Maverix Private Equity reposted this
Founder & Managing Partner at Maverix Private Equity. Founder, OMERS Ventures and Co-Founder, Council of Canadian Innovators
We have now had time to digest the shocking news that TD Bank has pleaded guilty to criminal charges in the US after allowing drug cartels to transfer hundreds of millions of dollars in illicit funds. Not only will TD pay the largest fine in history over AML abuses of US$3BB but will face restrictions in its growth in the US. To all my very good friends who are employees of TD, my heart goes out to you. In 2002, I was a Global Partner of Arthur Andersen when the DOJ in the US indicted the firm over the Enron fiasco. It really stung. Despite the courts overturning the indictment, it was too late and the reputational damage broke up the firm. TD however is a very strong business with a strong balance sheet and will survive. I am a shareholder of TD. But the reputation hit will hurt and TD will be put in the penalty box for a period of time in the short/medium term. I suspect growth in the retail business will suffer (especially in the US) but their clients will remain loyal. Now is the time to deeply understand what went wrong. This article in the Globe in August is a good starting point. https://lnkd.in/gCrNtXaW This brings me to the role of governance. Five years ago, RBC and TD were vying neck and neck for the most valuable bank in Canada - $150BB vs $130BB in RBC’s favour. Today it is $241BB vs $137BB in RBC’s favour. RBC’s performance has been stellar but TD has grown 6% over 5 years. A public company’s board of directors is chosen by shareholders and its primary job is to look out for shareholder’s interests. Management runs the day to day operations but the board has oversight for strategy and risk. Ultimately however the most powerful tool a board has is the ability to hire and fire a CEO. The questions that people are now asking, including the employees of TD Bank, are: 1. Who exactly knew what and when? 2. What processes did the board take to satisfy themselves that the AML processes were actually functioning properly? AML risks have been known for years. 3. Why was there a breakdown in the culture of risk management particularly in the US and why was this not known? Did the board know? 4. If the investigation (and criminal charges to the laundering participants) was discovered a few years back, why did the board not determine that perhaps it would make sense then to make a change in CEO? Was there a proper succession plan in place? 5. Even since the criminal indictment was announced and a new CEO has been announced, why delay the changeover in CEO for 6 months? It must be extremely difficult for the current CEO to operate given that he would be considered a “lame duck” in the organization from a decision making perspective. It is particularly perplexing when you compare this to the recent RBC situation where they decided to terminate with cause a well respected CFO for an alleged affair with a subordinate. Lots of questions. I do not pretend to have the answers.