Canada: Growing Value from a Base of 'Good Soil'

Last Updated: October 6 2015
Practice Guide by Duff & Phelps

Written by Jeff Buckstein

Adversity need not be a barrier for corporate executives in successfully creating shareholder value when market conditions are less than ideal, and a standard blueprint is not required in meeting goals, according to a recently released report sponsored by the Chartered Professional Accountants of Canada and Canada's Venture Capital & Private Equity Association (CVCA).

"The best analogy I have is a farmer needing good soil to grow their crops. It doesn't necessarily matter what you're growing. Unless you have fertile soil it doesn't work. I think that was the revelation within this paper ... no one size fits all," said Howard Johnson, managing director of Veracap Corporate Finance Limited in Toronto.

"Shareholder value can be accomplished [with] different companies pursuing different strategies," added Johnson, author of the CPA Canada/CVCA sponsored Strategies for Creating Shareholder Value in a Low- Growth Environment.

The report emphasized the commonality of several themes in the corporate pursuit of shareholder value, including the strength of a management team that espouses open and frequent communication, an emphasis on establishing an organizational culture grounded by passionate employees, attentiveness to customer needs, maintaining a progressive approach to risk management, moderate use of debt in the corporate capital structure, and the ability to maintain a long-term perspective.

"A lot of companies will talk about open and frequent communication, but the question is 'how well do they do it?' " Johnson told The Bottom Line.

Strong communication is particularly important as companies expand their global presence. Those employees feel better informed and as such are better able to make decisions that are in line with corporate policies and objectives, he added.

"I think that was the revelation within this paper ... no one size fits all. Shareholder value can be accomplished [with] different companies pursuing different strategies."

When employees are passionate about their jobs and want to service external customers and help their peers with problems they may be experiencing on an internal basis, that can also positively impact shareholder value. When people like to work for a company, it creates an environment where customers also enjoy dealing with it.

"And if that happens it's just a natural wind at your back in terms of driving the business forward," said Johnson.

One of the hallmarks of that passion is the willingness and ability to seek, read, and react to customer feedback on a timely basis, especially as business progresses deeper into a digital world and consumer expectation for instant gratification increases, said Johnson.

The report also emphasized the need to take a progressive approach to risk management.

"An example there is allowing your employees some latitude to try new things, to develop products that maybe aren't going to be successful, but saying 'we're prepared to invest X dollars in this new venture, and if it works out it's going to be fantastic. But if it doesn't, let's use it as a learning experience.' So they set parameters in which losses or costs are acceptable and work within those parameters, as opposed to saying 'don't try anything new because if you try and you fail you're out of here,' " said Johnson.

The report also advocated for using debt in moderation within the corporate capital structure.

"The moderate use of financial leverage helps organizations to foster an entrepreneurial environment of managed risk-taking, given that there is less concern with breaching banking covenants in the event that certain initiatives do not turn out as planned, or take longer than expected to foster results," it said.

It's a tough sell, but patience should pay off

Implementing a long-term perspective for creating shareholder value is important, although the report acknowledges this can be more difficult for public companies than for private firms.

"I've experienced this first-hand in the public-company world, whereby decisions were sometimes made that were oriented toward the current quarter or current annual profit as opposed to what's best for the long-term perspective of the corporation," Johnson said.

"And so it is difficult for a lot of companies to say 'this quarter won't be as strong as expected. However, we're setting the foundation for future growth.' The headwinds are against having this long-term perspective if you're a public company. But if you can demonstrate over the long term that your strategies are well-founded, then I think you develop an expectation among the investors and analysts that if they're patient their patience will pay off," he added.

The report focused on the strategies of four Canadian companies that implemented some of these best practices to help them create shareholder value.

Constellation Software Inc. was cited for its ability to acquire smaller companies in complementary software industry areas without having to resort to excessive amounts of leverage. Constellation, it said, has experienced significant revenue growth, while maintaining strong profit margins.

Birch Hill Equity Partners, a private equity firm, was praised for the success it achieved as a result of its focus on capital discipline when acquiring companies. "Specifically, the private equity firm looks to acquire companies that do not require significant amounts of working capital or capital spending in order to generate a higher cash return on invested capital," the report said.

GoodLife Fitness Clubs was lauded for its emphasis on operational excellence, including instituting innovative programs that help it stay attuned to customer needs. "GoodLife's effort in achieving shareholder value through operational excellence has propelled the company to be the largest fitness company in Canada and the fourth largest in the world," it said. "The company has also relied on innovation, a culture of employee engagement, strategic acquisitions and capital discipline to create shareholder value."

Johnson noted how lack of integration is repeatedly cited as one of the key reasons for deal failure.

"If you're trying to meld two very disparate corporate cultures, they both may be good cultures independently. But if the cultures are not grounded in the same fundamental beliefs and values, then that clash will make an integration more difficult, and the likelihood of deal failure all of a sudden escalates exponentially," he said.

Cineplex Inc. was praised for focusing on identifying its core competencies and finding innovative ways to leverage those capabilities, including its theatre infrastructure and customer base.

"Because of the company's high fixed cost structure, the incremental revenue, particularly because of the company's media business ... leads to significantly higher profits without the need to deploy additional capital. This, in turn, leads to shareholder value creation," the report said.

It elaborated on how, for example, Cineplex has been able to leverage its fixed costs and generate incremental revenues on high-margin product offerings such as concession sales. It has also expanded its core theatre offerings to cover a variety of events, such as music concerts, sports entertainment programs, party rooms and gaming, among other uses.

Two years in the making

CPA Canada and Canada's Venture Capital & Private Equity Association (CVCA) first teamed up in 2012 to brainstorm about identifying major issues affecting corporate finance professionals, including their own members.

"Generally what came out of it was we know that in a slow growth environment, you can't just focus on organic growth. So, what is hidden behind the public persona of these organizations, and what do they do well?" said Carol Raven, principal of strategy, management accounting and finance for CPA Canada in Toronto.

The result was the recently released report sponsored by those organizations and written by Howard Johnson, the Toronto-based managing director of Veracap Corporate Finance Limited, entitled Strategies for Creating Shareholder Value in a Low- Growth Environment.

"I think when we first embarked on the project, we were hoping that there was going to be some big 'aha' moment that we could share with the members," said Raven. "But what it really came down to is having a strong management team in the organizational culture grounded by employees. It was really [about] just staying the course, and sticking to the areas of focus that these organizations have."

Mike Woollatt, the CVCA's Toronto-based chief executive officer, said the management team and structure is a vitally important component of the ability to create shareholder value in their companies.

"I see it around my members every day. The importance of what type of culture you set up in a company can really lead to a transformational change, and lead to significant shareholder growth. It's a side I find that's often under-recognized as [being] important. It comes down to [having] a strong management team, and a flexible entrepreneurial environment. You see that time and time again.

"So I was happy to see the report come forward," he said.

Source: The Bottom Line, December 2014

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Mergers and Acquisitions
Labour and Employment
More Advice Centers
Useful Resources
CBVs are experts in their field. The following articles and papers have been written by CBVs, several articles have been featured in various national publications.
Tools
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.