Community Investment, Multiculturalism and Canada’s Competitive Advantage

March 23, 2007

Thank you and good morning. You’ve asked me to talk to you this morning about the role of business in our communities, not just as economic actors but as citizens.

The Canadian Council of Chief Executives is made up of the CEOs of 150 of Canada’s largest companies, and our purpose is to enable business leaders to engage in broad issues of public policy.

One of our ongoing areas of interest is that of good governance, both corporate and public. And in our view, good governance flows fundamentally from issues of ethics and values.

There has been much discussion about such matters in the years since Enron and Worldcom became household names, and while internal behaviour in a company may be governed by a code of ethics, the external expression of its values can be seen in the way that it acts as a corporate citizen.

Businesses do not operate in a vacuum. Businesses serve people. Businesses are run by people. Businesses are owned by people.

The goal of any business is to make money. I often hear people quote Milton Friedman and his belief that the only duty of those who manage a business is to maximize returns to shareholders.

Oddly enough, those who quote Friedman most often are those who disagree with him on the basis that good corporate citizenship, social responsibility or simply doing the right thing from an ethical point of view is somehow automatically in conflict with the goal of maximizing profit.

I have a very different view. I would suggest to you that in today’s world more than ever, maximizing profit over the long haul is impossible without taking into account the views of stakeholders.

In plainer language, companies that want to grow and keep growing have to pay attention to how other people feel about them – as its customers and suppliers, as its employees, as its investors and as citizens of communities within which it operates.

This at the core is why businesses do invest actively in communities. The rationale is framed in different ways by different people, but it all boils down to keeping people happy as the key to making money.

On one side of the coin, bad behaviour has a real price for shareholders. A business that ignores its environmental responsibilities risks government regulation, lawsuits and even criminal charges. A business that makes products in child-labour sweatshops in Third World countries risks consumer scorn and lost sales. A business that flouts market expectations of transparent and accountable governance is less attractive to investors.

In a world of instant global communications, anything a company does anywhere in the world affects its reputation everywhere in the world. Bad behaviour anywhere has consequences everywhere.

And bad behaviour anywhere is seen as risky by investors – and any perception of increased risk translates immediately into lower demand for shares, a lower share price, and lower compensation for the company’s managers.

On the other side of the coin, good behaviour is an important source of competitive advantage. Companies that are seen as well run and ethical are more attractive to consumers, to investors and to employees. Companies that pay attention to the needs and values of their communities are more eagerly sought as employers and less likely to be the target of government intervention.

To give you one example, global surveys of international institutional investors like big pension and mutual funds by McKinsey and Company have shown consistently that professional money managers will pay significantly more money for a given dollar of profitability for shares of companies that they see as well governed.

This premium is higher in countries where the rule of law is shakier, but the pattern is consistent. Good governance is in many ways a reflection of sound management and ethical values – and that leads directly to higher prices for shareholders and better pay for managers.

In this context, business investment in communities is about much more than old-fashioned philanthropy. Yes, corporations still make charitable donations, and most executives still recognize a moral duty to give back to the communities in which they live and their companies operate.

But community investment, and good corporate citizenship more generally, is driven increasingly by corporate strategy, by the recognition that to do the right thing for shareholders, managers also have to do what’s right for the communities within which they operate.

We at the Canadian Council of Chief Executives first started digging into this issue a decade ago. As part of a major survey of our members, we asked questions about where companies were investing in communities, why they were doing it, how community investment priorities were shifting and why they were shifting.

What was striking to us was the answer to the first why question, why companies spend shareholders’ money through community investment. Conventional wisdom suggested that this was primarily a reputational issue. A few of our members mentioned that, but the number one reason by far was human resource management. In other words, people.

In short, our members told us that the most important reason for investing in communities was that such investments helped them recruit employees, retain employees, motivate employees and develop employees.

And when we asked them why their community investment priorities had shifted, again the answer boiled down to the values and priorities of their employees. Companies were putting money into causes that employees cared about, because that helped the business attract and hang on to the talent it needed to drive its growth.

Keep in mind that we received these answers in the mid-1990s, at a time when the economy was still pulling out of recession, when unemployment was high and companies were still as likely to be laying off staff as hiring.

Since then we have seen the dot-com boom and its launch of the term “war for talent” as a global buzzword.

And Canada, like all industrialized countries, is now facing a chronic and growing shortage of labour because of demographics. The existing workforce is aging, baby boomers are heading rapidly for retirement, too few young people are entering the workforce to replace them and only our country’s strong flow of immigration is preventing the shortage of workers from becoming even worse.

In short, employers – be they private companies, schools and hospitals or governments – will have to work harder and harder to attract and keep the people they need. And in Canada, employers need to compete for people within an increasingly multicultural labour force.

At the most recent meeting of our members in January, we held a roundtable discussion on competitiveness issues with the deputy ministers of Finance, Industry and Human Resources. And the top of mind issue from the point of view of our CEOs was clearly related to people, and how to find and develop the people their companies need to compete and to grow within the global economy.

In effect, Canada is halfway through a two-decade transition from an economy in which we did not have enough jobs for our people to one in which we will not have enough people to do the jobs that need doing. This has fundamental implications for public policy.

One implication is that Canada cannot afford to waste a single mind. This is why we are seeing governments pay growing attention to issues such as bringing young Aboriginals into the mainstream by ensuring that they at least finish high school.

But governments also are having to take a hard look at how to do better in attracting skilled immigrants and then, once arrived, at making sure they are able to integrate quickly and efficiently into the labour market, so that we don’t waste any of their talent either.

That’s why the latest federal budget pays so much attention to immigration issues, to the need to speed up access through temporary worker programs, to market Canada’s virtues more effectively to foreign students, to make it easier for those students and temporary workers to become permanent residents and to help assess and recognize the skills and education that immigrants bring with them.

I have been making the point for many years that immigration is one of Canada’s greatest competitive advantages.

In 2000, British journalists and authors John Micklethwait and Adrian Wooldridge described how they saw multinational corporations evolving worldwide, from a model in which a company based in and run from a single country made money by hiring cheaper labour or exploiting resources elsewhere, toward a model in which global businesses are becoming genuinely multicultural multinationals in which the nationality of employees ceases to matter.

In the book I wrote a year later with my colleague Tom d’Aquino, which we called Northern Edge: How Canadians Can Triumph in the Global Economy, we talked about how this reality was unfolding within companies doing business in Canada.

We talked to dozens of our member chief executives across the country. One of them, the head of the Canadian subsidiary of a French-based multinational, described how his company had taken over a British competitor, and in doing so made a strategic decision to radically diversify its executive pool and adopt English as its working language worldwide, including at its Paris headquarters.

And we described how the diversity of Canada’s population had helped our country win new investment in leading-edge businesses serving international markets.

In the late 1990s, for instance, IBM Canada won a mandate from its parent company to provide all telephone technical support to customers across North America, a mandate that came with 1,500 highly skilled technical jobs. Other cities could offer an equally plentiful supply of computer scientists at comparable wages, but only Toronto had the right people at the right price who also could do the job in 23 languages.

We concluded that this diversity of talent could become Canada’s unique selling proposition within an increasingly intense global competition for investment.

High-end work would increasingly flow to where talented people either already live or would be willing to move. And as multinational companies continued to evolve into institutions with truly multicultural management teams, the diversity and tolerance of Canada’s communities could become the key characteristic that would let our country stand out in competition with many attractive alternatives.

Our suggestion has since been reinforced by other research, most notably by the work of Florida professor and author Richard Florida. In his series of books on what he calls the “creative class”, he argues that wealth is increasingly concentrated in places where creative people want to live.

He suggests that immigration is a major driver of innovative and creative communities. He goes further to suggest that while a high proportion of immigrants is positive, a diversity of immigrants is even better. And he concludes that Canada’s major cities are incredibly well positioned to blossom as centres of innovation and growing prosperity.

That said, we know Canada has its work cut out if it wants to maintain and build on its immigration advantage. We know that immigrants are having more trouble rather than less in integrating with our labour market and achieving levels of compensation equal to those of Canadian-born workers with comparable credentials.

We also know that competition for talent is getting more fierce globally, and that in particular that some of the countries that have been key sources of immigration for Canada, notably China and India, are growing by leaps and bounds and creating vast new opportunities that their citizens can enjoy without taking the risk of moving to another country.

I’ve talked a bit about what governments are doing to address these issues and why this will have to become an increasingly important focus of public policy.

But it also brings me back to the private sector and the topic of business investment in the community.

I made the point earlier that a major driver of business investment in community was its impact on human resource management, on a company’s ability to recruit, retain, motivate and develop its employees.

The growing shortage of labour means that companies have a growing incentive to make extra efforts to reach out to immigrants as new employees and to take more responsibility for helping these employees fill any knowledge gaps that may exist.

As immigrants become a larger proportion of the population, companies that serve consumers have a particular need to meet the increasingly diverse needs of their customers.

But no matter what business they are in, companies that want to meet their need for skilled and talented people will of necessity build an increasingly multicultural work force.

And as they compete to recruit, retain, motivate and develop these employees, their investments in communities will evolve as well, to reflect the diversity of the values and priorities of their employees.