Expectations and disappointments

By Gérard Bérubé

On the economic front, 2004 has been a very mixed bag, marked by the end of a four-year period of monetary easing and record-breaking increases in oil prices. We witnessed the re-election of the Liberal government in Ottawa, albeit in an uncomfortable minority position, and the US presidential election.

While 2004 was a year of expectations and disappointments, when economic recovery was slow to reflect any genuine vitality, let’s hope we have seen the last of the financial scandals. No matter what the future holds, at least these failures led to a redefinition of the role and duties of boards of directors.

As for the Nortel and Hollinger controversies, which began in the speculative bubble of 1999-2000 and are now being compared with Enron and Tyco, with a little luck they will trigger a cleanup of capital markets. Of course, we cannot be sure the barn door is closed as the ongoing lawsuits could give rise to other accusations, but the spring cleaning that started after Enron’s spectacular bankruptcy at the end of 2001 is well under way.

The amendments proposed to the Canada Business Corporations Act in 2004 indicate this cleanup is intended to increase directors’ responsibility. Following the lead of the US Sarbanes-Oxley Act signed into law July 30, 2002 in an attempt to launch the most far-reaching reform of corporate oversight since the 1930s, Ottawa and Brussels have also begun to examine the matter.

They are both considering issues such as the separation of the positions of chair and CEO, transparency, the increased accountability of directors for financial reporting, as well as board of director and auditor independence. Action taken in response to these issues will improve the image of directors, whose role will be that of watchdogs seeking to protect the interests of all shareholders.

It certainly will not be possible to solve everything at once and the new rules of the game will have to consider businesses with one majority shareholder or the disparity resulting from majority control through multiple voting shares. But two major changes occurred in 2004. On the one hand, the sight of Enron’s founder, chairman and CEO, Kenneth Lay, in handcuffs struck fear in the hearts of directors, who then took steps to tighten their internal controls. On the other, share-holders became more organized, more confrontational, and more demanding.

The events of 2004 that resulted from the bursting of the 1999-2000 speculative bubble were paralleled by another development — just as real and important — that is, central banks’ laborious attempt to tighten the money market. The easing reflected by key rates of 0% in Japan, 1% in the US and 2% in Canada and Europe produced four years of easy cred-it. This situation in turn led to a major imbalance on stock, real estate and bond markets and did not prevent the world’s chief economic powers from having to face public deficits once more.

Take a look at the US for example. The country’s robust growth was achieved at the cost of almost four years of zero rate increases, a highly stimulating fiscal policy that dragged it back into budget deficits and a 30% decrease in the value of its dollar. This level of growth was largely artificial and generated no new jobs during most of 2004.

As a result, the US Federal Reserve, intent on phasing out its monetary easing policy, finds itself in a situation where benchmarks are few. What’s more, the picture is muddled by the fact that oil prices continued to fluctuate throughout the year, reaching historic highs, while the glob-al economic recovery aimed for more synchronization and better distribution of growth among the major economic blocs.

Despite it being an erratic year, 2004 has also been marked by several important milestones. Specifically, stock market and real estate wealth continued their upward swing begun in 2003, after falling off early in 2000.

In late 2003, it was hoped this pace would continue un-checked by a sudden or violent tightening of monetary conditions. In the end, we could say that 2004 has been a year of transition, a time when trigger-happy monetary authorities managed to steer clear of the pitfalls of the past and avoid panicking over the many speculative bubbles — from oil prices to the cost of raw materials — that raised the spectre of inflation.

As for the great return to balance, which was supposed to be gradual in 2004, we will have to wait until 2005, as long as nothing serious happens to jeopardize it in the meantime.

Gérard Bérubé is editor of the Économie et finance section of Le Devoir in Montreal