Toronto-Dominion Bank TD-T is on a path toward redemption in U.S. markets that starts with embracing Wall Street financial expertise and coldly cutting ties to Canadian business elite.
The country’s second-largest lender remade its board on Friday, and sped up the exit of chief executive officer Bharat Masrani, as part of what promises to be a multiyear journey back from U.S. regulatory sanctions over the failures in the bank’s U.S. anti-money laundering systems.
Friday’s overhaul of TD’s board is more significant than the US$3.09-billion penalty the bank paid to U.S. regulators last October. The fine is just money. TD has lots of that.
Moving out the CEO and six directors and announcing chair Alan MacGibbon will depart by December, less than two years after taking the title, is a wholesale reset of the bank’s governance. It’s a sign TD’s leaders know they’ve lost their corporate groove, and a coming-of-age moment for corporate Canada.
TD CEO steps down early amid push by investors to overhaul leadership
A generation back, the country’s largest companies were largely focused on the domestic market and recruited directors from the crowd who gathered for white-tablecloth lunches at the Toronto Club.
TD’s makeover, triggered by painful sanctions on its U.S. division, shows businesses with global ambitions need to build boards with deep international expertise. In a report on Friday, analyst John Aiken at Jefferies said: “The Street should also look for changes at other banks’ boards as risk management and compliance become the number one issue at the top of the house.”
TD jettisoned directors with distinguished track records in favour of new board members with AML experience, ties to U.S. regulators and no ties to a regime that failed to catch drug dealers moving millions of dollars through the bank’s New York branches.
The new board members include former compliance and accounting executives at JP Morgan Chase and Co. and Morgan Stanley. Their presence is meant to speed the bank’s exit from punishing limits on the assets at TD’s U.S. retail bank, the bank’s growth engine.
The departing directors include Mr. MacGibbon, former CEO of accounting firm Deloitte’s Canadian arm, the former chief financial officer at Bank of Montreal and the former CEOs of Canadian National Railways and Cenovus Energy Inc., one of the county’s largest oil producers. Based on past achievements, this crew are corporate all-stars.
The delayed and delicate departures at TD reveal a bank struggling to do the right thing
However, impressive résumés didn’t help TD’s board ensure the bank ran an effective AML program. Their departures speak to a welcome accountability, along with investor clout.
TD agreed to rework its governance as part of October’s agreement with U.S. regulators. Analysts say the scale of Friday’s restructuring, along with the decision to move up Mr. Masrani’s departure to Feb. 1, rather than the previous retirement date at the bank’s April 10 annual meeting, show the board wants to satisfy both market watchdogs and owners of TD’s underperforming stock.
“Our interactions with investors over our years covering TD Bank made it clear that there was a sense of frustration with management and the board,” said analyst Paul Holden at CIBC Capital Markets in a report. He said the board’s decision to let incoming CEO Ray Chun take the wheel sooner rather than later is a positive step.
“The changes announced today are in response to shareholder concerns, and are the right changes to make,” Mr. Holden said. “A more shareholder-friendly TD should earn back the premium valuation multiple it once held.”
Again, a generation back, investors tended to defer to boards when it came to the timing of succession, and boards allowed CEOs gracious exits in the wake of egregious errors. Rushing Mr. Masrani out the door after four decades of most distinguished service is the latest evidence corporate leaders are on a shorter leash.
For TD’s board and Mr. Chun, job one is winning back the trust of regulators and getting limits on growth lifted at one of the largest U.S. retail banking networks. On Friday, the bank showed it is willing to sacrifice blue-chip directors and a long-serving CEO to achieve that goal. The road to redemption will be painful, but TD is taking necessary steps to get its groove back.