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CIBC Weighs Break With 100 Years of Tradition for New CEO

Photographer: Jin Lee/Bloomberg

Canada’s fifth-biggest bank said in April it’s looking internally and externally to replace retiring Chief Executive Officer Gerald McCaughey within two years. Close

Canada’s fifth-biggest bank said in April it’s looking internally and externally to... Read More

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Photographer: Jin Lee/Bloomberg

Canada’s fifth-biggest bank said in April it’s looking internally and externally to replace retiring Chief Executive Officer Gerald McCaughey within two years.

Canadian Imperial Bank of Commerce, known for infighting when picking its leader, is considering breaking a century of banking tradition by looking for an outsider instead. Shareholders are wary of the uncertainty.

Canada’s fifth-biggest bank said in April it’s looking internally and externally to replace retiring Chief Executive Officer Gerald McCaughey within two years. Previous CEO changes at CIBC have broken executives into factions as candidates vie for the spot. Choosing an outsider could head off a fight and the defections that follow -- or further rile the troops.

“To bring somebody in from the outside, there’s then a learning curve for that person, and personalities come into play,” said John Kinsey, who helps manage about C$1 billion ($933 million) at Caldwell Securities Ltd. in Toronto. “I’d just like to have something that’s planned and everyone knows where they fit into that plan.”

Even though internal hires are generally considered the safer route, the bank has suffered an exodus of talent after previous CEO changes. CIBC has two internal candidates to succeed McCaughey: David Williamson, head of personal and commercial banking, and Victor Dodig, who oversees wealth management, according to a person with direct knowledge of the matter who requested anonymity.

“There’s a history of brutal bloodlettings, always with internal candidates, and the worst thing was to be the heir apparent,” said Robert Paterson, 64, who was senior vice president of policy development and strategic management when he left the bank in 1994. “CIBC was a shark pool.”

‘Second-Class’

CIBC didn’t identify a successor when announcing two months ago that McCaughey, 58, would step down by April 2016. Toronto-Dominion Bank, Royal Bank of Canada and Bank of Nova Scotia have all announced the retirement of their CEOs in the last 15 months. Each named a successor at the same time and each of them came from within the bank.

CIBC hired executive recruitment firm Russell Reynolds Associates Inc. to help with the search, said people familiar with the process who asked not to be identified.

“Our succession process is underway,” Kevin Dove, a bank spokesman, said. “As such, it is inappropriate to comment further at this time.”

The lack of a clear succession path at CIBC is emblematic of a bank that’s always one step behind its larger peers when it comes to management, strategy and focus, said Sadiq Adatia, chief investment officer of Sun Life Global Investments Inc.

“Its management team has always been known as second-class,” Adatia, whose firm manages C$8.1 billion in assets, said in a June 10 interview. “CIBC has always been kind of behind the pack.”

American Ascends

Canadian banks have historically promoted leaders from within. The last time Royal Bank (RY) went outside the company for a top executive was in 1908, when it appointed industrialist Herbert Holt on the death of Thomas Kenny, who had lead the lender from 1870.

Some banks have reached beyond their ranks to recruit senior executives who later took the helm. Bank of Montreal, Canada’s oldest bank, hired former Morgan Stanley executive William Mulholland to serve as president in 1975, and the American ascended to the top job by 1979.

Promoting from within has not been easy for CIBC.

When Al Flood became CEO in 1992, his main rival, Paul Cantor, departed the company. The competition to replace Flood in 1999 pitted investment banking head John Hunkin against retail banking’s Holger Kluge. Hunkin won and Kluge left.

Different Loyalties

“As we were being considered, people naturally lined up and had their favorites and loyalties,” Cantor, 72, said in a June 20 interview. He worked 17 years at CIBC. “At CIBC the culture was that when somebody becomes the CEO they want to have the people who they know and trust and the ones who helped them achieve their goals.”

Williamson, one of the internal candidates to succeed McCaughey, joined in 2008 and has been head of personal and commercial banking for the past three years. Dodig joined the bank in 2005. Telephone messages left with both executives weren’t returned.

CIBC’s management has been depleted through succession battles and leadership shuffles over the years. When Hunkin was CEO, he replaced David Kassie, the firm’s top investment banker, with McCaughey in February 2004, putting the current CEO on the succession track. As McCaughey rose to become president and chief operating officer, management shakeups resulted in departures including consumer banking head Jill Denham.

Culture Shock

McCaughey, who became CEO in August 2005, rebuilt the executive team during his term, bringing in outsiders such as Richard Nesbitt, Williamson and Kevin Glass. Nesbitt, recruited in 2008 to fix the bank’s capital-markets business, became CIBC’s second-in-command a year ago as chief operating officer. In March, the 58-year-old banker said he’ll retire by October 2015. Glass was named chief financial officer in 2011.

An outsider can have difficulty fitting in and winning acceptance in an organization as complex as a bank, and new management styles can result in culture shock.

“From an investor perspective, the unknown is always somewhat concerning,” said Kash Pashootan, portfolio manager at First Avenue Advisory of Raymond James Ltd. “It’s going to be essential that who they hire as a successor buys into the vision or strategy CIBC has.”

Whoever the board chooses, the new CEO will have to outline a new strategy for growth, said investors including Barry Schwartz of Baskin Financial Services Inc. CIBC’s current strategy isn’t immediately apparent to all investors.

New Perspective

While Toronto-Dominion is building its U.S. base and Scotiabank is renewing its focus on Latin America and credit-card growth, CIBC has concentrated on wealth management and consumer lending at home, where debt-laden consumers are paring back on borrowing.

“They’re not making the dynamic moves that you’re seeing other banks do,” said Schwartz, whose Toronto-based firm manages about C$700 million. “We need to get a clear strategy from CIBC and I think that’s what’s holding them back.”

An outsider may be what CIBC needs, investors including Pashootan said.

“The advantage of bringing someone in from the outside is you can acquire a skill set that you don’t already have in your tool box, or a perspective or experience that isn’t already there,” he said.

Reducing Risk

McCaughey spent most of his tenure reducing risk at CIBC, starting on his second day as CEO when the bank disclosed a $2.4 billion settlement tied to failed energy trading firm Enron Corp. He was also forced to clean up other messes, including bad bets on U.S. subprime mortgages and structured debt that cost the bank more than C$10.7 billion in writedowns from 2007 to 2009, the most of any Canadian lender during the financial crisis.

McCaughey’s mantra since at least 2011 has been to have a lower-risk bank that delivers consistent and sustainable earnings. The strategy has worked so far.

CIBC has the second-best risk-adjusted returns among Canada’s six-biggest banks in the past five years, with a 6.8 percent return after adjusting for price swings, according to data compiled by Bloomberg. The bank has the highest return on equity among the Canadian lenders at 19.3 percent.

The firm’s shares gained 5.9 percent this year, trailing the 7.1 percent gain of the eight-company Standard & Poor’s/TSX Commercial Banks Index. Over five years, CIBC has returned 70 percent, matching the index’s advance. The stock rose 10 cents to C$96.09 at 4 p.m. in Toronto.

“What they’re saying is they’re going to hire the best person, either internally or externally, and they’ve got a two-year process to do that,” said Peter Routledge, a National Bank Financial analyst. “That’s not a bad thing. I wouldn’t be selling CIBC for that.”

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net Jacqueline Thorpe, Steven Crabill

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