Case Study:
The Toronto-Dominion Bank (TD Bank Group) was one of the few large financial institutions in the world to have prospered during the financial meltdown and subsequent recession in 2008/9. It did this without any government assistance. Furthermore, it emerged from the crisis substantially larger in terms of market capitalization and assets while having the best performance of any of the Big-5 Canadian banks in terms of stock price and total shareholder return during the period 2003-2011
Unfolding Events:
In 2002, the new leadership of the TD Bank decided to redefine its risk management appetite. This shift in risk strategy followed many years of volatile and uneven performance, during which the bank had experienced some significant credit losses because of over exposure to single names or specific industry sectors. Over the next decade, the bank exited risky and complex synthetic investment products, reduced its reliance on single-name and concentrated industry lending, and built out its retail banking and wealth management businesses in the U.S. and Canada. These moves shifted its risks from those over which it had little or no control to those it could better understand and manage. From 2002-2012, TD Bank Group moved from being the 55th largest North American bank in terms of market capitalization to become the 6th largest. It also was one of only two U.S. or Canadian-based banks with a Moody’s AAA credit rating.
Steps Taken By Ed Clark in Good Governance Detailed Below:
Chief Executive Ed Clark, Through Diligence And Pragmatism Achieved The Impossible When The Lehman Brothers Were Going To The Wall.
• Pursued profitable long-term, institution building consistent with his views about stewardship, leaving an organization in better shape when he left it than when he had found it, and not pursuing fads and short-term opportunities at the expense of long-term growth.
• Developed and promulgated a risk appetite that had three fundamental pillars: not taking risks you don’t understand and can’t control; not taking long-tail risks with low probabilities but very severe consequences; and not taking risks that could result in serious reputational damage to the bank, its brands and its franchises.
• Explicitly targeted a mix of 70 percent retail/30 percent corporate and capital markets banking. In pursuit of this goal the bank intensified activity in Canadian retail through extended hours and convenience banking, and started to acquire banks in the Northeastern U.S. (Banknorth), then the tri-state area around New York (Commerce Bank of New Jersey), and then with selective acquisitions in the Carolinas and Florida (South Financial Group). These were careful acquisitions, made over time and based on sequential learning where the acquisitions could benefit from superior TD Canada Trust management, systems, processes, etc., as well as a stronger balance sheet.
• Made major investments in TD Ameritrade, a business that he knew well through TD’s experience with Internet banking (TD Greenline). TD also bought Chrysler Financial, again a business (automobile financing) that they knew well and with which they were very comfortable.
• Avoided sub-prime lending either in Canada (where it was, in any case, highly unusual because of the structure of the Canadian mortgage market, government insured mortgages, etc.) or the United States, in which it was becoming very common and which turned out to be the epicenter of the 2008 financial crisis.
• Avoided investment in or trading of third-party, asset-backed commercial paper other than a very limited amount for its internal, treasury needs.
• Exited the profitable but very high-risk structured-products field.
• Talked constantly about the bank’s risk appetite, what they were doing to ensure that they complied with it, what successes they were having.
• Instituted formal executive- and management-development programs, in which risk strategy, management and the role of senior managers and executives as risk leaders were addressed and discussed with more than 800 senior leaders, and which formally cascaded down to lower-level managers and non-managerial employees. The CEO personally participated in the vast majority of these programs.
Avoided strategic drift or muddying the message by not pursuing high-risk strategies in emerging markets or unfamiliar geographies.
• Instituted formalized risk governance and risk management systems, starting in 2002 but evolving to very highly sophisticated levels by 2011.
• Understood and appreciated the value of regulation and worked proactively and effectively with regulators, thereby extending his influence within the financial community.
• Built up the bank’s Tier 1 capital reserves in anticipation of tighter Basel regulations. This meant restricting dividend growth at a time when some of his competitors were increasing their dividend payouts
QUESTIONS:
1. Explain “each” of the above steps Ed Clark took through your reading of the contents, videos, references and activities set out in all the Topics under Module 1 and Module 2. You will need to support your report by setting out a Governance Policy on Data, including an Ethics and Social Responsibility Policy on Data using John Carver’s Policy Governance methods. Use academic references to support your conclusions. (Length: 500 words.)
2. As the GFC loomed prior 2007, TD Banking Group stood to lose a significant amount of revenue due to the “unforeseen” economic catastrophe. At that time, a board member proposes to establish a task force to “work with the staff to develop a business plan to mitigate possible insolvency.”
a. Was this board member correct in proposing this event? Support your answer by reviewing Module 1 – Topic 3, Module 2 – Topic 1, Topic 2 and Topic 3. Use academic references to support your conclusions. (Length: 500 words.)
3. What is the difference between a Board Committee to that of a Board Task Force? Out of the two types (Board Committee or Task Force), which would be relevant to mitigate the risk? Explain you answers to both questions and use academic references to support your conclusions. (Length: 500 words.)
