The Globe and Mail, Sinclair Stewart, 29 September 2006
There was a time, not really that long ago, when Gerry McCaughey would have been considered the wrong man for the top job at Canadian Imperial Bank of Commerce. Scratch that. He wouldn't have even been considered.
McCaughey is regarded as a fine operator, and he has successfully, if quietly, tackled several tricky assignments for the bank. It's just that…well, he's considered a bit eccentric by Bay Street standards.
This is a man without much in the way of identifiable charisma, a man whom the media has described (with some polite restraint) as Melba toast, and whom one former colleague dismissed (with much less restraint) as a walking ATM machine.
This is a man without an Ivy League pedigree, much less an MBA after his name, a man who recoils from the social circuit and the limelight with equal distaste. (He politely but firmly declined requests to be interviewed and photographed for this story.) This is a man who makes millions of dollars a year, yet doesn't own a car. A man who has shunned an exclusive address in Rosedale in favour of a modest condo within strolling distance of work. A man who has never mastered the art of small talk, but who can sermonize, ad nauseum, on the Peloponnesian War.
This is a man, in other words, who is defined by dissonance in an industry that thrives on conformity.
"When you first meet him, you think, God, well, he's a bit different," says Tony de Werth, a retired CIBC executive who handpicked McCaughey in 1993 as his successor at the head of the bank's retail brokerage division, Wood Gundy. "There were some raised eyebrows on the rest of the executive committee at Gundy when I decided that I wanted him to come down and ultimately take over. They weren't too sure about Gerry."
Nobody was, really. Not that McCaughey wasn't admired: He was recognized as someone who always got the job at hand done, flawlessly, regardless of its complexity or tedium. Yet McCaughey lurked as an almost invisible presence at CIBC, and his quirks always seemed to be a tacit argument against his potential as a leader.
"I think if you look back through his entire career, people never saw him as the next big promotion," said Stuart Raftus, a CIBC alumnus who now runs Seamark Asset Management Ltd. in Halifax. "I got into CIBC, and I remember at the time everyone was telling me I had to meet David Kassie [the former head of the investment banking arm, CIBC World Markets] because he was going to be the next CEO. And from very, very early on, I remember telling everyone that in my opinion Gerry was without question the next CEO. And it was amazing to me—you couldn't find a person who believed that."
Of course, that was before CIBC stumbled through a looking glass into a cycle of scandal, blunder and internecine fighting that reached an almost hallucinatory climax with a $2.4-billion (U.S.) payout to Enron investors in 2005. The investment bankers who had imposed their swing-for-the-fences mentality on the rest of CIBC fell from grace. The bank's damaged reputation—not to mention its precarious financial situation—demanded a fix-it-man, not a visionary.
Thus Gerry McCaughey awoke one day to find himself the beneficiary of a rare planetary alignment. He was, as de Werth succinctly phrased it, "the right man, in the right place, at the right time, for CIBC."
That time was last summer, when McCaughey was passed the CEO's mantle from the singed fingertips of John Hunkin. Now, with a year of results under his belt and the foundation of his rebuilding effort plainly visible, McCaughey faces a crucial test. Will he be remembered as the incidental CEO, the man whom fortune, more than any innate leadership skills, happened to deposit atop the bank? Or is he the man to continue shaping CIBC's future, even once the mess has been cleaned up? Is he the right man, period?
Several years ago, at a financial services conference in Palm Beach, a well-regarded broker from CIBC's Calgary office strutted to the lectern to give a speech to a room of colleagues from the bank, including Gerry McCaughey. The purpose was to share his secrets for success, but he couldn't resist a little inside jab at his boss.
"Unaccustomed as I am to public speaking," the broker told the gathering, "and having only spent five minutes with Gerry McCaughey, I haven't yet learned the art of taking a five-minute chat and turning it into a two-hour dissertation."
McCaughey doesn't merely talk. He expounds. He perorates. He declaims. Ask him what time it is, and he'll tell you how to build a watch. If the discussion veers toward Rome or military history, well…you had better cancel all your plans for the afternoon. Like many autodidacts, McCaughey can't resist the urge to share the fruits of his learning, regardless of whether listeners share his fascination with the subject.
"Gerry loves the sound of his own voice," says a former colleague, who nevertheless stresses his fondness for McCaughey. "I talked to a guy at CIBC the other day. He said the meetings are a killer."
The tic extends beyond the hallways of the bank. At Frontier College, a literacy foundation that includes McCaughey among its volunteer directors, he has been known to begin meetings by diagramming the Russian army's position at the battle of Stalingrad, or by analyzing a turning point in Roman history.
"He can get up and say, Here's the Alps, here's the Rhine River, here's the Rhone River, the 10th legion was here, the ninth legion was bogged down here, the Huns were coming over here, they didn't see this. …He'll go into this tremendous detail," says John O'Leary, the charity's president, himself a self-described Sunday afternoon historian. "I find it fascinating. I'm not sure everyone does, but I sure do, and I think a lot of people are quite impressed by it."
O'Leary once set up a lunch for McCaughey with military historian Desmond Morton, and then watched as the two men volleyed back and forth, "like a tennis match," over the causes of the Luftwaffe's failure in the Second World War.
There is one topic, however, on which McCaughey is decidedly less voluble: himself. He would say there really isn't much to tell, and in some ways, he would be right.
He is a pedantic man, and his explanations are often indebted to the Socratic method, teasing out the answers from others by way of roundabout, and often expansive, inquisition. There is something earnest, if not nerdy, in his appearance: compact and trim, with wire-rimmed hexagonal glasses, inexpensive suits and an obligatory banker's coif, with hair parted desultorily to one side.
It is a workmanlike look for someone who works, and works, and works some more. When he's not punching the clock, he's either swimming (he religiously swims 2.5 kilometres four days a week, a habit he developed to help his back after a horse-riding accident 20 years ago), indulging his fascination with movies or reading one of the multiple books he always has on the go. He hasn't had a proper vacation in several years.
McCaughey lives an ascetic life with his long-time partner, Joanne, an interior designer. They don't drink, have never formally married and don't have kids. He has a small circle of friends he socializes with, including Richard Nesbitt, a one-time member of the CIBC investment-banking fraternity who now heads the Toronto Stock Exchange. McCaughey prefers the working-class patter of Shopsy's Deli to the crisp linen and starched service of the Four Seasons.
"He is a very nice man," says a former colleague. "His life is work. Gerry probably has the first commission cheque he ever made sitting in a drawer. He has no interest in spending money on any of life's pleasures."
Gerald T. McCaughey was born in Winnipeg in 1956, the son of an Irish father and French mother. He and his four siblings attended parish school there until 1970, when the family moved to Montreal and his father, Tom, became head anesthetist at Montreal General Hospital. (Now, at the age of 80, he spends much of the year in Nepal, where he helps run a training program in anesthesiology.)
Shortly after McCaughey turned 17, he left the family fold. His parents had separated just as he was finishing high school, so he packed his bags and headed west to work on the railroads. It was an odd choice for a kid: The work was both dangerous and gruelling, especially in the "rock and tunnel gang," which McCaughey opted for because it offered one extra hour of overtime pay.
For four years, he spent summers wielding a pick or a shovel in the B.C. Interior, and winters back in Montreal, taking courses at Concordia and McGill universities for his bachelor of commerce degree. It was annealing work, which likely helped to form McCaughey's stoic constitution. A shipbuilder would have difficulty improving the man's even keel, and he rarely—if ever—has been known to lose his temper.
He is fond of talking about his railway days, one analyst speculates, because it reaffirms his status as an outsider: It is a reminder of just how far he had to reach for his bootstraps.
McCaughey returned to Montreal to settle in 1976, and toiled at a meat-packing plant—again, overtime was a key selling point—until, by chance, he met a local real estate appraiser, George Debelle. Modestly successful, Debelle became a mentor to McCaughey, encouraging him to better himself and to come work for him as a bookkeeper-cum-accountant.
Just 23 years old and armed with a pair of introductory accounting courses, McCaughey agreed to help out. By day, he imposed some discipline on the company; by night, he completed his degree. One evening, in 1980, he arrived at class to find that a guest from Merrill Lynch was about to speak. McCaughey knew Merrill Lynch was one of the world's great financial brands, and he was impressed by the presentation. He asked the speaker for his business card and quickly set up an investment account for himself (his first stock was Pembina Pipeline Corp.).
If McCaughey had cut class that night, it's anybody's guess where he would be now. As it turned out, McCaughey eventually asked his contact for information on the Merrill training program, and was in New York the following spring, taking his place alongside other would-be trainee recruits at 1 Liberty Plaza. By June, just after he had graduated with his business degree at Concordia, McCaughey was a broker.
Over the next decade, McCaughey methodically scaled the organizational pyramid at Merrill, moving to Winnipeg, then Edmonton, then back to Montreal, by which time he was regional manager. Then, in 1990, Merrill retreated from Canada, selling its retail brokerage division to CIBC. The bank thereby acquired several hundred brokers, one of whom, its leadership little suspected, would be its future CEO.
In the mid-to-late 1990s, CIBC underwent a profound cultural shift. For decades, Canadian banks had been hulking retail monoliths, dominating the landscape for loans and deposits. It wasn't until the late 1980s that they were granted permission to extend their reach into the brokerage business. A feverish round of consolidation followed, as the banks took over long-standing independent firms like Nesbitt Thomson, Richardson Greenshields, McLeod Young Weir and, in CIBC's case, Wood Gundy Inc.
Wood Gundy was an investment bank, advising companies on mergers and acquisitions, and helping them finance their public offerings. This business, all about the deal, turns on swagger and competitive fire. At most of the big banks, this style was gradually subsumed into the more docile, but preponderant, retail stream. But in CIBC's case, the current ran the other way, thanks in part to the force of personalities at Wood Gundy—and in part to their ability to generate tremendous amounts of cash. The investment bankers emerged as the golden boys of CIBC.
By this point in CIBC's evolution, McCaughey had established his signature pattern. Someone gave him a job—at this point, dealing with some difficult personalities in Montreal amidst the uncertainty of a large merger with CIBC—and he got it done, quietly and largely alone.
So effective was he that de Werth, who was heading the merged retail brokerage, singled out McCaughey as his successor and, with the blessing of senior CIBC management, asked him to relocate to Toronto in 1993.
McCaughey wasn't completely taken with the idea, de Werth recalls. He enjoyed running his own unit and being in the field; head office was still a foreign concept, a place involving high-level political manoeuvring, and filled with ambiguous terms like "vision." Nevertheless, he was eventually persuaded: This was a big job, the chance to lead one of the largest retail sales forces in the country.
CIBC sent him to New York for a couple of years in the late 1990s to help integrate its newly acquired brokerage, Oppenheimer. But McCaughey didn't like the deal, chalking up the brokerage's decent returns to the bull market, and instead recommended that the bank sell it—drawing stunned looks from most members of the bank's executive team. It took several years and some failed negotiations, but with the support of Hunkin, McCaughey eventually parcelled it off in 2002.
"One of the transactions that was most impressive to the board was the decision and the ultimate sale of the Oppenheimer retail sales force in the United States, which Gerry really led," says one CIBC director. "It was done quietly. He found the buyer, he worked with the buyer and found a way to keep the team together. As he brought that in through the board, what we saw was this incredible focus—results-oriented—and nothing gets in Gerry's way when he's on track. It was very clear that this was a man who was steady, knowledgeable and could get the job done. He delivered."
CIBC as a whole was on a roll, buoyed by the aggressive investment banking team that seemingly could turn any investment into gold. That unit made an estimated $2.6-billion killing on telecom Global Crossing, and its push into U.S. investment banking landed it enviable assignments with up-and-coming powerhouses like an energy trader named Enron. Hunkin and his right-hand man, Kassie, drank up the increasing plaudits of investors.
To many of the investment bankers that ruled CIBC, the retail brokerage was merely a distribution pipeline to move product. McCaughey, accordingly, was destined to be marginalized, and his unusual mien only heightened the divide.
"It's a number of things put together that make him an outsider," says Stuart Raftus, who once headed CIBC's U.S. wealth management division. "A lot of these guys, when they sit down and have a couple of martinis, probably don't want to talk about ship battles of the 14th century."
McCaughey may not have won any popularity contests, but the Wood Gundy boys were still able to recognize an asset when they saw one. When Hunkin was named CEO of the bank in 1999—capping a bloody succession feud with retail veteran Holger Kluge, and cementing the bank's cultural tilt toward the investment bank—McCaughey was promoted to head the bank's newly formed wealth management arm, which disentangled the retail brokerage from CIBC World Markets, the investment bank.
McCaughey was content to stay beneath the radar, identifying needs or problems and then addressing them through an assortment of deals: He sold the bank's Guernsey operations (which had managed money for well-heeled customers), acquired TAL Global Asset Management, consummated the disposal of Oppenheimer and, most notably, pulled off one of the most successful financial services mergers Bay Street has seen in years: the $550-million purchase in 2001 of Merrill Lynch's Canadian brokerage business, which Merrill had rebuilt with the purchase of Midland Walwyn Inc. a few years earlier. It was a pivotal deal, one that immediately transformed CIBC into a dominant brokerage house, and simultaneously buttressed its already strong investment bank with a powerful distribution force.
But by 2002, cracks began to show. Global Crossing went bust, and CIBC was criticized for exiting early with a tidy profit while investors bore the pain. Amicus, CIBC's much-touted U.S. electronic bank, fizzled quickly, costing more than half a billion dollars.
Then Enron imploded, and CIBC suddenly found itself under investigation by U.S. regulatory authorities. It was forced to pay $80 million (U.S.) to settle allegations that it had abetted the accounting scandal at the disgraced energy trader— a pittance, it turned out, compared with the $2.4 billion (U.S.) it agreed to pay last summer to settle a class-action suit by Enron investors. The bank also had to pay $125 million (U.S) to forge a settlement with Eliot Spitzer as part of his probe of the U.S. mutual fund industry's market-timing shenanigans. It even got on the wrong side of a junkyard operator after repeatedly faxing him other people's financial information, prompting a wave of media-induced schadenfreude and a review by the federal Privacy Commissioner. CIBC appeared to be dangerously close to the breaking point.
Kassie, the presumptive heir to the throne, was dismissed from the bank in 2004, and within a year had started up a rival investment banking shop, Genuity Capital Markets, stocked with many of the top dealmakers he had worked with at CIBC. Cue another lawsuit, this one from the bank, which accused Kassie of poaching, a charge he flatly denied. Cue the mutual recrimination. Cue another black eye for CIBC, the bank one analyst memorably described as "most likely to walk into a sharp object."
Hunkin was under siege, investors were screaming and the board of directors, led by former IBM Canada CEO Bill Etherington, had had enough. They wanted to stop the headlines, and they wanted to deracinate the investment banking culture that had given them both heady scores and miserable afflictions. They wanted to convince investors that CIBC could morph into a stable, steady company, with an emphasis on lower-risk retail banking. They wanted, more than anything, to revive the bank's reputation. They looked around, and decided they needed Gerry McCaughey.
There is a debate, which rages intermittently in boardrooms and business schools, about the relative merits of insider and outsider CEOs. Entire forests have lent themselves to the effort, supporting case studies, PhD dissertations, consulting surveys and the like, all geared to determining which companies tend to perform better: those who hire from within, or those who hire from without.
If you distill all the work down to its essence, you're left with a couple of fairly agreed upon theses. Insider CEOs tend to have a better track record in the stock market, if for no other reason than they know the company intimately and require less time for transition. When a company is in a groove, most experts would say that insiders are the safe bet.
But what happens if a company is strategically challenged? What happens if it has been paralyzed by crisis? What happens if it has to restructure? These are the clarion calls for outsider CEOs. The rationale is fairly straightforward: Outsiders tend to be more comfortable with the tough decisions, like slashing jobs, since they have fewer existing relationships with employees. The outsiders are turnaround artists, but that in itself can cause longer-term issues. A Booz Allen study found that during their first couple of years on the job, outsider CEOs produced returns to investors that were four times higher than insider CEOs. As the tenure increases, however, the insiders' performance looks much better.
CIBC certainly met the classic criteria of the company in need of outside help. But at Canadian banks, recruiting an outside leader is anathema. Perhaps it is because these are large, complicated organizations—financial services conglomerates, really—with increasingly global operations. Maybe it is because they are clubby, and the hire-from-within culture is too deeply engrained to rub out. Maybe, though, it's because they are rarely in the sort of trouble that CIBC found itself in.
In McCaughey, the bank discovered an elegant solution: an outsider's insider. Here was an insider who was fully familiar with the bank's operations, and had more than a passing familiarity with its challenges. He also came from the retail side of the business, which is where CIBC was retreating to as it licked its wounds.
At the same time, he was a cultural outlier who bore none of the taint from CIBC's investment banking follies. He was capable of cleaning house at CIBC World Markets, and he was in no apparent danger of getting sucked into warring factions. Retail banking head Jill Denham was once thought to be a possible contender for the CEO's job, but it didn't help that she was groomed by Hunkin in the investment bank. She preceded him out the door in 2005, following a shakeup orchestrated by none other than McCaughey.
"John [Hunkin] had a unique personality—very personally visible, very charismatic. People followed him easily. People liked John," says the CIBC director quoted earlier. "But we also said that the attributes that Gerry had, given where the bank was in its history, were probably more attuned to what we needed. He didn't come from the World Markets business. That was a significant plus—it wasn't a showstopper, but we felt that as we needed to restore shareholder confidence, having someone who had not been part of the World Markets team was important."
De Werth, the CIBC executive who brought McCaughey to Toronto, is adamant that his protégé deserves the top job at CIBC. Yet he confesses that, like many others, he was surprised that McCaughey actually got it.
"The personality is very different. I thought the bank directors might say, 'Yes, but...his public persona is not really good enough to have this job. He's just not that kind of a guy.' But to their credit, they've given the best guy the chance to do it, I reckon. He's done a good job all of his life and he's getting his just rewards for it."
In early August, exactly one year after he had taken over as CEO, McCaughey strolled into a CIBC board meeting. It had been an awkward start, to be truthful—first on McCaughey's to-do list was announcing the $2.4-billion (U.S.) Enron payment, the most punishing bill yet for any of the U.S. and Canadian investment banks that settled with the energy trader's investors.
Plenty of water and red ink had flowed under the bridge in the intervening year. McCaughey had thrown himself into the job with his usual discipline, embarking on a multistep fix. He pledged $250 million in annual cost cuts to improve profitability, and is on track to beat that number by the end of the year. He promised to rebuild the bank's decimated Tier 1 capital ratio— a measure regulators use to assess a bank's financial strength—to 8.5%, and got there ahead of time. He painstakingly set to work cleaning up the bank's abysmal retail lending portfolio, dumping unsecured loans in favour of less profitable—and less risky—secured loans.
He managed to get the bank back to business and out of the headlines, and caught nearly everyone by surprise when he found time to pull off a deal: doubling CIBC's 44% stake in FirstCaribbean International Bank, in a $1.1-billion (U.S.) deal with Barclays.
When McCaughey entered the boardroom on the 56th floor of CIBC's Toronto skyscraper that day, he was by himself. The CEO typically spends an hour addressing the board, after which he is joined by a select group from his executive team. Before he could begin his briefing, however, the directors, including chairman Bill Etherington and former federal finance minister John Manley, rose to give him a spontaneous round of applause—the first time in a long time, conceded one, that they had had the occasion to clap for a CIBC CEO.
McCaughey was taken aback, and quickly switched the room's attention to a discussion of the business at hand.
He knew as well as anyone that investors weren't quite ready to give him their own ovation. McCaughey's critics have two lingering concerns. One is that his aggressive restructuring and "de-risking" operation, particularly on the retail lending side, has hurt the pace of revenue growth.
The second, longer-term question is whether McCaughey has a strategic vision. There are those who think he's merely an operator dressed in CEO garb, and that once CIBC is functioning cleanly again, it should find someone capable of charting its future: a visionary, rather than a tactician.
"He's a spectacular number-two guy. He's so detail-oriented," insists a former colleague. "Gerry would make a great COO, but a lousy CEO. To be a great CEO in any sales organization, you have to be a great salesman. When things go off the rails, they wanted Mr. Control Freak in. They don't want Mr. Business Builder."
Mind you, many current CIBC investors would argue that business builders are precisely what got the bank into this mess in the first place. Those investors like the fact that CIBC has been steadily returning cash to them over the past couple of years, both through aggressive stock repurchasing and healthy dividends, and they don't want to see the bank make another ill-fated run into the U.S. market.
"I think the biggest mistake any CEO in the Canadian banking industry could make would be to underestimate Gerry, which I think people do just naturally," says Stuart Raftus. "I think people on Bay Street get so caught up with what you're supposed to look like and talk like. He's not an overtly charismatic, flamboyant kind of guy. What he is, in my opinion, is just an outstanding leader."
For all the gripes about McCaughey's long-winded oratory, and for all the talk about his idiosyncracies, everyone agrees he is an incredibly smart man, with the ability to think several moves in advance. But can he do this for CIBC, given the relatively weak hand he has been dealt? Those close to the CEO say it would be premature to present investors with a strategic blueprint before he concludes the pressing task of whipping the bank back into financial fitness. Yet if one looks closely, there are some clues as to which direction he might take the bank. He is prudent, without doubt, and is not the sort of trigger-happy gunslinger to fashion a blockbuster—and dilutive—acquisition. But he may indeed pursue smaller, "bolt-on" purchases in his comfort zone of retail banking and wealth management, and it would be a mistake to think he wouldn't consider deals outside of Canada.
"I think he probably has a vision," said Robert Wessel, an analyst at National Bank Financial Inc. "But I think if you're him, you have to follow two steps: First, fix the bank and get it in good operating condition. The second step is implementing whatever your long-term vision is. How successful you are on your first determines the options you have for the second."
"He's the right man for the job right now," echoed another analyst who tracks the bank. "But at some point, CIBC has got to pick its destiny."
Their heyday over, the investment bankers who ruled CIBC have dispered to new positions of power—or of repose
CIBC World Markets, the investment bank formerly known as CIBC Wood Gundy, has endured its share of controversy and turmoil over the past decade. Along the way, it has witnessed considerable turnover among its top executives, many of whom have gone on to noteworthy new jobs. Here are a few of the names that have dropped off the CIBC World Markets roster:
Richard Nesbitt
The chief executive officer of TSX Group, the parent company of the Toronto Stock Exchange, Nesbitt spent five years at CIBC World Markets in the 1990s. A close friend of Gerry McCaughey, Nesbitt left the bank in 1997 to head up the Canadian investment banking arm of HSBC. He headed to the TSX in 2001 and was named CEO at the end of 2004.
Don Lindsay
Lindsay joined Wood Gundy in 1985, prior to its takeover by CIBC. He ran the firm's mining finance team, then worked his way up the organizational chart, culminating in his promotion to president of CIBC World Markets. He left in January, 2005, to become president (and soon, CEO) of Vancouver-based miner Teck Cominco, and has spent much of 2006 working on an unsuccessful attempt to seize control of Inco Ltd.
Wayne Fox
Fox worked closely with former CIBC head honcho John Hunkin when the two were still ensconced at the bank's investment banking arm. The 33-year CIBC veteran was once president of CIBC Wood Gundy, and later became the bank's vice-chairman and chief risk officer following an internal reshuffling. He retired from the bank in August of last year, just a few weeks after Hunkin officially stepped down. He is now chairman of the TSX.
David Kassie
Kassie joined Wood Gundy in 1976. He started CIBC Wood Gundy's merchant banking operations and rose through the ranks under Hunkin, replacing him as head of CIBC World Markets in 1999. Kassie was also heir apparent to Hunkin as CEO of CIBC, but Hunkin and the board ousted Kassie in 2004 after the bank's Enron debacle. In 2005, he started Genuity Capital Markets, sparking a fight with CIBC over his alleged recruitment of former colleagues.
Jill Denham
Denham joined Wood Gundy in 1983, and spent five years in corporate finance. After earning a Harvard MBA, she joined the merchant bank. In 2001, she was a surprise choice to take over retail banking. Her ties to the investment bank were seen as a detriment when the bank considered succession, and McCaughey replaced her with one of his own team, Sonia Baxendale. Denham is spending time with her three children, and has joined the board of the Ontario Teachers' Pension Plan.
John Hunkin
Hunkin became CEO in 1999 with a vow to take the volatility out of the bank's earnings and bring CIBC World Markets to heel, neither of which he really accomplished. The long-time CIBC executive spent the last year of his tenure trying to restore the bank's reputation. He left in July, 2005, planning to spend more time sailing at his Nova Scotia retreat. But he maintains an office at CIBC and is involved in several charities.
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