Tuesday, November 06, 2007

FP Interview with RBC CEO Gord Nixon

Financal Post, Brian Bank & Duncan Mavin, 5 November 2007

Financial Post Business: You have a reputation for being a CEO who speaks out on issues. How do you negotiate using the position of chief executive of Royal Bank as a platform? How do you pick your spots?

Gordon Nixon: I think it is important for business leaders to speak out on issues that are important to them and to their institution. I've tried to speak out in areas where I do feel strongly. Probably the two areas where I've spoken most have been around the diversity issue and around what is often described as "hollowing out." Although, the first thing I would love to see is the words "hollowing out" eliminated - so that people don't debate whether Canada is being hollowed out, but we actually debate whether Canada has competitiveness issues that make it challenging as a location from which to expand and to grow your company. That's where the real debate should be occurring.

FPB: As CEO, you're closely associated with the brand, the face of the bank. How much do you have to be aware of that when you're speaking out?

Nixon: When I speak out on issues, I'm speaking out as Gord Nixon, the CEO of Royal Bank. But often people link it together with the bank's position. So absolutely you have to be very careful that you don't do anything to compromise the brand or to embarrass the organization. Hopefully, I don't do that too often [laughs].

FPB: You mentioned "hollowing out." Earlier this year you teamed up with Roger Martin, dean of the Rotman School of Management, to publish a major article on the topic. Why did you do that?

Nixon: It was at the peak of the debate. You'd just had a number of takeovers pre-July when things were really heating up, you had Alcan, you had BCE. Roger and I both felt that the debate was a little bit off the mark, with a lot of people actually discussing whether hollowing out is occurring, as opposed to asking what should we be looking at to make Canada a great country from which to grow your company. We also wanted our views clearly on the record.

FPB: So it's not just top-of-the-market anxiety - there are salient, long-term issues around the topic that we need address?

Nixon: Absolutely. And that's one of the reasons I'm so pleased to see the [Competition Policy Review Panel] that's been formed by the federal government, which Red Wilson is chairing. I think that's a great thing. Because I think the markets will go quiet here. And it's just human nature that when things go quiet, issues of debate tend to be forgotten.

But it doesn't change the fundamentals of Canada's competitiveness, and the question of whether there are things we should really be looking at. Tax policy is probably the most important one, but competition rules, Investment Canada rules, the cost of regulation across all industries, provincial trade barriers - those things are all part of it.

FPB: Do you think because of RBC's history and profile, there's a particular need for the CEO of RBC to speak out on these things?

Nixon: I don't think so. And I say that because there are other CEOs in other industries who have spoken out as much or more so. I probably speak more now than I did in the early stages of my career. I'm now in my eighth year. I'm now the longest-serving CEO of a financial services company - which I'm not sure I like very much [laughs]. I think when I took over as CEO, I spoke out very little about issues, yet you had someone like Charlie Baillie at TD Bank who was very actively engaged around specific issues. If you look at Charlie, a lot of it was around things like social issues, inner-city poverty, those types of things. It's got to be the right time, right place, right issue and, to some degree, right position in one's career.

FPB: As CEO of Royal Bank, how much of your job is being a manager of this long-standing business, and how much is to take what you've got and to transform it?

Nixon: Great question. It's a trade-off between the two. I think when you are running a company with the size and scale and history of RBC, you've got to be very respectful of that history. But we are in a very dynamic industry and you cannot rest on the legacy of an institution. As CEO, your primary responsibility is to ensure that the organization is continuing to move forward, to change, to innovate and to transform. So operational growth and performance is clearly job No. 1.

Every company has a slightly different history and every company is in a slightly different position, so you can't have a one-size-fits all in terms of managing a company. But I think if you look at an organization like Royal Bank, we spend a lot of time thinking about how we are going to transform this bank over the next five years, and what businesses are good businesses, and what businesses are mature businesses, and what businesses are high-growth businesses and where we should be investing and withdrawing capital. It's asking, "How do we change the bank to recognize that the customer will buy services from a financial services institution very differently five years from now from what they do today?" Because if you look at the bank today, it is a remarkably different institution than it was five years ago. And five years ago, it was remarkably different than it was five years before that.

FPB: What are the two or three most important differences you see in RBC today versus five years ago?

Nixon: Clearly, the big one stems from the Client First initiative we launched in 2004. A lot of that was about the sort of analysis I just referred to. When we launched our Client First initiative, we took a charge at the end of the fourth quarter of 2003 and eliminated just under 2,000 positions. We restructured the organization in terms of how it was managed. We went from five businesses to four businesses, we restructured the different divisions and we made a lot of changes in terms of the people managing the various businesses - not just at the top level, but down the organization. We eliminated a lot of processes, and really focused on shifting the culture of the organization to be quicker, more responsive and client-focused. We centralized all of our operations, all of our global functions and empowered our people in the field to go out and do a better job servicing their customers.

Now, if you look at what happened, today we're actually net up 5,000 jobs, excluding acquisitions. And that's because we said at the time we were going to use the efficiencies and savings to invest back in the business and that's exactly what we've been able to do. And as a result, we've had very good growth in our market share, we had good product growth, and we've also had a very good improvement in our customer satisfaction results - and that is what we felt would be the ultimate litmus test in terms of success with respect to Client First.

Second, I'd say our consistency. If you look at our results since 2002, we've generated about 28.5% or 29% of the earnings of the major five Canadian banks, which is significantly higher than the others. We've had years where some of the other banks have taken significant one-time charges, they've had issues. Even in 2003, when we took our restructuring charge, our earnings were close to $3 billion. So I think that consistency of performance has allowed us to continue to make good investment decisions with respect to the future.

A third thing that we've been able to do is really clarify our international growth strategy. We've been able to grow our international earnings from about a half a billion dollars to about a billion and a half. We've been very clear about what our important international platforms are. And how we're going to stay very focused in terms of investing in those platforms, whether it's wealth management in the U.S., global private banking, our joint venture RBC Dexia or our capital markets business. Turning around Centura [in the U.S., which RBC bought in 2001] was an important part of that as well.

FPB: You'd been CEO for three years when you introduced Client First. Can you explain the timing - did you need a few years to take stock?

Nixon: If I have a regret it's that I probably didn't move earlier with respect to some of the changes that were made in 2003 and 2004. But it's tough when you don't have an internal crisis. It's a lot easier to initiate change when there's an internal crisis.

I took over an organization that had terrific performance, that was continuing to perform very well, and which had just made a series of acquisitions that had yet to be digested. There was no need when I took over to make significant changes. But as we were integrating some of those acquisitions, we started to underperform. Part of it was the RBC Centura and RBC mortgage issue, which was well written about. We sold our mortgage business - thank heavens we aren't in that business today [laughs] - and we restructured the management of Centura.

But the much bigger issue was simply that we needed to look at making changes to continue to transform the organization as we moved forward. We were becoming too process-driven, we weren't where we wanted to be with respect to things like our customer satisfaction numbers, we were too bureaucratic and our expenses were starting to creep up and our operating leverage was underperforming. That provided the opportunity to create a bit of an internal crisis to make some of the changes we made veryaggressively over the next three years.

FPB: That was called a three-year plan. What's next? Another plan?

Nixon: We called it a three-year plan, but after two and a half years, we dropped the word "initiative" from "Client First initiative" and said this is not a three-year plan, this is a shift in terms of how we want to manage the organization going forward. What we don't want to do is stand up after three years and say, "Okay, Client First worked for the last three years so now we're going to restructure the organization again and launch a different three-year plan." A lot of processes that we've embedded in the organization through that Client First initiative are continuing.

FPB: How do you decide where to allocate your time?

Nixon: A lot depends on what is happening across the organization. I sit down with the board at the beginning of the year and say, "Here is my mandate, here is how I'm going to allocate my time." A lot of that would be built around operational execution of what the bank is doing day in and day out. A lot would be built around strategy. Some around visiting customers, branches, and so on.

Now, if you sit back at the end of the year and ask, "Did it match up?" you're probably not that far off. But the specifics would have shifted depending on what's going on. If we're looking at a specific acquisition, then I spend a lot of time on acquisition and strategy. If we're going through a period of significant operational change, like we did around Client First, I spend a lot of my time on operational issues. When you go through a period like we have since the first week of August, I spend a tremendous amount of time on internal management issues and with external people, whether it's regulators, the Bank of Canada or the other bankers.

FPB: Are there specific dimensions of that work that really turn your crank? It's all important, but what gives you the biggest charge?

Nixon: The strategic stuff is more fun and always interesting as you're looking at ways to really drive change across the organization. That area clearly is engaging. But you never want to lose sight of the fact that driving operational performance across an organization like RBC is what drives our share value and what drives competitive performance relative to others. I'm struggling a bit with the answer [because] I think one of the interesting things about being in the role of a chief executive officer is that there is so much variety and different things that you're dealing with and working on at different points.

Even as we go through a period like we've been through since the first week of August, there are huge challenges, huge issues, but as well, it is very intellectually stimulating and very interesting as you're managing through that. I don't think it's fun to manage through a period like that, but from an intellectual perspective and a challenge perspective, it's certainly an interesting period of time.

FPB: You've been CEO for eight years. You're only 50 years old, yet your tenure is already as long as many CEOs ever get. Does being young factor into what you do, because you've possibly got more time?

Nixon: I think there's a bit of a trend going back to longer tenures for CEOs. I think in the U.S. it got down to that the average tenure for a CEO of a Fortune 500 company was less than four years. And I think now boards of directors are realizing that to implement change and strategy across an organization, you can't do it in two years, and, in fact, you don't want to be doing it every three years, because then you just continue shifting the organization.

I think it's important to have a long enough period of time to be able to continue to move the organization and build your management team and all those other things. What you never want to do is get to the point where you're stale or where you've overstayed your welcome or where you're in the job for the sake of the job.

At 50, I like to think I've got a few more good years left in it. But I think there will come a time - and it will be well before

I'm 65 - when certainly I should take a fresh look at whether it makes sense. When I'm 55, I will have been in the job for over 12 years, which is a much longer time frame than any of my recent predecessors have served.

FPB: When you speak or are quoted, you seem to put sharp emphasis on terms like "smart use" of capital and the "proper deployment" of capital. What do you actually mean by that?

Nixon: It's very much a part of banking, in terms of driving growth. We do generate a lot of capital. And you have a choice. You can

increase your dividend payout ratio, you can buy back stock, you can make acquisitions or you can deploy capital in your existing businesses. And there's no right or wrong answer. I mean, you can do any of those things strategically and create value for your shareholders as a result.

So we have a very disciplined approach internally as we look at our budgeting one year ahead, three years ahead. We constantly have a rolling six-quarter forecast, and we pay a lot of attention to where we are against plan and where we have shortfalls and where we're ahead. How do we make shifts in the organization? Where should we be deploying capital in terms of maximizing the return on that capital for our shareholders?

You know, we made a decision [in September] to buy Alabama National [for $1.6 billion], which is a capital deployment decision. We could have deployed that capital in a lot of different parts of our businesses, in different regions. And those are trade-off decisions that you have to make. And I think the more disciplined you are in that decision-making process, the more effective you are, in turn, in generating good total returns to your shareholders.

FPB: The recent liquidity crisis in the markets must be presenting some new ways to deploy capital here in Canada and the U.S. that weren't visible six months ago. Do you see that happening?

Nixon: Absolutely. I think the turmoil in the marketplace, longer term, for an organization like RBC, is healthy. I won't say it's a good thing, but I think it's healthy. Because the turmoil in the market will result in a much more balanced pricing of risk going forward, which I think will be helpful in terms of return on assets for the financial services industry generally. And also, because it will create buying opportunities. We've been through a period where the cost of acquisitions on the financial services side has been very expensive. It's been very difficult to execute opportunities because you just haven't been able to do it in a way that's been attractive from a shareholder perspective. Companies have been overpriced. I think this market turmoil will certainly create opportunities and what we want is to have a lot of optionality in any of our businesses. And I think that will happen.

FPB: Elsewhere, you've been pushing for growth in Asia, as a region, and in wealth management as a business line. How important are they?

Nixon: If you look at our non-North American business, which I really think is your question, we've got a very strong global wealth-management business, we've got a good global private-banking business, a capital-markets business, a good business in RBC Dexia Investor Services, and we've got a good ability to offer those products and services to high-growth areas like Asia, China, Latin America. What we're not trying to do is to aggressively find ways to build new business in those markets, but to find ways to exploit and invest and capitalize on our core strengths as an institution.

Perception in this context is very different, I think, from reality. With the possible exception of one or two companies, there's really no such thing as a global financial institution. Most financial institutions are very broad within their domestic marketplace, and then they've got businesses outside of their domestic market where they're strong and where they focus on certain activities.

If you look at China, most of our business is wealth management and capital markets. And those two are linked as well. And if you look at most of them, they relate to the export of capital from Southeast Asia into other markets where we've got strength and capability. I mean, global private banking by nature is offshore banking. With capital markets, we're doing a lot of securities business through our European operations, our U.S. operations and our Canadian operations. A lot relates to the flow of capital across borders as opposed to doing domestic business in China.

And that's similar in a lot of markets around the world. One of the reasons in Canada that you don't see a tremendous amount of foreign competition at the personal and commercial banking level is because it's such a competitive marketplace. You've had some, like HSBC, who've done a good job, and you've got niche operators like ING. But it's very difficult to come into a domestic marketplace and compete with the incumbents. It's got nothing to do with rules or regulations or foreign investment restrictions in Canada. It's got everything to do with how a foreign bank comes here and competes in a market that's, frankly, overbanked and where you've got some of the lowest margins in the world. And there's my pitch for the competitiveness of our banking industry.

FPB: Speaking of the federal government, there's been a lot made lately about Bay Street and Ottawa not getting along. Do you think it has any impact on the politicians when you speak out on issues?

Nixon: I think it does. I think that public debate ultimately leads to decision-making. Now you may not like the decisions that are necessarily being made, but you've got to make sure that all the different arguments and voices are heard around these issues.

If you look at income trusts, there was lots of public debate around the issues: I think that all was factored into the government's decision-making process. Whether the decision was right or wrong, I won't comment on.

And when you look at hollowing out, I think it has had an impact. Business leaders speaking out on this issue one way or another has raised the level of debate. You've even got the Canadian public, if you look at surveys, having views on hollowing out. And if people didn't speak out on it, the public would be unaware of it.

FPB: People are often more intrigued, too, when business leaders express differing views, rather than speaking with one voice.

Nixon: Although, what's interesting - and this is why I hate the term hollowing out - is that no one would disagree that we want to have an environment that makes it really attractive to grow from a Canadian base. Nobody disagrees with that. People will disagree whether we should be more restrictive in terms of allowing foreign investment; they'll disagree as to whether bank mergers should be allowed to happen; whether we should have ownership restrictions in our telecommunications or entertainment industries. But where you do get a lot of agreement is that you want to have an economic and business environment in Canada that makes this country the best place from which to attract capital and to grow a company.

That's why this review panel is so important. It is a big opportunity for the country to look at these issues. This is right up there with the Macdonald Commission [which advocated free trade with the U.S. in 1985 and was a blueprint for Brian Mulroney's Conservatives]. Hopefully it will ask if it's time to transform the way we look at things from an economic perspective in this country. And whether we actually want to lead as opposed to follow.

This is not about whether corporations pay their fair share of taxes. This is about the future of the country. And whether we want to compete against the Scandinavian countries and Ireland, and if we want a competitive advantage against the United States. And how do we actually create the right environment to do that?

FPB: So you think this is as big as the Macdonald Commission? We fought the 1988 election on that. By and large, the success of the free trade side has defined Canadian business, the whole economy, from that point on.

Nixon: And I think we're at a pivotal point now. The world has changed dramatically. Ten years from now, we'll be on the outside looking in if we don't recognize that the status quo may not be the best way to position ourselves. I think we are at a pivotal time.