Personal Philosophy

I believe in transparency. I know lots of people say that. For me it's not just words. It's part of who I am. I don't know how to be anything else. I've spent my career trying to drive transparency into every organization I've worked for. So I understand that it's easy to say and much harder to do.

To some extent, transparency has become the flavour of the day. People worry that if we'd had more transparency we wouldn't have had the Enron and Worldcom problems. But that's not true. The perpetrators of Enron and Worldcom were crooks and you can't solve the problem of crooks with transparency. I don't believe that it resolves the issue that crooks will be crooks, no matter how much regulation or transparency you have. History is littered with examples - Bre-X is another more recent one - and it always will be.

But do I think you can drive out 'near crooks'? I do. I believe that transparency makes it harder for near crooks to enhance their results.

Everyone has different ways to run their organization but I believe that over time, transparency is fundamental to better performance. If you're not transparent, it's hard to hold your people accountable. It's hard to have a performance driven culture. If your job is to increase shareholder value then I believe that transparency is a tremendous tool. But it's not necessarily an obvious one and it's certainly not an easy one. Transparency isn't a simple concept. It's a moving picture and it changes according to the circumstances. You have to deal with dilemmas and it has consequences for how you relate to your Board, your investors, the media and your employees. So I want to talk about how I handle it in relation to different stakeholders.

Board of Directors

Let me start by talking about the Board of Directors because much of the pressure centres around their role and because they are after all, my most immediate boss. Corporate culture starts at the top. If you want a culture of transparency you have to start with the CEO's relationship to the Board. So what is my relationship to my Board? And what is the Board's dilemma in light of the issues around transparency?

The CEO/Board relationship has to be a relationship of trust. Essentially the Board makes a huge bet - do we have the right CEO? Does he/she have the right value system? So obviously the Board's first protection is in the person they choose for the CEO job. But the more you build a culture of transparency and the greater the degree of openness, the harder it is for a CEO to lie and the greater the protection for the Board.

Good executive management teams want a strong board. If they're going to add value they need to ask the tough questions. They need to challenge us on our assumptions.

So I tell my Board to wander through the organization; meet the executives; ask for any document you want. And if any executive refuses, tell me and I'll have a conversation with him or her and make sure they know they have to let you have it.

Before each Board meeting I go through the agenda item by item. I tell the directors where the problems are and point out where they might want to press for more information on issues.

Directors keep telling me how different this Board feels from others they sit on. Even the former CEOs on our Board tell me they never treated their Board this way. It took them time to get used to my candour. I have to manage their reaction to the fact that when you've got a $10 billion company and 40,000 employees you're going to have problems every day. The former CEOs get that quickly, but the academics take longer, they're saying: "Holy Cow, it's one serious problem after another".

Over time, the Board starts to understand that there won't be any surprises. They're getting the straight goods. And once they adjust to that, they can sleep at night.

I'm not upwardly delegating when I tell the Board about problems. I do it because if you don't do it with your Board, if I don't tell my boss my problems, how can I expect the people below me to do it to me? And the fact is that I could filter out more than I do, but it has a tremendous impact on management that I don't. I'm sending a message that you can talk to the Board about problems and not get fired.

My motivation is that openness inspires trust. You earn it over a long period of time. It's part of your corporate reputation and part of your personal reputation. It's your credibility that keeps your stakeholders' faith when times get tough. As we've seen over and over again, if you lose it, it takes a long time to get it back.

I'm also motivated to keep things simple. It's just too complicated to run a large organization if it's not transparent. You can't operate effectively with two sets of books. It doesn't work in the long run if you're giving some facts to one group but not to another. You'd forget who you'd told what. The more complex the situation, the more you have to take the pain of transparency.

Investors

The second stakeholder group I want to talk about is investors. I believe in transparency with investors too. I'm not saying this is the right approach for everybody. Transparency is a higher risk strategy because it leads to greater volatility. But the market prefers less volatility. Volatility hurts your stock price. So how do you manage it?

The market is also short term. It doesn't look ahead very far. If you have to use your stock as a strategic tool then transparency is more difficult.

You have to focus on the short-term currency of your stock. You have to be optimistic about your future outlook. You have to avoid providing any unnecessary information that could move your stock price down. When there's a reduction in enthusiasm for your stock outside it can undermine morale inside. So now you have two problems, an undervalued stock and worried employees. Neither is good for business.

Ultimately, you have to run strategies you're comfortable with. Fortunately at TD we're not running a strategy that depends on issuing shares. We're playing for the long-term. My style is to let the stock price reflect our actual performance.

So we were the only bank to have a 37 % earnings increase over two consecutive quarters and still talk down the future. We were the only Canadian bank to announce that it would take reserves for possible litigation related to Enron. We had seen the litigation environment in the U.S. worsen. We'd seen Enron related lawsuits ranging from $10 billion to $20 billion. We were the lowest level of the players involved but once Citibank - basically the guy at the top of the chain - said they would settle rather than risk the reputational hit they would take from fighting the suit, you knew most of the other players were going to do the same. Once that was clear, then our logic was that we had to do something about it and it was just a matter of saying, "Well then how much money do you want to reserve so that you can be reasonably sure that you've cushioned yourself against the potential impact?"

So I think we did the right thing. We were nervous about how the market would react and frankly we worried we were weakening our litigation position in the sense that we could be perceived to be admitting culpability. But our fears were unfounded. On both fronts the market has come back and said, "We're glad you're continuing this process, that you're going to surface all the bad news and get it out of the way first". And that reinforces my message inside the company where I constantly tell people I want to hear the bad news.

You have to remind yourself that investors are asking different questions than you are. They are asking are you over-valued or under-valued? We're asking are we making the company worth more this year than last year? You don't want your management to be too obsessed with the investors' questions because they'll always think you're under valued and so they'll go into hype mode.

When it comes to making forecasts, you also have to realize that the market doesn't understand that our ability to predict the future is no better than theirs. We don't know what will happen. So our solution is to give analysts the facts and let them decide what they think the outcomes will be. We use our dividend policy to signal what we think the company's fundamental direction is.

Analysts hate to be wrong. So in the end they see us going down the transparency route and they see they have to trust us.

They're starting to move in that direction. But it takes time. You've got to have two to three years to have transparency pay off. But I am a long-term player because that's my strategy and that's what makes sense to me.

Transparency and leadership

How I communicate externally has a lot to do with my personal style. Generally when the world thinks about transparency they think about it in relation to the external world - because that's where the pressure comes from. But I think transparency is more about management and leadership and creating great organizations. I see it as more about Human Resources than Investor Relations. My passion is developing great leaders because great leaders create great companies. So how I behave with my Board and with external audiences reinforces the message I give our employees - that they shouldn't be afraid to surface bad news and mistakes. I have to walk the talk. If I'm prepared to do it, they don't have a reason not to do it.

Employees

I'm constantly saying to people: "Bring forward the bad news, the good news will surface soon enough. What I want to hear about is what's going wrong. Let's deal with it."

It's amazing how much that notion runs counter to human instinct. I couldn't believe how opposite it is to people's natural tendencies. People turn over all the good rocks and show off all their achievements and all the positives but they don't instinctively turn over the bad ones where the problems lie. But my approach is that every time I see something unusual I know instinctively that it will be negative.

It's not normal human behaviour to say: is there a way I can skewer myself in front of the boss? When I first came into the bank everyone had a deep fear of upwardly delegating problems. That's human nature. You think, I'm being paid the big bucks so I can't go to my boss and show I can't manage this on my own. But that's not what it's all about. It's about no surprises. Any number of problems we've had to deal with could have been solved if the person had only let us know early on.

Part of what's going on is that people think they'll be beaten up or fired if they bring problems forward. They think they are judged by how few mistakes they make. That might have been true once, but it's not how I judge them.

In fact they joke that I'm only happy when the world's falling apart and that I'm a total pain when everything is going well. And there's some truth to that. But their reaction tells me something about how they behave when they hear bad news from their people. They have to learn how to behave so people aren't afraid to come forward. Nobody's going to be punished for making a mistake if they're honest about it. But that's a hard message for people to believe.

My view is that how people handle bad news is part of being a leader. The days when you were promoted because you looked good to the people at the top are over. In our Executive Resource Planning today I'm not the one to determine your future. The people below you are the ones who know how you behave. The system lets the leaders emerge.

No one will get to the top if they don't demonstrate they can handle bad things that happen. You don't get to the top by blaming your predecessors. You get to keep your job if you can show that you can correct your own mistakes. And that's not easy. It's hard sometimes to recognize your own mistakes. It's hard to tell your people that you made a mistake and that you are changing a decision.

I believe that what differentiates a leader isn't great strategies because no one can get the strategy right first time. It's how you correct mistakes and get it right as you go.

What I'm looking for in leaders is optimism, a sense of growth and a willingness to take chances. If I had a management team that was down in the dumps all the time we'd stagnate. We'd never progress. So everyone just needs to know that the business will always throw up lots of problems and just relax. We'll take care of them.

One of the dilemmas of transparency is that it is different going up than going down. You've got to be completely transparent to your boss but to your employees, where you've got a bigger group to manage, you have to sharpen your message and deliver it often. You can't just play to the front row. You have to play to the back of the audience. So you have to over communicate and you have to make your message really sharp.

That becomes apparent when you have to meet disclosure and shareholder communication requirements that don't address employees' information needs. You're bound by confidentiality agreements. You can't give your employees information that you can't give to investors or the media. But you have to settle people down. You have a business to run and shareholder value to maintain and you can't have it stalled by speculation around the water cooler.

This is what we encountered when we did the deal to merge Canada Trust and TD Bank. We were announcing the deal, but regulatory approval was still six months down the road. We debated whether we should tell employees how many jobs we expected to be lost and how many branches would close. The dilemma in a situation like this is that you want the investment community to understand where your cost synergies will come from. But if you do that, you know you're going to increase employee anxiety. Suddenly they're hearing big numbers - in our case jobs would disappear and 275 branches were to be closed. We knew they would need some sort of reassurance about their future when we had very few facts to offer.

The more communication you do internally, the more you realize the main issue is: what happens to me? What happens to my job, to my benefits? What happens to my branch?

In the merger situation, we solved the problem by creating a set of 10 commitments to employees that said, this is how long your salary is guaranteed, and if you should lose your job, this is how you'll be treated. We gave every employee this information as the deal was being announced publicly.

You always have to be ready to answer the next logical question. Even if you don't have the answer employees are looking for, you have to be able to give them enough information to satisfy them that you are working to get the answers.

The media

One stakeholder group where you have more dilemmas than others is the media. How transparent should you be with the media? As a general rule you want to be more transparent with employees than with media. But you walk a very fine line. You have to assume that anything you say to your managers could be in the media the next day. So my view is that you are transparent with the media in the sense that you make yourself as available to them when there's bad news as you would when the news is good. You don't hide. You have to be consistent. The media are a conduit to all stakeholders and in a rumour situation have an assumed objectivity and credibility in the absence of any news from the company. They're going to run with the story whether you participate or not. Unless you've established your credibility with your employees, they're going to believe the media. And even if you have established your credibility they always believe that where there's smoke there's fire.

You're on the record all the time. What you say today can be played back to you in the future. I'm not saying that's a bad thing. It's just what you have to deal with if you're going to be transparent.

Interestingly in Canada TD gets a disproportionate amount of coverage relative to our size on a North American scale. If you're a bank in the United States, you have to pitch your story. But if you're a bank in Canada, you get extensive coverage whether you want it or not.

That's largely because we are a small country and the banks account for a much larger percentage of the Toronto Stock Exchange relative to banks on the Dow Jones Industrial Average. TD for example ranks 4th overall in the TSX whereas Citibank is 15th on the Dow Jones Industrial Average.

So we get the coverage that you would expect a bank 10 times our size to generate.

Close

Let me stop by saying that ultimately transparency is about building trust. You get trust by having no surprises. You have to be upfront about the good, the bad and the ugly. Trust is not about whether you can deliver the hard or the soft messages, it's do I actually believe what he's telling me?

For me transparency is just part of my personal style. I find it hard to dissimulate. I can't behave one way with one group of stakeholders and another way with another. Ultimately I believe it's what builds great leaders and great leaders create great companies and that in the end is what really matters.

Thank you