help 90% of Canadian companies. It will fail many of our most vulnerable workers. We need to understand why to advocate for the stimulus we need. Canada needs to rethink its approach to fiscal aid in the short window of time we have to act.

Let’s begin with a reminder of economics to help put things in context.

The economy and where it was prior to this crisis

The economy in its simplest understanding is the sum of all transactions that make it up. It is measured by summing up the production and consumption of all goods and services. In the long run, economic growth is driven by productivity growth. In the short run, economic growth is driven by how much people and businesses spend (consumption).

Governments, through central banks, have two tools to influence how much spending happens: adjusting interest rates and printing money. They can promote spending in times of slow growth by making it more attractive for companies and people to borrow money (lowering interest rates and making access to credit easier), and they can discourage spending in an overheated economy, by raising interest rates and tightening access to capital. In this way, they influence the credit market – the market for all the debt in society (individual, corporate and government).

While most people fixate on stock markets, the credit market is far more important to understand. Credit markets enable the flow of productive transactions between people. Were the economy a body, the credit market would be its cardiovascular system, pumping blood to regions that need it. The overall size of the US credit market is twice the size of the entire value (even pre crisis) of all US equity markets.

Credit itself is neither good nor bad. Too little credit in an economy stifles growth because it means productive assets don’t get purchased. For example, when there is not enough credit, the farmer can’t get the loan to buy equipment that will make him 10x more efficient in his fields. Conversely, too much credit burdens the economy with debt and unproductive assets. When there is too much credit, people (and companies) overextend themselves on nonproductive assets, like taking out a second mortgage to buy a vacation property beyond their reasonable means.

Over long periods of time (decades), societies go through many businesses cycles and accrue progressively more debt. Each business cycle sees an expansion of credit and a period when debts are repaid. But overlaying this cycle is a multi-decade trend towards debt accumulation. Eventually, a society’s debt burden grows so big that debt levels are high across virtually all levels of the economy. Interest rates are usually low by this point and the credit lever ceases to function properly. When policymakers reach to pull it, unsurprisingly, less spending comes out.

This was our economy before the present crisis hit. During the financial crisis of 2008-09, central bankers around the world had to move aggressively. They dropped interest rates to zero, engaged in quantitative easing (large scale bond buying), and saved the financial system from collapse. What ensued was a massive but temporary (see the small blip on the graph) deleveraging of debt around the world. Since then, debt has again steadily accumulated at every level of society.

Now Canada reels from exposure to two economic shocks – a big drop in global oil prices and the repercussions of fighting a pandemic – and finds itself with a limp monetary policy weapon. While central banks like the Bank of Canada have been responsive to the crisis, they can only do so much. Zero percent interest rates can’t cure a pandemic-led recession like this.

The policy tools we have

Canada now has to coordinate fiscal and monetary stimulus in order to adequately limit the damage from the pandemic. And for the reasons stated above, fiscal stimulus (direct intervention in the economy by the government) must play the leading role.

It’s not that monetary policy is totally useless. Like other central banks around the world, the Bank of Canada has been intervening in bond markets to ensure liquidity and market function. This has been absolutely critical because many credit markets are loudly groaning under the pressure of these shocks. For perspective, US Treasuries – formerly seen as one of the safest financial havens (other than cash) – have been selling off. They “should” be rallying. This tells you how extraordinary these times are.

But there is noticeably less ammunition. Interest rates were already near zero when this crisis began; our collective debt load was already high. This is why markets haven’t responded positively to the substantial announcements made by central banks: no amount of “free money” incentivizes people to go outside and spend during a pandemic. Citizens are doing their duty to stay home! We need to appreciate that digging ourselves out of this crisis will consequently be much harder, especially if we fail to deliver well-targeted fiscal stimulus.

Canada’s fiscal response

To date, the federal government has made pledges to support both individuals and companies. In this article we will focus on the ways the government is supporting business, because while citizen support also clearly matters, the package fails individuals less egregiously than it does Canadian workers and enterprise.

First, the facts. The government response comes down to two big pledges. The first is a commitment of $55 billion to buy the debt of corporations if necessary. The second is $10 billion in loans available to the SMEs (small and medium sized enterprises) through the Business Development Bank of Canada.

The $55 billion to ensure corporate debt markets remain liquid is necessary. In recent weeks corporate credit markets (like other bond markets) have been hammered. At a time when we need to keep employers afloat, the federal government is right to ensure there are no liquidity-related bankruptcies; no one would benefit from the collapse of the entire airline or hotel industry. This is a responsible policy choice.

What about is the $10 billion in loan availability to SMEs? While this will probably depend on the business, many companies will find it lacking. For starters, the BDC has said that $5 billion will be dedicated to those businesses that can prove a “direct impact by COVID.” Many companies won’t be able to prove this. Moreover, even when they can, many may feel uncomfortable with destroying their balance sheets just to kick the can down the road.

This brings us to the big problem with Canada’s current COVID-19 fiscal response. In this crisis, our greatest economic priorities must be to protect our collective future and safeguard the most vulnerable in the population. The most economically vulnerable in our population are the people who can’t afford to not work. Yet the current package for businesses is aimed at keeping corporations alive – by loading them up with debt - not saving jobs.

The deficiencies with the current approach become even more apparent when we look at the numbers. In Canada, SMEs employ 89.4% of the 12 million individuals working in the private sector.[i] Yet few SMEs will find useful support in this package and those who do must drown themselves in debt first. This is hardly the way to support companies that employ 90% of our private sector workers. And it’s worth mentioning that it also won’t boost national demand.

Of course, technically, the government has offered businesses some wage support. The current package proposes wage support of 10% up to a maximum per company of $25K. But anyone who actually runs a business knows $25K is symbolism at best. In no way does this package effectively counter job loss.

Starting the car in the cold: alternative strategies

Every Canadian knows that a car left abandoned in the cold is way harder to restart than a vehicle whose engine has continued to run. This should be the overarching economic lesson that guides the fiscal stimulus given now. We know that the pandemic will eventually end. Everything we do in the next few weeks and months will dictate how well and how fast we recover once everyone feels safe again.

Bold strategies are needed but not yet given. As a starting point, the government should be aggressive with job share support (currently maximized at $573 per month). For example, in Denmark, the government will cover 75% of the salaries of employees paid on a monthly basis who would otherwise be laid off. For hourly workers covered by the agreement, the government will cover 90% of their wages up to $5,000 per month per employee. Similarly, the UK will pay 80% of the salary for all staff kept on by their employers, covering wages of up to £2500 a month.

Instead of debt, what if the government split the salary difference with companies for a few months? This would cut the burden for companies in half, allowing them to keep their workforces whole. True, it would be an exceptional move but then these are exceptional times.

The government should also directly help SMEs since they employ 90% of our private sector workforce. SMEs require immediate help ensuring viability– and should not be forced to take on unsustainable debt to do so. There are a number of different partnering, backstopping and deferral strategies that the government could undertake on this front.

Fixed costs of business, like rent and leases, insurance, taxes and royalties could be temporarily subsidized or deferred. Again, there are a number of strategies that can be undertaken to protect current asset holders (like landlords) while focusing on the short-term viability of business.

Beyond this, there needs to be a P3 approach (public private partnership) that enables the purchase of troubled assets and encourages capital spending. A fund should be created to support this. In past crises, similar funds (TARP) have been set up to support government acquisitions. A more effective approach now would be for companies with strong balance sheets (not governments) to acquire the troubled assets and companies. If the government can backstop some capital project risk alongside private enterprise, it will encourage investment and maintain employment.

A new crisis with new needs

An extraordinary confluence of events has hit Canada and the world. For many businesses, customers have temporarily gone away and there is extreme pressure to remain viable while maintaining the workforce.

While I do not have the franchise on all workable policy ideas, I do know we must do better. COVID-19 will end. $20 WTI will not last forever. Eventually we will climb up the right side of this economic wall. But the car that has kept its engine running is easier to restart. Our economy will come back stronger and faster if business is maintained and strong and dedicated teams are left intact.

The Prime Minister is right that these are extraordinary times that demand extraordinary measures. But the current fiscal package reflects dated thinking. We need to make immediate amends to it. Now is the time to be bold.

[i] According to Statistics Canada, a small business is less than 99 employees and a medium business is under 500 employees.

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“Greed, for lack of a better word, is good.” These words immortalized by 1987 fictional character Gordon Gekko represent more than the line that earned Michael Douglas his first Oscar. They speak to an idea that has long ensnared capitalism: “good” business is greedy business. It concentrates on shareholder interests alone.

When I was in college, I pursued a Master’s degree in economics. The unimpeachable belief at the time was that the sole purpose of the corporation was to maximize shareholder profit. The theory - first introduced by Nobel Laureate Milton Friedman in a 1970 essay - argued that a company has no social responsibility to the public or society; that its only responsibility is to its shareholders. This doctrine ultimately became so influential, it defined business practices, government policy and all business school instruction for nearly half a century.

But then things shifted. While corporations had been, without question, the source of global economic prosperity and growth for much of the twentieth century, public trust in them had been steadily eroding. By the time Wall Street requested its bailouts during the financial crisis of 2008, distrust had calcified to such an extent that “the corporation” had become synonymous with inequity, misdeed and environmental degradation. License to operate for “shareholders alone” was effectively lost. Now, companies had to consider the impact to their people, society and the environment.

Like with most things that die, the failure of the Friedman paradigm has given rise to a reimagining – this time, in the very purpose of business itself. This is where we find ourselves today. Leaders and economists grapple with questions on the moral responsibility, purpose, and social impact of business.

But for all this evolution, people remain profoundly confused in one area: we still imagine we can “be good” or we can “do well” but we cannot do both at once. There remains a deeply held association between the financial results of a company and its self-interest.

It is time to dismantle this final vestige of Gekkian philosophy. Not only are “good” and “well” not trade-offs in business, having purpose can be a source of competitive advantage in commerce. Good can be harnessed to great effect.

The seesaw

Let’s imagine a seesaw. On one end sits a little girl called Good, who cares about her classmates, her teachers, and the school grounds. Whenever someone is injured in class, Good is there to lend a helping hand. On the other end is a boy named Well, who is a gifted athlete and student. Well excels in everything he touches, but is blind and deaf to the needs or wants of Good and her friends.  Good and Well sit on opposite sides of the seesaw: when one goes up, the other goes down.

This is the way that purpose and profitability are typically framed in business. It is a reflection of the theories for which Friedman won his Nobel prize. If a company deigns to focus on anything other than shareholder interest, it will invariably cut into profit.

The problem with this thinking is that it doesn’t reflect reality. According to this logic, “greedy” business (companies that focus on shareholder returns) should always outperform “purposeful” business (companies with meaningful missions). But this is simply a misconception.

Were conventional thinking correct, we wouldn’t see long-term returns in purposeful companies outperforming the stock price of conventional ones. But  purposeful equity frequently surpasses conventional equity in both public and private markets. For example, in one study by HBS professors John Kotter and James Heskett, purposeful and value-driven companies outperformed their counterparts by a factor of twelve over a ten-year period.1 Meanwhile, in a study of over 450 private equity deals over a five-year period, Bain and Company observed that median multiples tend to be higher for deals with social and environmental impact (3.4x) than those without (2.5x). 2

These results falsify the trade-off assumption implicit in the Gekko-Friedman paradigm. They beg the question, what IS the relationship between “good” and “well” in a company? And is there something fundamentally attractive about purpose?

Gravity

Adam Lowry and Eric Ryan were childhood friends from Grosse Pointe, Michigan before they were ever entrepreneurs. But in 2000, the young men joined forces to launch a highly disruptive start-up. Their target? Soap.

They called themselves Method. And from a tiny apartment in San Francisco, Lowry and Ryan brewed soap batches in a bathtub, with the hopes that they would one day steal market share from the likes of Proctor and Gamble and Clorox. The dream was to counter the toxic and wastefully packaged household products that dominated the market at the time. Lowry and Ryan sought to disrupt an industry by introducing environmentally friendly, nontoxic products to the masses.

Conventional logic said that Method shouldn’t make it. Indeed, they barely did. At one point, the two founders had but $16 in their bank account, having blown through the $100,000 in seed capital they had both invested.3 The company was squaring off against multinational corporations with established positions, brands and retailer relationships. But what Method lacked in resources they made up for in purpose, product innovation and tenacity. The Method founders firmly believed that mainstream demand existed for green products – they were right.

Today Method generates over $100 million in revenue per year. It sells household soap and detergent that are nontoxic and come in packaging that is closed loop and biodegradable. Customers are willing to pay a premium for the brands, big retailers stock the product, and the company has access to high quality talent because of its reputation for innovation and purpose. In other words, Method has competitive advantages (brand and talent) that extend from its purpose. It has been successful precisely because it never concentrated on profitability alone. So much for the seesaw.

In a world in which stakeholders matter and are vocal, a better way to conceptualize the relationship between “good” and “well” is gravity. According to this mental model, companies are like masses in the universe, competing to attract customers, capital and talent: the greater their mass, the greater their attraction, the more they can pull desirable resources and assets to them. In this universe, being “good” is a source of mass.

It is easy to see why this would be the case. When an organization has a meaningful purpose in the world, it has an easier time attracting top talent. When its products and services reflect values with which its customer base associates, it has an easier time differentiating the brand, demanding price premiums, and generating sales. Finally, when companies possess attractive ESG traits, they are less likely to lose capital from concerned investors and more likely to earn it from impact-oriented ones.

This isn’t just theory: many studies demonstrate the benefits of purpose. For example, according to one 2016 paper in the Journal of Accounting and Finance, “there is evidence that the investment returns to brands run on conscious capitalistic principles have been 1025% over the past 10 years vs. 122% for the S&P 500.” 4  That same paper noted that a majority of consumers would be willing to pay higher prices for products or services made by socially responsible companies, and would avoid or boycott products produced by companies found to act in an irresponsible manner. This is in addition to the studies that highlight the relationship between meaning and job satisfaction. For example, in one study, Harvard Business Review found that 9 out of 10 employees would be willing to trade a percentage of their lifetime earnings for greater meaning at work – on average, they’d be willing to give away up to 23% of future earnings to work somewhere meaningful. 5

I’ve seen this in my own experience, too. Over the past thirty years of my career, I have had the privilege of working with many fine men and women in the finance, construction and the oil and gas sectors. By far the most committed employees I’ve ever seen are the ones we have today at Backwoods. This is no slight to the great people I’ve worked with before, but at Backwoods, there truly is a higher calling. Tremendous economic disparities exist between indigenous communities and the rest of Canada: our staff understands this and deeply appreciates how what we do contributes to addressing this problem. It makes coming into work every day with some fire that much easier.

Why this matters

A month ago, world leaders convened in Davos for the World Economic Forum. Seven major themes were presented; among them was one called “better business.” Clearly, there is worldwide recognition that businesses must better respond to the needs of the people, society and environment they serve.

What is less appreciated is potential. As the CEO of Backwoods, a purposeful business that grew its revenues to $120 million in 5 years, it still astounds me how many CEOS cannot understand that good business is good for business. Of course purpose can be profitable. In many instances, it is more profitable over the long term.

Good can be harnessed and made to be a competitive advantage. Backwoods and Method are but two cases where this has been achieved – there are more. Leaders who see this have the potential to have meaningful impact, not only on their bottom line, but also in the lives of their people and in the world. That’s an exciting prospect.

References

1. Kotter, J.P., and J.L. Heskett. Corporate Culture and Performance. New York: Free Press, 1992.
2. Yang, Kiki, and U Akhtar, J. Dessard, and A. Seemann. “Private Equity Investors Embrace Impact Investing” Bain.com, Web. 2019
3. “How Two Friends Build a $100 Million Company” Inc.com, Web
4. Gerstein, Miriam, and Hershey F. Friedman. “The necessity for a new kind of accounting: conscious accounting.”
   Journal of Accounting and Finance. 2016, Vol. 16, No. 1, 63
5. Achor, S, and A Reece, G. Kellerman, and A. Robichaux. “9 out of 10 people are willing to earn less money to more meaningful work” HBR.com, Web. November 6, 2018.

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I recently read some research by Professors Stephen Dimmock and William Gerken that looked at the contagiousness of employee fraud. Their findings showed that, in essence, even your most honest employees become more likely to commit misconduct if they work alongside a dishonest individual.

As I thought how this applies to our (or any) organization, I recalled too many examples where we recognized, discussed and debated an employee that was systemically debasing our company virtues but did nothing about it.

There are always common themes (excuses): “If we let him go right now, we put the company at risk” or “Look not everyone is going to be a poster person for our mission” or “Yes their attitude kind of sucks but they are actually doing their job” or "We just need to reset expectations".

Nonsense! In fact, more than nonsense, it's dangerous to the health of your organization and profoundly unfair to the rest of the team members. There is a saying in the safety world that a new employee to a site will observe the behaviours of those around him and emulate that behaviour (good or bad). Therefore, if everyone is doing the right thing, they are much more likely to follow suit. This is true for every part of an organization.

Leadership and management must guard against their own biases and inherent need to rationalize their own indecisiveness. Simply put, do the right thing. It is never pleasant and any dismissal must come with a high dose of introspection.

Do the right thing for the health of your team. Act swiftly and send the right message. One bad apple can indeed spoil the bunch.

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