Getting to Know Smith

On October 1, 2015, as Principal Daniel Woolf announced Stephen Smith’s $50-million gift and the school’s new name — The Stephen J.R. Smith School of Business — a stream of students descended the stairs of the packed Goodes Commons. All were wearing shiny new T-shirts emblazoned with “Get to know Smith”. The tees were a huge hit, instantly coveted by the staff, faculty, students and dignitaries in attendance on that historic day.

Almost simultaneously, alumni were informed via email of Stephen Smith’s transformational gift in support of scholarships for students, and faculty research through fellowships. Within 24 hours, a video appeared on the school’s website, enabling alumni and friends around the world to share in the excitement.

The response was overwhelmingly positive, judging by social media reaction and the many emails and phone calls to Dean David Saunders and other school officials. A common question was, “Who is this Stephen Smith?”, which, given Stephen’s low public profile until that day, wasn’t surprising.

To answer this question, the school hosted events in Vancouver, Calgary, Toronto and Ottawa to introduce Stephen to the alumni family. Each presentation began with introductory remarks by the Dean, followed by an informal chat with Stephen led by Distinguished Professor of Marketing Ken Wong, BCom’75, MBA’76, in Toronto, and by Smith School of Business staffer Jeff Dixon, BCom’00, at the other locations. A lively Q&A session ensued, with many alumni prefacing their questions by thanking Stephen for his generosity.

The following is a sample of some of the recurring themes and topics raised at these extremely well attended events.

Why would you, as a Queen’s engineering grad (Electrical, Class of ’72), direct your transformational gift, and attach your name, to the School of Business?

While engineering was important to me, economics was, too. Even while in high school in Ottawa, I was interested in economics and in business. Like a lot of kids, I had a paper route, so I started in business quite young.

After my third year at Queen’s, I had enough economics credits to switch from engineering to economics. I turned to my dad, who was a civil servant in Ottawa, for advice and he suggested I finish up in engineering then wait for a year or so and get a graduate degree in economics. I followed his advice, and went on to do my master’s at the London School of Economics (LSE). Since then, most of my career has been in the mortgage finance and insurance business.

In thinking about where my interests really lie — and notwithstanding being an engineering grad — I felt that since I’ve spent my career in business, this is where I want to give back. When I discussed the naming opportunity with my family, we felt this would inspire others to give or take their giving to the next level.

But a gift like this one doesn’t just happen overnight. I started to give to Queen’s back in the early 1990s, when I set up a bursary for students in economics and electrical engineering. Since then, about 250 students have been helped out financially. I think we all remember how tough it can be: it’s near the end of the month and you’ve been living on Kraft Dinner, so that extra $500 to $1,500 can certainly make the difference in your ability to continue your studies. Later I contributed to a fellowship and then a chair in the Department of Economics.

I’m a really big believer in secondary and postsecondary education. No matter where you live in Canada, you can get a high school education that will get you into any university in the country. And once you get into that university, no matter what university you go to, you can get a great education that will set you up for life.

I think that the real wealth in society comes from the human capital that we have, and we get that human capital by having a well-educated populace. I thought for a long time about how I wanted to give back to society, and certainly I looked at education. When I thought of education, of course I thought of Queen’s. So this gift is a way to give back to society, improve its human capital, help Queen’s and help Canada as a whole.

Entrepreneurship has been at the heart of your professional life. What path have you followed as an entrepreneur?

One thing about giving to a business school is that ultimately everyone wants to ask “How did you make your money?” So I’m going to tell you.

After graduating from LSE, I worked first at Philips Electronics, then Canadian Pacific, then I got a job at Hawker Siddeley in the late 1970s. By then, I was really keen to do something on my own, so I left my job and bought a couple of triplexes in downtown Toronto. After renovating and flipping them, I thought, “Oh, I know all about real estate, so I’m going to build houses.”

I bought some residential infill in the downtown core and started to build houses when I was 30, in 1981- 82. Then a major recession hit. Interest rates climbed to 21 percent and I went personally bankrupt. I had to move into my sister and brother-in-law’s place (both Com’75 graduates, by the way). I was in their spare room for six months. It was really tough.

I finally got a job and started working again. It probably took me another three or four years to build back my self-confidence. I founded First National in 1988, and that’s primarily been the source of the money I have made.

Initially my business partner and I operated as a mortgage lender, providing mortgage-underwriting services. Revenue in our first year was $200,000, and after paying ourselves around $30,000 each, we had a $50,000 profit. We put that back into the business and it just gradually grew from there. We started to service mortgage loans, so that we owned the relationship with the customer, and also began issuing mortgage-backed securities. Our EBITDA (earnings before interest, taxes, depreciation and amortization) was $50,000 in the first year. When we went public in 2006, the EBITDA was about $58 million, and now it’s in excess of a couple of hundred million a year.

What’s unique about our business, compared to the Schedule I banks, is
that we’re actually a low-cost provider, because our underwriting costs are lower and our servicing costs are more efficient.

Stephen, with moderator Ken Wong, answers questions from the Toronto audience.

Our proprietary technology gave us a cost advantage, and then a technical and service advantage, that enabled
us to gain a significant market share. This type of business is not particularly capital intensive, so it threw off an awful lot of cash, which enabled me to purchase Canada Guaranty from AIG. You may recall that AIG was having a few problems during the financial crisis in 2008, which led to the divestment of some of its assets. At that time, nobody wanted to have anything to do with a mortgage default insurer, and I saw that as an absolutely huge opportunity. So, in partnership with Ontario Teachers’ Pension Plan, we bought AIG’s mortgage insurance business in 2010.

My third major investment has been the acquisition of a significant position in Equitable Bank, the country’s ninth largest bank. I’m the largest shareholder, with about a 20% share of the company.

So that’s the long story on how things have worked out. I was able to take advantage of technology changes. And I think I have an understanding of an industry that is perhaps not as well understood as it could be and has also been somewhat out of favour.

You survived the failure of your first business, but you got back on your feet and your subsequent ventures have obviously gone very well. How did you get through the difficult times?

That period, 1984 through 1985, was the toughest time in my life. I made the mistake of not reading the market or not having enough experience in the housing market to realize that I shouldn’t have been building at that time. But I was keen, and wanted to make a go of it, and kept making decisions that turned out to be the wrong decisions. After a while, you just start sinking and at a certain point, when everything’s gone, you wonder if you’ll ever have the confidence to make the right decision about anything again. But the only way to deal with it is to just find a job, get up each morning, and go to work, and, bit by bit, rebuild your self- confidence.

Looking back 30 years later, I realize that a personal bankruptcy in ’84 and being re-established by ’87-’88 is not a long time at all. But I can tell you, when I was living it, it felt like a very long time. It was also quite embarrassing: moving into my sister’s place, and causing my parents concern, which put stress on them. It was not a good situation.

Everyone in their life goes through periods when things aren’t going as well as they’d like. I’m sure everyone can relate to the stress that that can put on a person.

You’ve certainly learned some valuable lessons in your life. What do you think others could learn from your story?

Well, I guess if I’ve learned anything, I’ve learned that perseverance and hard work can get you a long way. At the Toronto alumni event, one of the best questions was, “We’ve heard about the failures, but what did you learn from your success?” After thinking about it, I replied that there is certainly an awful lot of luck involved in success.

I was lucky in several ways. There was the growth of the broker market, and I was lucky in finding a business partner who was a great fit. We don’t hang out, but we’ve worked well together in business for the last 25 years. We never have personal disagreements. At the beginning of the relationship, my partner was the very charismatic guy, and I was a little bit more the nerd, the analytics guy. When we were starting out, he was the stronger part of the team. Now, I’m the CEO — I’m better on the strategic issues, but we’re still a really strong partnership. So you have to find the right partner at the right time.

A lot of businesses can’t move from having a workforce of 20 or 30 people to one with 900 employees, as we currently have. Managing that transition is a skill, and there’s probably a bit of luck involved in having that particular skill. We were also lucky in being able to respond well to the changes in the industry. I would say any big success story often involves being in the right place at the right time.

Often when people fail, they say, “I had bad luck,” and when they succeed, they say, “I worked hard. I was smart.” Actually, I think it’s the other way around. When you failed, you screwed up, and when you succeeded, you had good luck.

You’ve given this great gift to Queen’s. Tell us about the gift and what you hope it will accomplish.

One of the great things about the gift is that the funds are all endowed, and this will move us up to first or second place in endowment size for a Canadian business school. It’s also significant that 70% of the gift is directed toward retaining and attracting faculty and to funding their research. I think that faculty funding is important for us to be able to compete globally for the top professors, especially now that business schools are truly international.

Alumni had plenty of opportunity to chat with Stephen before the presentation in Ottawa.

The 30% balance of the gift is directed toward scholarships to attract great students. We already have by far the strongest undergraduate school in the country. The graduate programs are also strong, but we can make them even stronger, both in regard to international reputation and to national ranking. I certainly see the potential for the MBA program, for example, eventually to be ranked number one in the country.

Much more so than rankings, I think the real measure of success will be to look back in 20 years and see the contributions of Smith graduates. Hopefully, my gift will help produce even stronger graduates and faculty, who will be able to contribute and to give back even more to society at large.