"Final Major address as TD's CEO"
Thank you for that kind introduction.
I struggled a bit with what I should say at my last major speech as TD's CEO. I'm often not sure, at the best of times, that I have something worthwhile to say.
But on this occasion – with an audience filled with so many people who have been such an incredible source of support to me – there's a unique pressure to deliver something meaningful.
I toyed with focusing on Canada's economic and public policy dilemmas.
For those of you who've heard me before, you know I worry. Canada -- a country we are all so lucky to call home – has done extraordinarily well in recent decades: in economic growth; and in supporting public health and education institutions so vital to people's real well-being and social mobility. We've done well in managing to reduce poverty and to offset some of the global trends driving corrosive economic inequality.
But I worry because Canada, in the future, will need to manage rapid technological change, negative demographic challenges, and a shifting competitive context where our hand is not so strong.
This will require a shift in our economic base, the development of new firms as well as more outward looking firms. It will require a more innovative economy. And it will require a willingness, on the public's part, to support governments talking about -- and then ultimately making -- tough choices on how to allocate our scarce resources.
In the end, we must find a way to enhance the real incomes of average Canadians and preserve social mobility within an economy with sustainable economic growth.
But I've talked about these issues before and I thought a more meaningful speech would focus on what I've learned from leading Canada Trust and then TD through a period of pretty dramatic change.
To a certain extent, I'll try to take you behind the scenes at TD -- to hear what I say to our executives at development sessions, or when I meet new recruits to the Bank.
I talk much less about performance numbers than you might think and much more about our leadership and the vision required to build an enduring franchise, which actually makes our customers and our country better off. But I'm getting ahead of myself.
My "real world" learnings started even before I entered the workforce. It was 1968. And the student council at U of T asked me to lead a project to build a new student residence.
No I wasn’t in engineering, or architecture. Indeed, you will detect an emerging theme here – I've been uniquely unqualified to do most jobs that have been given to me.
At the time, Rochdale College – a co-operative housing experiment – founded by a couple of students -- had just opened up. So I trekked off to that residence to ask its founders how they made it happen.
Their answer – "look man (it was the 60s after all) building isn’t a birthright. Just do it – learn by doing."
That's stuck with me ever since.
You cannot figure out the game without being in the game. So get in the game. But do it in a way that mistakes, which you will inevitably make, won't kill you. And make adjustments – be prepared to drop pre-conceived ideas.
And so began my journey. Of course, in my case, it was not a straight line to running a large Canadian bank.
The first two decades of work were spent in Africa, France, the federal government, investment banking – and rescuing a financial services company while also running my own firm. Quite a wide range of circumstances and challenges.
I picked up some important skills along the way:
- A tolerance for things going wrong;
- An ability to manage multi-stakeholders;
- A focus on surrounding yourself with people smarter than yourself – I would say my main competitive advantage;
- An understanding that inarticulate, non-conceptual people are sometimes right and articulate, conceptual people are often wrong; and,
- An ability to inspire people in different and difficult circumstances
However, what I had not learned was how to be a banker.
Now, by the time I joined Canada Trust – in 1991 -- it had $35 billion in assets, earned around $200 million – and was losing market share heavily to the "Big Bad 5 Banks" – despite having a fabulous brand and great focus on customer service.
These two concepts – brand and customer focus – dated back to Canada Trusts' incredible move to "8 to 8, 6 days straight" in 1976; a move that was truly unique in the banking world. They have left an indelible mark on my approach to things – you must understand Brand – what is it and how to build it -- and always start with what the customers want – not what the banks want to do.
As the new leader I did what most leaders do when they arrive at a new place – walk around, listen – find the issues, fix them -- build a vision which your employees not only get but inspires them, and then find ways to operationalize it.
We focused on retail growth, customer service and earning more of the customers' business – all pretty obvious. But it worked. The lesson: execution makes the difference.
When we were sold to TD – in 2000 -- our branch system had grown from around 340 to 440, we were gaining market share and became, in our own customers' eyes, their core bank. Our assets were $50 billion with earnings of about $360 million.
The price tag -- around $8 billion – 4 times tangible book – looked pretty good to me as a seller.
But, to his full credit, Charlie Baillie, aided by his management team, but especially Bill Brock, had a bigger vision – could he transform TD by acquiring Canada Trust – but doing it in a different way – buying Canada Trust to get its business model and management – and allowing a true merger of the best of both companies.
So another learning for me -- leadership does matter. There are moments when it is possible to transform institutions. You have to seize them. Charlie had the courage to do so – but even more importantly – he had the courage to resist what almost every acquisition involved – the destruction of the culture and business model of the acquired entity.
I was put in charge of merging the two retail banks. And discovered – what should have not been a surprise – that the cultures differed. Different cultures can work – you just have to decide what culture is right for your company.
In our case, we tried to make it genuinely a merger of the two cultures. There were parts of the TD culture, which in my view, were better.
For one thing, TD folks were given the room to make bold decisions. It had a history of being an international bank and ventured in the US successfully. Something that helped us down the road.
For another, at Canada Trust, we had too much of a "get along" culture where real differences were not always surfaced.
We needed to be willing to change a culture that we built. This is often hard for people to do. Again a lesson of leadership: There are many leaders who define themselves by their ability to change what other people have done. The real test of leadership is a willingness to fix your own mistakes.
This is never harder to do than when you have made people mistakes. Undoing them is painful. But sometimes leaders make it worse because they don’t like publicly admitting an error in their past judgment.
Delay only causes more pain. When you look for great leaders – look for people who've actually had to fix their own mistakes – in my case, I had lots of opportunity to showcase that skill!
This natural tendency -- to be slower at fixing your own mistakes -- is why it's often a good thing to move people around. Not quickly – but there are times when new eyes are needed.
Now to build a unified retail franchise which had the capability to sustainably outgrow our very competent and entrenched competitors, we also needed to agree on – what George Bush Sr. called -- that "vision thing."
And the vision had to be more than words. Indeed, it had to transcend the making of money – it had to be something that attracts employees to an enterprise that adds value, creates a better world for its clients and customers and is truly focused on the long run.
Analysts and journalists would make fun of us – "everyone at TD has drunk the Kool-Aid." But getting everyone to drink it makes a big difference – it empowers your people -- it unlocks their potential – for the average employee knows better how to implement the vision than the people on top.
What was our vision? It won't surprise you: Start with what customers want – not what banks want to do. It's amazing how many organizations have such profound tendencies to start at the centre, do what they like doing and forget the customer.
Flip that on its head – and you quickly realize that the key is to figure out how to support and engage the people who know their customers – the front line staff and all those who support them. And, in doing so, you change the culture – you become more open, transparent, less hierarchical, and more empathetic.
Do this and great things can happen. We set out a very simple growth goal following the merger: Supercharge our growth by growing businesses where TD was strong but their market share was less than our new retail market share: commercial banking, credit cards and wealth.
Did they deliver? In an extraordinary way. We moved from number 5 in commercial banking to number 2; from number 5 in credit cards to number 1 and from number 4 in wealth earnings to number 2.
All of this leads me to another important learning: business models drive culture.
Now we see all the time how different business models breed different cultures. A business which uses commissioned sales people will have a different culture than one with salaries.
So when we step back and analyze what happened in the financial crisis – a truly awful tale of banks evolving into pure "me, greed" cultures with apparently no moral code – we need to ask: how did this happen?
It was the shift in the culture of their securities dealers and the ascendancy of that business in the banks. What's striking to me was the naiveté, or perhaps, it was a self-interest of bank leaders, not to look at the consequences of how the dealers both in and outside of the banks were evolving.
I recognize that the dealer world always had a very entrepreneurial culture – a drive to make money – and therefore a focus on personal achievement and a willingness to push the limits. I lived and worked in that world. There is much in that culture which is admirable. But two important things happened leading up to the financial crisis.
In many cases, the dealers became owned by the banks or became publicly owned. This dramatically changed the risk-reward equation for the employees who previously had their personal wealth at risk. Bets in dealers were now backed by public shareholder money. Risks to trades became asymmetrical – "heads I win with a bigger bonus" – "or tails – the shareholders lose."
The second shift was the change in business model. Dealers before were built around their clients. They created great franchises by supporting the clients' needs – and growing their loyalty. They added value to the economy.
With access to more capital, dealers saw that the real opportunity lay – not in the hard work of serving corporate or retail clients – but in betting. Sure, it was dressed up to sound nice such as trading structured products – but it was ultimately a zero sum game where money could be made off your clients, or your competitors.
I got to learn all this as I wrestled with what to do with TD Securities – shortly after I became TD's CEO in 2002.
It was a dealer that had no defined mission other than the making of money. It was, in fact, the product of two competing views – the historical base of TD as a great corporate bank and the view of TD as a nimbler follower of this industry-wide trend to shift the base of the dealer from clients to proprietary trading. We had a world leading franchise in many of the most exotic products. But a number of things struck me.
First – the culture was completely different than the rest of the Bank. Not everywhere in the dealer. There were still old fashioned bankers there who cared about their clients.
In addition, we had bought Newcrest – an advisory boutique with no balance sheet. This was a firm which had built a great franchise because its clients trusted their advice. Their culture was the same as the rest of the Bank – built around the customer.
But a business model that says clients are counterparties was incompatible with our philosophy.
Second -- I gradually became aware, in a frightening way, that not only in TD, but also in banks around the world, that there were many bank leaders who didn’t understand either the risks involved in these products, or how they were making money.
The concept of tail risk – risk with low probability of occurring but with huge costs if it occurs – was not really understood. It is the most insidious of risks because current management gets rewarded today while leaving the possibility of loss for the future. Taking tail risk was fundamental to these products.
My takeaway – you need to dig deep enough into a business to fully understand how you make money and the risks you are taking. If the people below you answer your questions glibly – go deeper. And ask the question – "what happens if the assumptions don’t hold?"
So as you know we exited these areas -- controversial at the time because it cost us money. And we were criticized by analysts and investors.
Now it's easy, in retrospect, to see it was the right decision – but it could have turned out that these products did not blow up as much as they did. In that case, we would have looked stupid.
But it was still the right decision for us – we didn’t want to make money that way – wrong business model, wrong culture. It's important to recognize that not all "right" decisions will be profitable ones.
It's also interesting to see the factors that helped to make that decision.
First -- we had an alternative – we knew by then – 2005 – we had a winner in TD Canada Trust – a franchise which could outperform and replace the lost earnings.
And second -- I had the right support. In Bharat Masrani, my successor, I had a Chief Risk Officer capable of understanding these products, with a gut that told him they were wrong, and a willingness to swim against the tide.
Now I would like to pause here to make sure that I don’t leave the impression that the banks alone caused the Great Financial Crisis. Yes – many of the worlds' banks lost their way – they didn’t understand their risk; they took too much of it; they relied too much on markets for liquidity; they carried too little capital; and they allowed the greed culture to grow unrestrained.
But they had a lot of help creating the crisis. Regulators who too didn’t understand the risks – they were focused on the process, not the content. Central bankers who didn’t believe in the risks of asset bubbles.
Politicians who believed that if you provide aid to people buying houses, you will help the buyers – when history teaches us -- you just help the sellers.
Governments and regulators in Europe, who saw their banks as national champions, were willing to bend the rules to help them and, in return, expected them to be investors in government paper. I'm afraid the rest is history.
As it turned out, we were able to build a dealer of which I am very proud – focused on building old fashioned banking relationships with our clients.
So as you know the next big thing we did was enter into the US.
Why the US? Because we believed we could "win the ties" – attract customers to walk across the street and bank with TD.
We knew Americans wanted great service as much as Canadians do. And we could fulfill this unmet need by playing to our strengths as a customer-focused retail bank. Indeed, America's Most Convenient Bank is both our value proposition and our Brand.
Still, it was hardly an easy decision.
By making this move we would have to reinvest some of the outperformance from TD Canada Trust into what would be the inevitable underperformance of entering a new market from scratch.
It would also mean the leadership team was willing to pay a personal price – our stock price would obviously not perform as well – in the short and medium run -- as if we just had concentrated on the Canadian market.
"Understand," I said to my leadership team during a critical meeting, "this move will cost each of you money. So get ready to make out a cheque to TD."
Our CFO at the time, Dan Marinangeli, who had come up the ranks of TD, and who was planning to retire in about a year, would be especially hit hard by our decision. But he was the first to speak up.
"Ed," he said, "We get paid well enough to do the right thing not the wrong thing – I am all in."
We didn't look back from there.
What lesson do I draw from our US experience?
First, the support of your Board is critical. We had a thorough and thoughtful discussion of what we were doing: Investing in the future. Our Board clearly viewed my leadership team as custodians of a great Canadian institution – our job was to leave the Bank in stronger shape, not to make it look good in the short term.
At the same time, we all have to recognize the discipline and pressure of real world economies remain. CEOs who are visionaries but, cannot manage the demands of the marketplace, rarely find themselves in a position to deliver their vision – even if the Board bought into that vision – life is about balance.
The Board's support became critical with the passage of time because we learned another lesson – life never turns out as you plan.
We had modelled traditional recessions – we had never modelled the financial crisis.
Here we had avoided the pitfalls which befell many of the world's banks – but we missed entirely the collateral damage of the crisis.
We could not avoid the political, policy and regulatory reaction – changes in rules which cost us approximately $500 million in fees; low interest rates which cut our spread income by billions of dollars; and the regulatory reaction which caused us to spend hundreds of millions on compliance.
Nor, on the other hand, did we foresee emerging opportunities to take market share as others were hamstrung – or all of the advantages our low risk, customer focused model gave us and the speed with which our Brand could be recognized in the US and, for that matter, around the world.
Indeed, we did not fully appreciate the global profile we would gain from becoming a top 5 retail bank in New York City, the most competitive marketplace in the world, as well as the media capital of the world.
Nor did we foresee the incredible impact our American colleagues would have had on our retail culture – on both sides of the border.
The TD pin, the WOW! awards, which celebrate the contributions of our employees, and a willingness to express enthusiasm in large group settings all originate from the US. Their energy and verve is not only reinforcing our retail culture – they have helped to transform it.
Another takeaway: be prepared for the very unexpected. The fact we had de-risked Canada -- prior to adding on the risk of entering the US -- was critical, and that was a conscious decision.
We also made the decision to scale up fast in the US – we made 10 acquisitions over time -- but we never bet the farm. Nor did we do sub-prime lending even though it made us look like a poorer performer.
The key in all of this is to have a view of the totality of the company's risk balance – not just the risks of one decision.
The rest of the story you know well. We've had incredible growth. The day I became CEO, our stock split adjusted price was approximately $15 and a market cap of $19 billion. Yesterday it was around $58.00 with a market cap $105 billion.
We learned a few things from this growth. It creates its own complexity that you have to manage. It has taken awhile to realize that – and I think it is fair to say it remains a bit of a struggle. Shed businesses you don’t need and avoid strategic drift.
We wrestle all the time with whether scale produces economies or diseconomies. In the financial world you see the dilemma – monolines beat universal banks. Monolines have people with a true expertise and a maniacal focus.
But almost all monolines end up being owned by universal banks. Why? Because their growth trajectory stops at some point without the broad cross-sell and brand features of universal banks.
I draw two lessons from this: first -- a universal bank needs to create as much monoline characteristics as they can – which means creating jobs with real end-to-end responsibility and real bottom line responsibility.
But, in doing so, banks must be careful of the big danger -- the creation of silos. To offset them, you have to foster a very strong and unifying culture. For us, there is only ONE TD – ONE team – that works for our customers – not ourselves. And where you do centralize to get economies of scale or capability, find ways for those central groups to feel the heat of the profit and loss statement.
The second lesson is that the biggest scale economy is capability. By creating a larger company, a growth company, you can attract and grow talent which, in the end, is the source of real competitive advantage.
This leads me to one of the most important lessons: growth creates its own demand for better people. Growth, especially cross-border growth, requires executives with unique skill sets – so even if you think, because you have a great company, you're at the end of the journey – you never are. You always need better people and you need to make your people better.
To do this you have to do a few things.
First -- get leaders to understand that growing their business doesn’t make them great leaders – they also have to grow their people. They have to attract, grow and export the next generation of leaders to other parts of the business.
Again this may seem like common sense but it's not always common practice. Ask the average executive how he/she will be judged – most will say "business performance."
For many executives, it is counter-intuitive that people management is as critical as business management. Just as it is counter-intuitive for many to think that EQ is worth as much as IQ. But we all know happy employees make happy customers make happy shareholders.
And second -- you have to create an employment brand. It won't surprise you that I come back to Brand – it is critical in building an enduring franchise. But it is also critical to understand what Brand is and is not.
Brand tells people what you should expect – as customers, employees, investors, regulators or journalists. In the end, you only create a Brand by concentrating on actually doing – not telling, not advertising, not making speeches – but actually doing -- creating a reality which day-to-day reflects what's important to you.
Often people try to shortcut the process by marketing a Brand that is not consistent with what they actually do – that always makes your Brand, in the end, worse.
Let me end on what I believe is the "glue that binds" a company: its culture. Culture is what people do when no one is looking. It means that at every level of the Bank, risk decisions are based on what's best for our institution.
It means people do what's best for the customer, do what’s best for TD – not for themselves. It means being rewarded for doing good – not looking good.
It means that people feel comfortable disclosing mistakes. It means treating people respectfully. I am still astonished that, in this day and age, some leaders are admired for yelling at people. Is that respectable? Is someone, who does that, really a great leader? Even it if does produce short-term results?
A great culture leaves prejudices at home. It celebrates diversity – not as a gimmick to attract customers – but because it is right. It serves the broader interests of the community – if those around us are doing well, then we will do well. It celebrates generosity of spirit – people who care – care about people individually, care about society, care that others are given credit and grow.
It is a culture which makes you proud – you want to say "I love working here! I love the people here! You would love working here too!"
This is exactly how I feel about my time at Canada Trust and TD.
For me, the 23 years since I joined Canada Trust, and the 14 years since I joined TD, have been a tremendous learning journey. It turned out -- as long as I listened – was willing to adapt and change – surrounded myself with people who were smarter than me – then people trained me rather than I trained them.
We've had great success -- not because of me -- but because of a tremendous group of leaders – who bled green – bought into the dream – executed well beyond anything I could've done.
But the things I will remember most important of all, our greatest moments, will be the human moments – the good and bad times that we shared – where we all focused on a simple goal – do the right thing – and the rest will take care of itself.