It’s already in the vault

Regulator steps in to monitor hiring, but the banks were already getting safer The candidate earmarked to lead the institution in the future needs a period of incubation, which means carrying responsibilities for important lines of business

The first generation of a tighter, more diligent era of succession planning is graduating on Bay Street. As the CEOs of three major Canadian banks decamp their corner offices — highly unusual timing for this most buttoned-down sector of the Canadian economy — the departures of Scotiabank’s Rick Waugh, RBC’s Gord Nixon and TD Bank’s Edward Clark have yielded the first crop of successors to emerge from the clutches of sweeping governance reforms and tightened regulatory supervision.

Since Sarbanes-Oxley was unleashed in 2002 following a series of corporate scandals, succession planning has become less a game of who you know and more about what you know. Gone are the public internecine battles among competing factions for the corner office, which often caused bad blood among the losers and resulted in mass departures. Ditto for the days when the CEO, who was usually also board chairman, had a quiet chat with the directors (who reported to him) about deciding his best-before date. Back then, major financial institutions tended to pick an heir apparent and then groom that person for the top job. Not so today. A handful of candidates vigorously compete by operating lines of business, sometimes multiple divisions, whose successes and failures can be measured by analysts and investors depending on the bank’s needs. The result: an orderly passing of the torch based much more on accountability to the bottom line and a predictable outcome for investors.

More than anything, the separation of the chair and CEO roles dramatically changed the dynamics of succession planning, especially in Canada. This less static exercise means boards aren’t scrambling to find replacements at the last minute. For one, the process now commonly targets two potential replacement candidates. One is of the short-term variety in the event the CEO gets hit by a bus or doesn’t live up to his billing. That person is more likely than not to be the chief operating officer, who may not be the long-term choice of the board. Think Barbara Stymiest’s tenure at RBC.

The candidate earmarked to lead the institution in the future usually needs a period of incubation, which means carrying responsibilities for important lines of business, notably retail banking. However, since 2008, stints in risk management have become mandatory for future CEOs because, after all, the financial crisis has proven playing defence in banking is a good thing. To wit, the three new CEOs — Scotiabank’s Brian Porter, RBC’s Dave McKay and TD’s Bharat Masrani — all have had extensive exposure to managing bank risk directly or indirectly.

Ultimately, this tidy process is designed to produce stability and continuity, crucial to bank brands. RBC, Scotiabank and TD have been Canada’s top-performing banks for the past 15 years. And bank CEOs keep bucking the shortening tenures found in other industries. The average CEO can expect to stay in the corner office for less than four years, but that almost triples in the bank towers.

Given that change at the top is hardly roiling, it’s curious that the Office of the Superintendent of Financial Institutions ( OSFI) wants more say in the appointment of key top executives at the banks and insurance companies, from the CEO down to the chief internal auditor. Although the bank act already gives OSFI the power to remove any bank executive or director it deems unsuitable, it has rarely flexed that muscle. Regulators seem to prefer a less overt kind of influence by insisting on a say in succession planning, complete with copies of résumés and introductory candidate meetings. But if OSFI wants a seat at the boardroom table, shouldn’t it be prepared to accept the same liability as the directors making the decisions?