Retiring TD Group CEO Ed Clark offers his views and insights into how to build a strong organizational culture, the benefits afforded by economies of scale, how new U.S. regulatory requirements and trends in litigation and enforcement have impacted overall business strategy, and the global economic outlook.

Ed, congratulations on just an absolutely spectacular year.

Thank you.

One of the things that you said in your speech to the Empire Club of Canada that I thought was very humble but interesting is that your career has been a tremendous learning journey. What do you think are the basic lessons to be learned from that journey?

Well, I think I’ve learned to be a better learner, a better listener. I think when you start your career, people keep on saying, “Well, you have to make an impact, you have to be forceful,” and I think over time you learn more and more that you should walk around, listen to what people have to say, and absorb. Don’t be fixed in your views, and then you can lead people by listening. I think, in fact, listening can be a much better way of leading than by telling them.

There’s no question that one of the themes that also came across in your speech is the emphasis on customer service and culture. I have a quote from your speech that I thought was really fascinating, which is, “Culture is what people do when no one is looking.” I think that’s an articulte explanation of what core values mean. Could you talk a little bit about how important it is to an organization to have that articulated statement of core values?

If you’re running a large financial institution and you say, “What keeps you up at night?” The answer is that somehow, somewhere in the organization, somebody is doing something that they shouldn’t be doing. How can you deal with that issue? You can’t have enough “police officers” in the organization prevent each instance of wrongdoing by looking over everyone’s shoulder all the time. You do really have to rely on the fact that the people in the organization understand that the values you have articulated are more than just words. I think that the core issue is this: how do you build a culture of integrity where people’s instincts are to do the right thing and where people feel comfortable escalating matters to the top to say, “You know, we’ve got a problem here”? The other issue that terrifies you running an organization is that there are problems occurring that could have been solved had they been escalated. I do think the core of leadership is whether the organization actually believes that you believe the values you’ve articulated.

Is that in part what you mean when you say “leadership matters”?

Yes. I think it’s a lot like with your kids. They don’t follow what you say; they follow what you do. Therefore, at a bank, what people are going to want to see is that you actually made decisions that were informed by your core value system rather than just solely the bottom line. If they see a leader that talks big principles but always goes for the buck rather than the right thing when it comes down to it, then they’re going to say, “Well, that’s what the real values are.”

One of the interesting things about your career it seems is that you’ve had some rather defining moments where culture was at a crossroads. The merger of Canada Trust with TD and then, certainly, your expansion into the United States. Tell me a little bit more about these instances.

I would say that another one was when we decided to get out of structured products. We were in the top ten in structured credit derivatives, and we were making lots of money and were the envy of banks in Canada. And we chose to get out of them. A core element was risk, because I thought these products had embedded risks that people were understating. But also, we had a culture that said if you don’t treat clients a certain way, you can’t build a franchise dealer. Those are really quite different models. One of the comments that I keep making to people is that business models create culture. Culture should tell you what business model you want, but you have to recognize it. I think there’s a certain naiveté that people can have certain business models and retain a culture that’s just not compatible with that business model.

That’s a very interesting observation. Talk to me a little bit more about the challenge of growing your franchise in the United States.

We basically entered the market through acquisitions even though in a sense our core model is an organic growth model. We believed that we needed to get a platform that was large enough. I think a mistake that previous Canadians have made trying to go into the United States is to go subscale. I think we came to a view either go big, or go home. We ended up doing a series of acquisitions. The first acquisition was Bank North and it was chosen very much for cultural reasons because we were worried about risk. We ended up inheriting a management team that was as conservative in risk as we were.

The next big acquisition was at Commerce. What they really had was, again, a cultural attribute which was, “We’re all about the customer.” The exciting thing was we were able to find a culture base in the United States between these two that had our conservative risk culture in lending and a retail oriented culture. When you put them together, that is the essence of what our culture is today.

I want to get back to a fundamental economic concept, which is economies of scale and scope. How important do you think scale and scope are to growing your existing franchise or entering new markets?

From my experience, I advocate that the scale necessary is bigger than what the economists would tell you. I’m an economist by training, but this idea that returns to scale diminish at relatively low asset levels doesn’t ring true. I’ve run smaller companies, and we couldn’t do the things that we can do with our size. I don’t think there are just economies of scale either. There are also income economies that allow you to take some chances and make mistakes. When you’re earning relatively small amounts, you do not have a lot of room to make mistakes. Most investments in the banking business are not investments of the capital dollars; they’re investments of earnings dollars. And you have to ask: are you prepared to do something that’s not profitable for three or four years? Take for example the digital revolution, where you know where this is going and therefore are prepared to invest. So, I think there are economies of income size that people misunderstand.

There’s also a second economy, which I think people tend to underestimate, and it’s economies of capability. At the end of the day, I’m a huge believer that it’s what kind of team you can gather around you. They make a difference.

Speaking of economies of size, scope and scale, it seems to me that as more and more of your expense base becomes fixed cost overhead in a post-Dodd-Frank world where compliance expenses, operational architecture, and technology investments increase, these are the things that by definition require scale. Have you seen within your own expenses increases with these kinds of costs?

It’s massive. There’s no question that by design or by inadvertence the regulatory agenda is going to change the landscape of U.S. banking because it’s going to drive scale. It just has to drive scale.

A frequently asked question I hear is “when will the regulatory pendulum swing the other way?” The facts of our story are much more positive and transformational than the industry is being given credit for right now. So what will it take—is it just time?

I think it is. I mean, humans just do take time. I think the industry’s doing the right thing here, and I think it has to just get out and say, “Well, we have put the capital in place. We have added the liquidity. We have changed the risk management. We have got out of a lot of businesses that we shouldn’t be in.”

One thing that really concerns me is that some of the rhetoric around banks isn’t really about banks. Instead, there is a fundamental loss of trust in institutions and that banks, as the personification of the institution of capitalism, are caught up in some broader socioeconomic anxieties.

I don’t think there’s any doubt. But it’s not the primary cause. It’s a huge problem that the current economic model is not delivering any real income growth for the average person. The fact is a middle-class American family is worse off financially today than it was 15 years ago. And while economists traditionally tend to focus on signals like job creation and GDP, a recent article in the New York Times aptly noted “you can’t eat GDP.” Moreover, the wage gains that have occurred in recent decades have been concentrated within the top half of income earners. I think the other issue that feeds this dilemma is that the regulators won’t stand up and be willing to say, “We solved the ‘too big to fail’ problem,” when in fact we’ve made enormous progress. And so that also feeds this narrative.

Talk about the regulatory environment and how that has impacted your way of thinking about business and your growth in the United States.

It’s overwhelming, and not all bad. I think it’s a mistake when the industry says it’s all bad. Clearly, as a foreign bank with a U.S. operation, there’s a particular difficulty that, while in theory we are implementing the same set of rules, it turns out that the U.S. wants to implement them slightly differently than the Canadians. It means you’re constantly adding to the burden because you actually are not doing things exactly the same way. You have to do things in the U.S. one way and another way in Canada.

Overall, do you think the cost-benefit analysis of the macroprudential rules have tipped in favor of perhaps a stop, look and listen approach?

We come with a particular bias. We find the U.S. regulatory system way too micromanaged, and we believe that being so prescriptive is pro-risk, not anti-risk. Rather, a principles-based approach actually is a much better way to go. I do worry that even though we know that models got us into trouble, and that was one of the core problems, that we’re just creating new models. We’re saying, “Well, why don’t we build new models and more models and be better at doing models” instead of saying, “why don’t we figure out what the real problem was?” That’s where you go back to culture.

Another thing I worry about is that we are transferring the risk management function to the regulators. Instead of banks owning the risk management function, with an understanding that you better be sure you know what you’re doing, the regulatory environment is so micromanaging that incentives can exist to defer the risk-taking and defer the risk management to the regulators. I think if you ask people honestly, their risk departments in banking are increasingly becoming compliance departments, not risk departments.

In some of your writings, you have suggested how challenging it is to manage everything and on top of it deal with the massive litigation and enforcement situation. Could you speak to that a little bit?

Yes. I think one thing is that it’s a mass of uncertainty and it’s made even sharper when you think about it as a foreigner because, rightly or wrongly, there is a perception that there are two scales of justice. And then secondly, who’s going to buy a bank in the next crisis? Something often overlooked is the ability of healthy, sound banking institutions to acquire failing institutions. That’s very difficult to do now. I think that it goes back to the fact that at its core, regulators, politicians and the population are skeptical of banks. So you just keep piling on and you don’t know when to stop piling on. I think that’s an incredible shame.

I want to get your thoughts on the Canadian economy and the global economy generally because it’s sort of apropos of what we talked about earlier. Global growth certainly helps cure many of these socioeconomic anxieties.

You know, I think the United States is back. I think despite all the critics, you can say that fundamentally this combination of massive fiscal and monetary stimulus has basically worked. It’s not been perfect. There are issues still there, but fundamentally the U.S. has got a recovery on the way.

The irony, though, is while the United States may have been at the epicenter of the financial crisis, it is now seen as a potential savior of world economic growth. We really have come full circle here.

I think Europe is a cause for concern. You have countries trapped in a Eurozone, and that fundamentally is asking countries to do devaluations by lowering real wages and changing practices. We know it’s extremely hard to do, so they’re trapped in a very low growth scenario. I think the irony is that around the world, the countries that weren’t initially affected by the crisis stepped up to the plate, and China would be number one in that, by providing stimulus, but have ended up creating their own debt problems in that process. Canada would fall in that category of having skated through the downturn but now raised household debt in that process and shifted its growth strategy from an externally-driven current account surplus to an internally-driven current account deficit. Unfortunately, that internal demand-generating growth path is no longer available to us.

Everyone has become much more dependent on the U.S. actually pulling the world economy out. I think we’re into a world where we are not going back to the growth rates we used to have, nor are we going back to the interest rates we used to have. I think U.S. rates have to move up here at some point. I don’t see it as staying forever that way, but I think we’re in a very different trajectory. And it’s, of course, exacerbated by the fact that we also are going through this demographic shift which was going to take at least half a point off growth rates anyway, just the shift in the population. It’s bad timing to have these two things go on.

We talked about the importance of culture, but, as CEO, you still live in a world of performance metrics and objective criteria. What are your performance metrics and what should the performance metrics be of banks?

Well, I think you should run what everyone calls a balanced scorecard. I think where you start going wrong is when you run an unbalanced scorecard. One of the things that I keep on saying to people is I’d love to live in the world where all I had to do is create the perfect institution with a long-term vision and I could ignore my shareholders, but that’s not the real world. What you get paid for as a CEO is to constantly balance those things, to try to get the right balance. I think there is a good discipline of the market that says, “It’s a nice dream, Ed, but we do have to make some money along the way.”

At the same time, if you’re just trying to make money along the way and you forget to ask, “Are we adding customers? Are we giving better service? Are we penetrating our customer base? Do our employees feel good about working here?” At the end of the day when you look back at a career, I think most people look less at the numbers than people would imagine and more at those intangibles. We walk down the street in New York City, and you know what, we’re a major player in New York City. We weren’t even there before. In the end, you’re here to make this institution that’s 155 years old go on for another 155 years.

The longevity of the brand. You talk a lot about the brand. Say a bit more about that.

People think of brand entirely as a consumer brand, but we think of it as an employment brand. We think of it as an investor brand. We think of it as a regulator brand. We win an investor relations award every year as the top transparent and responsive company in Canada. I think you want to think about your brand everywhere. The way I think of brand is what you actually do. It’s not a marketing slogan. It’s about the experience. Brand and culture are two sides of the same coin.

Right. Ed, thank you very much. ■