He was a reviled Trudeaucrat who made a dumb decision to head a shaky trust company. Now, at rebounding TD, Ed Clark is the banker who walks on water
The Globe and Mail, Sinclair Stewart, 24 June 2005
Michael Walker had already grown disillusioned with working in government when he met Ed Clark in 1974. The way he saw it, Ottawa was being overrun by a new breed of civil servants, young idealists hell-bent on meddling in the economy. Clark might as well have been their poster boy.
Clark had arrived that year in the nation's capital armed with a Harvard PhD in economics, a cocksure mien and a collection of hideous neckties. He bore little outer resemblance to the man known today as the chief executive officer of Toronto-Dominion Bank. Of all the attributes of this younger Clark, it was the whiff of left-leaning politics that irritated Walker, then a consultant with the Department of Finance. Still, this upstart made Walker feel good about one thing: his decision to quit his Ottawa job and co-found the Fraser Institute, the think tank that, appropriately enough, has since grown into the bogeyman of the left/liberal Canadian intelligentsia that Walker resented.
"My brief conversations with Ed, and the knowledge of where he was coming from, was kind of like the last straw," Walker says. "I thought, if these are the bright young people who are coming in [to the federal government], we have got a problem."
Walker pauses for a second, relishing Clark's journey from dirigiste civil servant to the head of Canada's third-largest bank. Then he exhales a smug chuckle. "What he shows you is that redemption is always possible."
Like other references to his supposed political stripes, this anecdote makes Clark wince. He is sitting in a corporate box at the Air Canada Centre, balancing a plate on his lap and half-interestedly watching the Toronto Raptors absorb another beating.
"You know," he says wearily, spearing a sausage with his fork, "I don't really care what the chattering classes think."
Clark's annoyance belies that statement. It's been two decades and several high-ranking private-sector jobs since Clark left Ottawa, and he still can't shake this burr on his résumé. People remain fascinated by the idea of a Big 5 bank being headed by "Red Ed," the derisive nickname Clark earned from oil executives after helping to craft the National Energy Program under prime minister Pierre Trudeau. Clark can't quite figure it out. "I think this is a dead issue," he says. "It's only in the press."
Indeed. All the stuff about Red Ed, and likewise Walker's notion of Clark's redemption, only faintly illuminate the larger fact: Clark is the most improbable CEO on Bay Street. A bank chief who learned his management chops as a mandarin. Who vaulted into his current perch by pulling a boner move in his first attempt to breach the executive suite. Who worries that he makes too much money. And who became arguably the Street's most popular CEO not just via predictable means--by turning around results at his company in the 2 1/2 years that he's been in charge--but also by simply telling it straight in a climate that's glutted with hype. Ed Clark is congenitally unable to oversell.
A couple of months ago, at an investor presentation in Toronto, Clark joked with the audience that he was the cup-half-empty guy, while Bill Ryan, the head of TD's recently acquired U.S. operation, Banknorth, was the cup-half-full guy.
"Together you'll get a balanced representation," he deadpanned.
Growing up in a Toronto suburb, ED clark was surrounded by very smart people. His father, Samuel Delbert Clark, who died in 2003, is regarded as the dean of Canadian sociology, a strain of the discipline that inclined more toward historical perspective and less toward number-crunching than the American school. The founding chairman of the sociology department at the University of Toronto, Del Clark studied social change--political protest, urban poverty and the like--and over time changed his politics from leftist to Liberal. Clark's mother, Rosemary, taught economics at college and edited Del's books. It was her footsteps that Ed traced after completing a bachelor of arts degree at the University of Toronto in 1969. He enrolled in a master's program at Harvard that same year, and remained there for his doctorate, moving to Africa to complete his dissertation on the economic strategy of Tanzanian president Julius Nyerere. Socialist Development and Public Investment in Tanzania was circulated in the oil patch following the implementation of the NEP as proof of Clark's revolutionary leanings. He says his critics have never read the thing. If they had, they'd know it wasn't a socialist tract, but rather a study of socialism.
The family's academic streak is wide. Clark's brother, Samuel, is an academic, as is his brother-in-law and mother-in-law. His wife, Fran, has a doctorate in psychology. That's also the degree one of their two daughters is pursuing in Denver. (They also have two sons.) Understandably, it came as a shock to Clark's parents when he turned down a professor's job at ne-plus-ultra Harvard in favour of joining the Canadian government. For Clark, the decision was simple: He thought he would make a terrible academic.
"Probably my best ability," he says, is to take something complex "and put it in a way that the average person can understand. That's not a particularly good ability for an academic."
Clark joined the Department of Finance as chief economist in 1974. After a series of moves, he earned responsibility for a portion of the Anti-Inflation Board. The highly interventionist program was contentious: Ottawa was capping wage and price increases to combat the spiralling cost of housing and commodities. For Clark, the job was an epiphany: He liked managing people (150 of them) and, what's more, he was pretty good at it. So much so that he would be named Canada's civil servant of the year in 1982, at the tender age of 35.
"Ed was the best manager of anyone in our age cohort," says Brian Levitt, who worked with Clark in Ottawa and is now co-chairman of law firm Osler, Hoskin & Harcourt LLP. "He had a knack for taking a group of people and getting everybody to do the most they could do. He's a challenging guy to work for because he's on top of the file, so you can't slide by him with generalizations. It's a standard of: Do you know what you're talking about?"
Clark says most corporate leaders don't realize that a job managing government staffers is more complex than a private-sector equivalent. "Can you imagine," he asks, "running a large organization where you can't fire, you can't hire and you can't reward people, and yet you have to motivate them to work extraordinarily long hours?"
Clark's Ottawa days will forever be linked to his role in drafting the NEP in 1980. It was an effort to give the government greater control of the energy sector and, by extension, a greater share of its profits. The West viewed this tithe as barely veiled theft, and Clark, who at the time was an assistant deputy minister of Energy, Mines and Resources, became a lightning rod for criticism.
"I don't think Ed would have been attacked nearly as much if the business community didn't regard him as a very formidable foe," says Senator Michael Kirby, a onetime senior Trudeau aide who has known Clark since the mid-'70s. "It was a tribute, in a sense, to the guy's competence that people thought he was the bête noire in this whole thing."
During the NEP imbroglio, Kirby was himself impressed that Clark kept his underlings focused and loyal, despite the torrent of abuse he endured from Western Canada. "Ed is not one of those guys who is going to run for cover when the going gets tough. Ed is going to hang in there."
Of course, you can't hang in once you've got your walking papers. The Mulroney Conservatives handed them to Clark in 1985, shortly after being elected. Clark's next stop, surprisingly, was Bay Street.
John Pelton remembers getting a fateful phone call from Ed Clark in the summer of 1988.
Pelton and Clark had become close during the year they'd worked together in investment banking at Merrill Lynch Canada, cutting deals and making a good deal of money. One of their shared mantras, scribbled on a sign in their offices, was "Don't hire children." Clark likes to joke that this rule immediately eliminated 70% of Bay Street.
On the day of Clark's call, Pelton was visiting family in Manitoba. Clark rang to tell him that a headhunter had approached him about becoming CEO of Financial Trustco, a struggling conglomerate run by the flamboyant (and now-deceased) Gerry Pencer. Clark had decided he was going to accept, on condition that Pelton come too.
"How long do I have to make up my mind?" Pelton asked.
"A couple of hours," Clark replied before hanging up the phone.
That was all the time Pelton needed. After a quick conversation with his wife, he jumped on a plane to Toronto and met Clark at Pencer's offices. The two friends signed on--Clark as CEO, Pelton as president and chief operating officer.
It was a bold move. But then, Clark already had turned more than a few heads with his seamless transition to the private sector. He insists he was never much of an investment banker, but that isn't entirely accurate. Financiers are often only as good as their connections, and among the many things Ottawa provided Clark was a coterie of influential friends. One of these, Mickey Cohen, was Clark's boss during the NEP battle. (He's been a TD director since 1992.) Cohen, who took an executive job at the Olympia & York empire, got Clark a meeting with the company's owners, the powerful Reichmann family. Merrill was soon tapped to lead O&Y's acquisition of Hiram Walker Group, and to underwrite a $500-million financing for Gulf Canada Resources, an O&Y subsidiary.
Clark was restless, though. He wanted to be an operator, and he believed he had the management skills to run a large company. Yet he also knew his government experience wasn't going to pass muster in the private sector. He had something to prove, and that compulsion made Pencer's offer irresistible.
Financial Trustco was widely viewed as a mess, a career-wrecker in the making. Pencer had assembled a mishmash of interests in the mortgage, investment and insurance industries, along with a list of heavyweight creditors who were beating on the company's door following the stock market crash of 1987.
Purdy Crawford, who was then CEO of Imasco Ltd. and knew Clark from the latter's Ottawa days, could see that the Pencer agglomeration was in shaky condition. He attempted to dissuade Clark over a lunch in Toronto.
"I said he had to be in a position of strength, that he didn't have to take orders from Pencer," Crawford recalled. That caveat was the mildest one Clark was offered, he says ruefully. "Every human being I knew said, 'Are you completely out of your mind?' "
Heedlessly, Clark bolted in. He discovered, to his horror, that things were even worse than the Cassandras had said.
There was little choice but to dig in. He had earned a reputation in Ottawa as a consensus-builder, and he relied on both that experience and his connections to bring regulators to the bargaining table and buy enough time to unwind Financial Trustco methodically. At the same time, he struck deft agreements with lenders and managed to sell off scattered bits of the company's holdings.
It was a nerve-jangling exercise, but it earned Clark his stripes. Peter Maurice, the CEO of Canada Trust, had had dealings with Clark during his Merrill Lynch days, and now he admired how the young executive was orchestrating a soft landing for Financial Trustco investors. Maurice quickly persuaded Clark to come to Canada Trust as his heir apparent.
After learning the retail ropes under Maurice, Clark took on the chief executive mantle at Canada Trust in 1994. It was here that Clark developed his reputation as a straight-ahead branch-banking operator, proving that he could produce results at a large, publicly traded organization--one competing against the big banks, no less.
Canada Trust was known for its innovations in customer service, like the 12-hour banking day. But its focus had begun to fade when Clark took over. Accordingly, he combined its real estate portfolio with that of another company, scaled back its auto-financing business and plowed resources back into branch banking and brokerage operations. He quickly steered Canada Trust away from riskier corporate finance and restored the emphasis on retail. A U.S. subsidiary was auctioned off, and a Canadian property and casualty insurer was added to the fold.
By the time TD CEO Charlie Baillie came calling with a takeover offer in 1999, scooping up Canada Trust in a landmark $7-billion deal, the reinvention of Ed Clark was almost complete. All because of stubbornness, skill and--most importantly--a timely dose of stupidity.
"That's why I'm running the TD Bank," Clark says. "Because I actually took the completely dumb decision to go to Financial Trustco. Objectively, you've got to admit that was the dumbest decision in the world."
Ed Clark may be an unusual banker, but he still looks like a banker, of course: The requisite pinstriped suit is draped over his lanky frame; the outré neckwear has given way to conservative choices and wire-rimmed glasses frame a still-boyish face.
Yet old habits die hard. Clark may have left Ottawa, but he retains his aversion to the rubber-chicken circuit and all the other glad-handing sessions that are part of his job description. Although he's recently taken up golf, managing to squeeze in a dozen rounds a year, Clark doesn't get out much for someone in his position. And when he does, he's not the life of the party.
"I'm not good at small talk," he says, and then corrects himself: "I'm miserable at it as opposed to not good. I'd rather go home and drop in and see my daughter and hold my granddaughter. Also, I married someone who has no interest in [the social circuit] too."
Clark not only lacks the desire to keep up with what can be a brutalizing schedule of receptions and dinner parties, he also lacks the vigour. Ten years ago, he had heart-bypass surgery. He is also a survivor of prostate cancer, but insists--rapping on the side of his head for good luck--that his health is good. Ever since the heart operation, Clark has been careful to get a good night's rest, and he religiously follows a four-days-a-week workout regime. Not for him the marathon hours that are many a dealmaker's badge of honour.
When Clark does emerge from the chrysalis of family and work, it's usually to participate in charities, a subject that he feels conflicted about discussing. He's allergic to self-aggrandizement but compelled, as an influential CEO, to lead by example. His donations typically fly below the radar screen: He funded a chair at the University of Toronto in his father's name, and another at University Health Network in his cardiologist's.
The charity he is most closely involved with is Homeward Bound, a project designed to help 30 single mothers who have been reduced to living in shelters. They get housing and education, and finally, a job. Clark and his wife gave $1 million to kick-start the effort, and if it bears fruit, he says he'll give another million to expand the program. Would that more people would feel so inclined.
"I'm shocked at how little well-to-do people give away," he says. "And how people who are earning vast sums of money don't feel there's some obligation to use that money for [something] other than to acquire goods.
"I mean, what toy could I possibly acquire that would give you the same sense of satisfaction as when you take 30 women, who literally have been f*cked around by men, and transition their lives so that they and their children's lives aren't on welfare?"
Clark can afford it. He was among the top earners in the country (see page 81), bringing in $8.6 million in compensation last year alone. As of the end of last year, he owned nearly $35 million worth of stock in the bank. The money doesn't make him feel guilty, exactly, just awkward.
"Nobody can earn as much money as I earn without sitting there and asking, 'Is this morally right or wrong?' It's hard to sit there and say, 'Why don't you pay me half my market value?' Maybe that's what I should do. But I tend to say, 'Judge me by what I do with my money as opposed to what I earn.' "
It's hard to overestimate the impact of such frankness in the banking world. In 2002, just before Clark was set to take the TD reins from Charlie Baillie, the incoming CEO held court with analysts during the bank's fourth-quarter conference call, presenting a brief manifesto.
"I want to start off by saying I don't want to be in the forecasting business," he said. "I find the world far too complex for me to predict and I don't find that forecasts from me have been particularly helpful over the past year. ...I'm also not in the stock-valuation business. I'm going to leave that job to you."
Clark's willingness to lay out the ground rules, resolutely and unapologetically, struck a chord. In the hazardous world of stock prognostication, where science and guesswork are often given equal weight, here was a bit of certainty: The investment community could count on Clark to deal with them straight.
"It was an amazing presentation," recalls one analyst, who could almost quote the speech verbatim three years after the fact. "He's the first one to tell you when there's a problem--not the last one. That sets him apart from the other bank CEOs. When you talk to Ed, there's not a lot of spin."
Clark has since become almost bulletproof in the investment community, spawning what some on the Street have begun referring to as "the cult of Ed." Of course, the esteem stems partly from Clark's getting the bank right side up: Its bottom line improved 115% in the past year alone, while its Top 1000 profit ranking climbed from 19th place to sixth (see page 44).
"If I've got a problem with the stock, it's that everyone agrees with me that Ed's a great manager," confesses Murray Leith, the director of investment research at Vancouver brokerage Odlum Brown. "He does walk on water in a lot of people's minds, but that to me is a bit of a worry, because everybody's fallible."
Clark himself is ill at ease with his popularity, in part because he knows how fickle the market's adulation can be. One major investor recently told Clark he'd sell TD's stock if he ever saw him grace the cover of a magazine.
"I really dislike personality cults," Clark declares. "I'd have to ask my psychiatrist why that is. I guess I'm just not of a leadership style that says it's all about me."
In truth, much of Clark's reputation is owed to a record that to date has been largely janitorial. TD was in bad need of a mop-up when he took over. It had made some dicey bets on the telecom and media sectors, so when the credit picture darkened, it was forced to write off billions in bad loans. The charges produced a year in the red, the first time since the merger of the Toronto and Dominion banks in 1955.
The timing was exquisite for a retail banker like Clark. The entire banking sector had been scorched by the meltdown in corporate credit, prompting an industry-wide shift away from the unpredictable performance of investment banking and back to what has always made Canadian banks buckets of cash: plain old boring branch banking.
Clark quickly identified $11.2 billion worth of loans to be lopped off the bank's portfolio. He shored up TD's ability to make deals by nursing its balance sheet back to enviable health, aided, he readily admits, by a beneficent reversal in the credit cycle. And he quickly absorbed some punishing charges to stop the bleeding at TD Waterhouse, the bank's discount brokerage, by slamming the door on some of the unit's money-losing international operations.
TD might be the best turnaround story in the sector, but even Clark's loyal following--nine of the 13 analysts who cover the stock have a buy recommendation, and no one has a sell--hasn't yet turned the bank into a darling. The stock is up about 50% since he was named CEO, but that's partly because it was languishing in the gutter around $34 when he came on the scene. Today, its price-to-earnings multiple is still dwelling near the bottom of the bank heap, meaning investors are unwilling to afford it a premium valuation.
Clark preaches that "E drives the P"--earnings drive prices. Consistent profit growth will eventually convince investors to push the stock to higher levels. Yet perversely, the candid Clark style that won over the Street is also one of the reasons the stock has not climbed further. Every quarter, prior to TD's conference call, the bank's senior executives chew over this problem of Clark's refusal to play cheerleader.
"We have a big group inside that says, 'Ed, you overdo it, because in a context where 90% of the population oversells and you are underselling, they're not going to understand that you're underselling. And so you're actually going to hurt us--you're not fairly representing us.' My problem is--call it a failure of leadership, or whatever--I can't do otherwise. You are what you are. The last thing I'm going to do is overpromise and underdeliver."
But it's more than a personal quirk, it's a conviction. "That's the biggest danger in an organization--lack of candour," Clark says. "All the great military disasters--why did they all occur? Because someone didn't come and tell the general, 'You're out of your mind.'
"If I have a thing that I hammer away and hammer away on in every situation I've ever been in, it's transparency. Bring me the bad news. I won't yell at you. The only thing I will get upset with is if I discover you've been sitting on bad news."
Clark isn't known for flashing a temper. But that doesn't mean he doesn't make employees nervous. He works closely with his senior managers--something that can be interpreted as controlling--and has little patience for poor results. Baillie, by contrast, was more aloof, less of a hands-on operator, says a former TD executive who worked under both men. "Most of the people who work for Ed live in fear of him," the banker says. "Because if you cross him, he'll cut your nuts off. He's always thinking three moves ahead in terms of people."
Several high-profile departures have occurred since Clark's arrival, some coincidental and others because executives didn't mesh with the new CEO's plans, or had been passed over for his job. Frank Petrilli, the long-time head of TD Waterhouse, retired. Don Wright, who headed up the investment banking arm, TD Securities, followed his mentor Baillie out the door. Andrea Rosen, who ran the retail bank branch network, the spine of the organization, took a year of family leave at the beginning of this year. She won't be coming back to the same post: She was replaced by the team of Bernie Dorval and Tim Hockey. Both came from Canada Trust, giving credence to the idea that the merger with TD was something of a reverse takeover.
To hear Clark tell it, this is not a case of the executive suite being cleared of all future pretenders to the crown. He knows he needs help.
"I'm not a brilliant strategist, I'm not really an innovator," he maintains. "I'm not the world's smartest human being by a long shot. It's not obvious that I'm even above average." (This is standard Clark schtick, always delivered with a grin.)
"Having grown up in an academic family, I'm not afraid of smart people. If you're not smarter than me, why would I hire you?"
The turnover, however, means that some unit heads have little experience in their new roles. That, in turn, prompts a more pressing question: Who can take over for Clark once he decides to leave? There's no clear answer, and it's a concern that analysts hear frequently when they meet with large institutional investors, who are not unmindful of Clark's previous health problems.
Clark, who is 57, acknowledges it's a valid point. Meantime, he figures he's got another five to seven years of work left.
A lot of the work will be south of the border, carrying through on one of TD's most ambitious moves in recent memory, the $5-billion acquisition of Portland, Me.,-based Banknorth Group Inc., announced in August of last year.
When one public company says it plans to shell out a wad of cash to buy another, the stock of the purchaser typically goes down, and the stock of the target goes up. This is Economics 101.
And this acquisition carried more than the usual risks. Clark was making a bet on the United States, a charnel house for the expansionist dreams of many a Canadian banker. TD's stock should have tumbled, if not tanked. But one day afterward, it was trading higher than before the news.
Of several reasons for the stock's stubborn refusal to drop, the most important was that the market was willing to give Clark, Mr. Candour, the benefit of the doubt. That's a gesture it wouldn't have extended to John Hunkin, at Canadian Imperial Bank of Commerce, or Gordon Nixon, head of Royal Bank of Canada, both of whom have experienced varying degrees of failure south of the border.
Of course, trust can be a fickle thing in the markets, and Clark, on the cusp of a major foray into the U.S. market, now has to deliver.
"The jury is still out on [Banknorth]," says Len Racioppo, president of Jarislowsky Fraser Ltd., an institutional money manager that is TD's largest institutional shareholder. But he credits the move as "emphasizing traditional retail branch banking, as opposed to running out and trying to capture earnings and gains from the capital markets."
Instead of buying the entire bank outright, TD purchased just 51%, and retained the option to continue increasing its stake over time. This both limited the amount of cash it had to spend up front and kept Banknorth's shares alive for future acquisitions. The latter aspect is crucial: When Canadian banks try to fund U.S. deals with their own shares, they are usually dumped back into Canada at a discounted price by large American investors, a phenomenon known as "flow-back."
With the Banknorth shares, TD gets to have its cake and eat it too. This is one of the reasons the deal generated some dissent among Banknorth shareholders. If Banknorth's stock declines, TD can increase its stake more cheaply. If the shares rise in value, they become a more valuable currency with which TD can make acquisitions.
Even if Banknorth proves itself to be a shrewd pickup, it is still just one plank in a more ambitious strategy. TD has signalled it is now on the hunt for further purchases in Massachusetts and metropolitan New York to solidify its presence on the northeastern seaboard.
This is where the risk occurs, and it is one of the chief reasons that the market is still hesitant to give TD's stock a premium multiple.
"Ed's in a pretty interesting predicament," observed one analyst who follows the bank. "To make the first deal work, you have to make other ones, and you probably have to do them in a relatively short order."
Much of the blame with Royal Bank's poor results in U.S. retail banking has been chalked up to micromanagement: The feeling is, Royal Bank executives thought they could run their North Carolina operations from the safety of Toronto, despite their lack of knowledge about what has turned out to be a very different market.
Clark wasn't about to make the same mistake. While he never takes direct swipes at his competitors, and downplays the extent to which he looks over his shoulder at the other banks, he repeatedly--some would say painfully--stresses that TD's strategy in moving into the United States is to look for strong local management who are capable of sniffing out opportunities and propelling TD's growth.
That's all well and good, but it poses a problem: Investors have faith in Clark, but the man looking for purchases--Banknorth head Bill Ryan--remains a relative unknown on this side of the border. Of course, Clark will be vetting any major acquisitions, but if he edges too far in this direction, he'll merely be replicating the same kind of behaviour that many believe got Royal Bank into trouble.
Clark's other stateside play is up in the air. He tried--and failed--to strike a $10-billion megamerger that would have combined TD Waterhouse's U.S. operations with E*Trade Financial Corp., but the deal fell apart because the parties couldn't see eye to eye on who would run the company (as one wag put it, E*Trade CEO Mitch Caplan wanted to keep his job).
Now Clark is at it again, with a different partner. At press time, he was finalizing a deal with Ameritrade Holding Corp. that would see the two sides combine their on-line brokerages. It appeared TD would take a minority stake of around 30% to 35%. The market was mesmerized by the advantages of a merger: hundreds of millions in cost savings, increased earnings power and the scale to go toe-to-toe with heavyweights like Charles Schwab Corp.
But this gambit is as much about Banknorth as anything else. Clark may insist that he likes the discount business, but he likes retail banking a lot more. Merging TD Waterhouse strips more than $1 billion in goodwill from the books and frees up significant capital for further retail acquisitions in the U.S. This is the real endgame. A marriage with Ameritrade could be the first step in Clark's surreptitious exit from a declining sector.
Timing in this business is everything, and Clark need only look at his own rise to the top of TD as a reminder. Baillie was highly respected in the industry, yet he left under the stain of TD's first-ever annual loss, apologizing to investors for the embarrassing mishap with soured loans, and essentially falling on his sword so that Clark's tenure would begin with a clean slate.
For all the current faith in Clark's management style and strategy, he will ultimately be measured by the things he hasn't yet done: making further U.S. acquisitions, resolving the discount brokerage conundrum and managing domestic bank mergers (assuming the government ever makes up its mind on whether to allow consolidation).
Clark hopes to be remembered as a great leader, but, he says, "I'm not big into legacy things. I don't want to sound gruesome, but when I'm gone, the ants will be eating the body away and I won't feel a thing, right?"
Spoken with candour.
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