In 1965, John Porter, then a little-known Carleton University professor, broke new ground with the first empirical study of the corporate elite in Canada. His now legendary work The Vertical Mosaic was a painstakingly researched dissection of the Canadian Establishment before that term became our shorthand for the people who really run this country. Porter set out to puncture our foundation myth--the idea of Canada as a mosaic, where citizens of diverse ethnic origins cohabit in harmony and equality.

The 985 men--no women, of course--deemed by Porter to constitute the corporate elite in 1965 were no mosaic, but rather an astonishingly homogeneous bunch. Save for the rare French Canadian or, even rarer, Jew, they were WASP, had attended one of a handful of private schools and had inherited their wealth and position. Interlocking directorships between companies heightened the insularity of it all. At the dawn of the Space Age, corporate Canada was an oligarchy where pedigree was the password to power.

But not today, if you believe Peter C. Newman. In his 1998 tome, Titans, the premier chronicler of the Canadian Establishment triumphantly declares the old boys' club dead: "The family dynasty has, by definition, become a spent force." Corporate Canada is now a "meritocracy." According to Newman, the men--they are still practically all men--who run Canada's business empires owe their positions not to lineage but to perseverance and pure smarts. They are also ruthless and have no particular loyalty to Canada, in striking contrast to the genteel sluggishness and snobby, inward-looking Britishness of the old-money set. "The old Establishment was so easy on itself," Newman writes. "Few of its operatives were ever punished for being stupid, incompetent or both." No quarrels there.

It's certainly true that Canada's business magnates are no longer exclusively old-money WASPs. Names like Schwartz, Asper, Munk, Stronach, Beaudoin, Desmarais and (once again) Reichmann are synonymous with wealth and power. Corporate Canada is finally a mosaic of sorts-still far from being a perfect reflection of Canadian society, but no longer an aberration like the Establishment of yore. But that hardly makes it the meritocracy that Newman proclaims. The new Establishment may not be as stuffy and insular as the old, but it still takes care of its own. Corporate power in Canada remains a family affair.

In the wake of the Eaton's catastrophe, this has become an unpopular viewpoint. As business writers such as Newman and Rod McQueen rushed to execute autopsies of Canada's fallen retailing empire, it became de rigueur to declare the family business dynasty an endangered species, maladapted to the kill-or-be-killed reality of modern business. To be sure, no clan epitomized the downside of the old Establishment more than the Eatons. They had become anachronisms, oblivious to the times. But to see the Eatons as a metaphor for the Canadian family dynasty, as proof that merit has replaced parentage as the key to corporate power, is to confuse subtle changes in the way Canadian business operates with the fundamental rules.

The fact is, blood ties still loom large in determining who wields power. Some family empires-the Southams, the Bassetts, the Siftons-have waned, as will happen. Others have renounced power in Canada for potentially more lucrative positions abroad-the Montreal Bronfmans' decision to subsume Seagram into Vivendi, for instance. But Newman himself proves that family still matters: In a chapter billed as an "epitaph for the family dynasty," he gives us profiles of the opposite-the Westons, Thomsons, Molsons and Rogers, not a "spent force" among them. He includes Conrad Black among the six new-wave titans enshrined in their own chapters, though Black inherited both wealth and status. He declares that the Desmarais sons, André and Paul Jr., "seem born to rule." The McCains are included among Newman's tapped-out families-never mind that they have installed the next generation at two major conglomerates: McCain Foods and Maple Leaf Foods.

More important, among many of the new names in the elite-the Aspers, Péladeaus, Stronachs, Coutus, Southerns, Bombardier-Beaudoins, Saputos, Chagnons, Domans, Shaws and Sobeys, to name but a few-blood ties have been a ticket to senior management. The family way isn't dying; it's constantly reborn.

In 2000, a quarter of the companies constituting the TSE 300 Index had a single shareholder who controlled more than 50% of the outstanding votes. More than 40% of the 300 had at least one large shareholder (with a voting stake of more than 20%). The vast majority of all these closely held companies are family-controlled. Overwhelmingly, these firms depend on a two-tier share structure (one class with multiple votes per share, another with one or none) and pliant boards of directors to ensure that bloodline executives are never forced to answer for their deeds. Pierre Karl Péladeau, whose family controls 62% of the votes but only 27% of the equity at Quebecor Inc., can sleep soundly knowing Quebecor's disgruntled shareholders could never vote him out of a job for plunging the media empire he inherited into a debt-induced slump. Non-voting shareholders of Rogers Communications might well like to see new leadership from outside the family. But, barring an act of God, that is unlikely so long as aging scion Ted Rogers holds 91% of the voting stock.

Contrast this state of affairs with that of the world's biggest family-controlled company, Wal-Mart Stores Inc. The Walton family has no more votes per share than any other investor-as is typical in the U.S.

At widely held Canadian companies, corporate democracy is a theoretical if not actual possibility. But at family firms, the deck is stacked so that minority shareholders are disenfranchised. Yet, federal laws capping Canadians' foreign pension investments and a paucity of alternative domestic stocks mean that these undemocratic companies continue to lord it over a captive group of investors. Other protectionist factors have also aided and abetted this family power: Is it a coincidence that Canada's communications industry, where foreign ownership is strictly limited, has spawned some of the most powerful family dynasties of recent years?

We all pay, in one way or another, for the inefficiencies of poorly run companies-in lower economic growth, higher unemployment, skewed allocation of resources. All too familiar are statistics such as this one, from the Ottawa-based Centre for the Study of Living Standards: Personal income per capita in Canada fell to 78.3% of the U.S. level in 2000 from 87.2% in 1989. Conservative commentators attribute such findings to a trinity of woes-Canada's onerous tax burden, beleaguered currency and intrusive government regulations.

Worthwhile theories. But maybe there's an additional explanation-the exceptionally large presence of family-controlled companies at the top of the Canadian corporate heap. A glance at the Top 1000 profit ranking reveals that, over all, widely owned companies vastly outnumber family-controlled ones. Ranked by revenues, however, the proportion of family-owned firms rises to about a quarter of the 100 largest companies (versus about a third widely held and a third foreign-owned). The fact that family operations account for a big slice of the largest firms but a much smaller slice of the most profitable ones is telling.

Consider what Porter had to say: "In the middle of the twentieth century, [it is of] practical concern that only the ablest people get into the top positions, for, at a time marked by keen international competition, no society can rely on a system of privilege as the basis for recruitment to the higher occupational levels." What was true then is even truer today. This is not to suggest that those who inherit their positions are universally undeserving. Some have even produced spectacular results. The most successful corporate scions-Galen Weston, Kenneth Thomson, Laurent Beaudoin among them-have wisely sought out the counsel and expertise of professional managers. But far too many families have not. They rely on the "lucky sperm" theory-hoping the next generation inherits talent. It rarely does.

There is only one way for investors to reclaim their economic destiny-by demanding that ownership and power accrue to those who put their money on the line. If family-controlled companies continue to tap the public markets for capital, they should be forced to surrender a proportionate degree of ownership and board representation to the investors who provide the capital. Then, and only then, could corporate Canada ever hope to become a meritocracy.