MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, APRIL 14, 1998 (2)
STEALTH BANKER, Con't
They also say that the John Cleghorn mythology that has sprung up since the merger announcement is pretty much on the mark. He really is the former college football champion who still plays for the team. He's the solid citizen who's been happily married for 34 years. He earned $3.2 million last year, but still flies economy. (If you see him in business class, it's because he's used his upgrades.) He takes the subway to work. Or he drives himself in his Chrysler LHS in Toronto, or his Ford Explorer at his 20-hectare spread in the Eastern Townships of Quebec.
Around Knowlton, where Cleghorn has his country house, they talk about how different he is from former BMO chairman Bill Mulholland, who used to roll in Friday night in his limousine and live a fairly reclusive life. In contrast, Cleghorn is seen doing the family shopping at Jimmy's grocery store. He and his wife, Pattie, support the Lac Brome Theatre and the local hospital.
"John is no-frills," says Lloyd Bankson, managing director at J.P. Morgan in New York. Bankson met Cleghorn in a credit analysis course in the 1970s. "He really doesn't care about the trappings of banking. He's a Detroit kind of guy, a General Motors kind of guy."
"Ambitious" is the first word Martin Connell uses to describe Cleghorn. Connell is the president of Toronto based Calmeadow Foundation, which organizes micROEnterprise credit financing to support small business in Canada and the Third World. He has been friends with Cleghorn since their student days at McGill in the '60s. "John's a very straightforward, uncomplicated long-haul thinker," Connell says.
Cleghorn likes to pepper his conversation with mentions of big-picture theorists. He's a devotee of the Austrian economist Joseph Schumpeter, known for his theory of "creative destruction," which posits that innovation is crucial to an upswing in the business cycle. "I've always been amazed by the number of companies that started in the 1930s," Cleghorn says. "They had to be resourceful, so they were innovative." He maintains that Canadian banks went through a period of "creative destruction" in the 1980s. "If we'd been Royal Bank of Alberta, we'd be history today."
Schumpeter is a favourite of many corporate leaders who want to justify a range of brutal, social Darwinian behaviour. But Cleghorn is also receptive to non-traditional approaches. He sits on the advisory board of Connell's Calmeadow and understands its aim to provide credit to people with no credit history or collateral, the very sorts that big banks will have nothing to do with. "John was one of the first bankers who understood and was supportive of the concept," says Connell.
More than his academic bent, Cleghorn is defined by a restless, focused energy. "Some of us mellow as we get older," says David O'Brien, chairman and CEO of Canadian Pacific Ltd. and a Royal director, who has known Cleghorn since the early 1970s. "But if anything, John is equally, if not more, intense now."
As the chairman of the 21st Century fundraising campaign for McGill University, which ran between 1991 and 1996, Cleghorn was given the responsibility for raising $200 million. Everyone thought that goal unattainable, given recession and uncertainty over a referendum. When the campaign stalled $30 million short six months before deadline, Cleghorn visited foundations and donors himself. In the end, he raised $6 million more than was targeted. "John's leadership was responsible," says Purdy Crawford, the chairman of Imasco Ltd., who also worked on the campaign. "He never said no."
Chalk some of it up to Cleghorn's fierce competitive streak, a trait he shares with Finance Minister Paul Martin, whom Cleghorn refers to as the "judge and jury" in approving the merger. Cleghorn and Martin have known one another for years, and are said to get along personally. Both belong to the Knowlton Golf Club. They have never played together, though. The reason, according to Cleghorn, is that he doesn't like to lose. "Paul is an excellent golfer. I'm pathetic. He got a hole-in-one last year. He gives me enough abuse. I don't need that on the golf course."
While the football-hero legacy explains some of Cleghorn's makeup, more stems from a constitution that made him decide to become an accountant when he was in Grade 10. Or perhaps it's his border-Scot lineage. He's known to measure everything that he does. Since he was named chairman, he's worked off a time sheet to make sure one-quarter of his time is spent visiting employees and customers.
He is also somewhat obsessive about calculating risk. Required reading within the bank last year was the the fashionable bestseller Against the Gods, The Remarkable Story of Risk, by Peter L. Bernstein. "The only way you win is by diversifying risk," Cleghorn says. He lost London Insurance Group Inc., an acquisition he wanted badly, last summer when Great West Life came in with a $2.9-billion bid; Cleghorn refused to pay more than $2.5 billion. Upping the offer didn't make sense he said at the time.
A megabank that could play on a global scale is something Cleghorn has been working on in his methodical way for years. The Royal had kicked the tires of a number of big U.S. banks over the years, but were put off by the prices. "We knew we only had a few serious options ahead of us if we were going to be a globally competitive bank," Cleghorn says.
The Royal then ran simulations of potential Canadian partners. The Bank of Montreal seemed the obvious match. Besides, BMO was where Cleghorn had his first bank account as a boy. It was the dominant force in Montreal, where he spent most of his childhood.
By December, 1997, as Cleghorn says, "the planets had lined up," meaning that he believed legislative trends and political sentiment in Ottawa would back a bank merger.
On Dec. 19, at a senior management meeting, Cleghorn reviewed the options. "I said to myself, `What's to lose if I go and see Matt?'" He called Barrett and said he needed 15 minutes, maybe half an hour. At 5 p.m., he walked a block and a half up Bay Street into the Bank of Montreal's staff Christmas party. "I asked him, how would you like to build a globally competitive Canadian-based financial institution on a merger of equals?" That's how he remembers it. BMO had been doing their own simulations, says George Bothwell, senior vice-president, corporate affairs, at the bank. Royal was their first pick too. Five weeks later, the bankers had a deal in principle.
Competition law offers the banks a convenient cone of silence when it comes to discussing details of the merger - things like high-level infrastructure or details about pricing, costs, even the bank's new name. It's believed that Cleghorn will hang in for the longer term, while Barrett will stay to smooth the transition for one or two years and leave with millions arising from his options. "He's looking at life now, and she's six feet tall," comments one analyst. (For anyone who hasn't read a newspaper in the past year, that's a reference to Ann-Marie Sten, Barrett's glamorous new wife.)
Cleghorn has said that CEOs should stay in the saddle no longer than six to eight years. That would give him only another two or three years at the helm.
John Edward Cleghorn learned early in life about what he calls "long suits and short suits," or personal strengths and weaknesses. He was born in Montreal on July 7, 1941; but soon after the family moved to Waterloo, Ont., the home town of his mother, the former Hazel Dunham, who was a dietitian. His father, Ned, got a job as the bursar of Waterloo College (now Wilfrid Laurier University). Nine years later, the Cleghorns moved back to Montreal when his father was named associate director and curator of the Montreal Museum of Fine Arts.
The family lived on Victoria Street in Westmount. Cleghorn was sent to the private Selwyn House to pull up his marks in Grade 6, but left because they didn't have a football team. He was a jock as a kid, albeit an earnest one. He liked having a paper route, he says, because he enjoyed meeting with his customers and paying his accounts on time.
Early on, he figured that Latin wasn't one of his long suits, which ruled out law and medicine. He decided to become an accountant after seeing a movie about the profession. His father was encouraging, telling his son that a career as an accountant would offer him mobility and stability.
He graduated from Westmount High in 1958, then went on to McGill, where he played for the McGill Redmen. During the 1960 season, the veteran middle guard was injured. Cleghorn was brought in as a starter. The team went on to win the national championship that year.
After graduating with a Bachelor of Commerce in 1962, he was drafted by the Toronto Argonauts. He turned the offer down after assessing the lineup; he figured that he'd only be bench strength. Instead, he went to Clarkson Gordon in Montreal and received his CA in 1964. Today, he says that he should have stayed longer in the profession. He speaks of the small and medium audits as being "the most fun."
Next, he took a position as a futures trader at St. Lawrence Sugar. He left because he wanted a broader scope, preferably working for an international company. He had come across an article in CA Magazine about the Mercantile Bank, which had just been bought by Citibank. The international scope of the bank appealed to him. He made an approach and was hired in the fall of 1965.
Cleghorn moved up the ranks more quickly at the Mercantile than he would have at one of the big bureaucratic Canadian banks. He started as an account manager in Montreal, then moved to Winnipeg to manage a branch. By the time he was in his early 30s, he was the Western regional vice-president, based in Vancouver.
In 1974, the bank moved him back to Montreal to do much the same job. Stasis had set in, which frustrated him. So he took a 10% pay cut to join the project financing department of the Royal in 1974. The bank's reputation had impressed him. "I had put them up on a pedestal," he says.
David O'Brien, then a Montreal lawyer, worked with Cleghorn soon after he joined the bank. They would travel across the country looking at any loan that wasn't plain vanilla. They worked on the first big financing of Petrocan. "He finds a way to get the deal done," says O'Brien.
Cleghorn was spotted as a young man with potential. He moved up through corporate lending and corporate accounts, before working under Taylor in international banking. Cleghorn spent most of his time trying to figure out how to get into the U.S. market. He spent a year looking at near-banks, financing and leasing companies. Prices were too high. "We didn't want the burden of the goodwill hit on our earnings per share," says Taylor.
In 1986, Cleghorn was appointed president. In 1990, COO was added to his title. In 1994, he was made CEO. People who worked with him say that he was impatient as president, that he wanted more.
In 1993, he spearheaded the $1.6-billion acquisition of Royal Trustco. The deal was his baby. They had to wade through a lot of bad paper. Integration took five years. But the trust company gave Royal access to wealth management, which is another way of saying getting your hands on all of a customer's assets, including RRSPs. This is hugely attractive to banks because profit margins are much higher than for traditional services.
They learned from the mistakes made folding Royal Trust into the bigger bank, Cleghorn says. For one thing, they closed branches too quickly. "The idea is to grow the business, not to shrink," he says. "You want to squeeze the technology side, not the human side."
He was finally given the top job in 1995. "Over the years, with a variety of positions given to him, he was the best person." Taylor says. "He can see the whole picture."
Cleghorn leads by example. Take his frugality crusade, for example. Royal had been known as a high-cost operator among the banks. He wanted to change that. He got rid of the corporate Challenger jet. He cut back on the bank's black-tie events. The in-house barber was chopped. The junk in Hong Kong harbour was sold. Public Relations likes to float the story of Cleghorn going to Druxy's, a deli in the mall under the Royal Bank Tower, for lunch after being appointed chairman.
Cleghorn encourages a team ethos. He delegates. Within the bank, where he's known as JC, Cleghorn is respected. "He's the kind of guy you feel you could go out for a beer with," comments a trader in Action Direct, the discount brokerage arm of RBC Dominion Securities.
"John has dispelled the myth of the banker being removed," says George Cohon, the senior chairman of McDonald's Restaurants of Canada and a board member of the Royal Bank. "He calls up directors and says, `Can we have lunch?' And he takes me out to lunch and says, `George, what can we do better?' John is very hands-on."
Cleghorn's management style, while effective, can be tough and impatient. Don Wells, recently retired executive vice-president, recalls the time that the bank failed in its expansion plans into Australia. "He kept asking me, `Aren't you mad about this?' He followed me down the hall, saying, `You should be mad about this.'"
As for voicing his opinion, Cleghorn doesn't hesitate. At a Liberal fundraising dinner at the Westin Hotel in Toronto last November, he launched into a public tirade against Industry Minister John Manley, whom he had just met. Cleghorn was furious about the politician's critical remarks about banks' inadequate lending practices to small businesses. He felt that they were inaccurate.
"Cleghorn was vehement," says Stephen LeDrew, president of the Liberal Party of Canada in Ontario, who witnessed the scene. "It wasn't very politic. What no one reported was that Manley gave back as good, if not better, than he got." After the exchange, they shook hands.
On the whole, Cleghorn is known to keep his ego in check. "For the grand Pooh-Bah of banking, he handles it well," says one bank analyst. From time to time, though, it surfaces. The same analyst recalls seeing it in meetings after Royal had to take significant real estate losses. "It was pretty embarrassing for them. He was defensive and more than a tad grumpy."
Yet being a banker does not appear to be Cleghorn's only source of self definition. Friends speak of his strong commitment to his family. Around the bank he is known for jealously protecting his personal time. "John takes every holiday he's entitled to," says Wells. "He'll tell anybody who doesn't they're fools."
Cleghorn married the former Pattie Hart, whom he had met while he was at McGill, in 1963. They have three children, all grown. Because of Cleghorn's career, they've moved house a total of 13 times. "Pattie is a real trooper," says Connell.
The couple also weathered Pattie's serious illness in the early 1990s when she developed diabetes and had a lung removed. Afterward, they established the Pattie Cleghorn Fund in Diabetes Research at the Polypeptide Hormone Laboratory at McGill, which is working on a form of insulin that can be taken orally.
On weekends in Toronto, where they live in Rosedale, he and his wife socialize with friends or go to the movies. Titanic is on his list of must-sees, he says, with no apparent irony. But most weekends and longer holidays are spent in the Eastern Townships.
In 1986, Cleghorn accepted an invitation to be chancellor of Wilfrid Laurier University. "He's truly committed to an undergraduate liberal arts education," says Marsden, who was president of Laurier at the time. He throws himself into the role. At convocations, he works the crowd, talking to students and their parents.
There remains more than the suggestion of the college frat boy in Cleghorn. He and his wife even attend Laurier dances. He remains crazy about college football and loves to watch Laurier's gridiron warriors. He's also been known to slip down to Notre Dame on the occasional weekend to catch a U.S. college game. One of his associates refers to his "campus" sense of humour. "He likes to roast people, that sort of thing."
Unsurprisingly, the stock market loves the proposed merger. Royal stock rose 5.4%, Bank of Montreal 18.2% the day that it was announced. Cleghorn and Barrett's campaign to convince average Canadian bank customers will be next to impossible. No one wants potential job losses (something Barrett denies will happen). Few trust that a big bank merger will be in the public interest. Not that that matters. All that the two banks have to do is to make the megabank politically palatable.
"I'm not a politician," Cleghorn protested in a recent interview on CBC Radio. But, increasingly, he has to sound like one. Cleghorn and Barrett have to market the merger as far more than a good business proposition. It's being played as crucial for this country's very survival in the next century, an argument that even some of the most ardent supporters of open competition find a bit rich. Yet Cleghorn is trying to whip up some sense of urgency. "We've got to get them in the water before they land on our beach," he has said more than once, referring to the threat posed by any incoming U.S. banks.
The banker has little patience for people who suggest that the banks have it soft. "Look, this is a competitive world," he says. "People think we're a protected industry, which is not true, and not in business, which is not true."
He talks about niche players coming into Canada to compete in credit cards, mortgages, mutual funds. He talks about the 4% decline in deposits, the 11% rise in mutual funds. He plays the U.S. domination card. Fidelity and Templeton are here, he says, and they're bigger than two of the Big Five in Canada. The potential of big international deals will make for cost efficiencies that will cut costs at home. "Unit costs are important," he says.
Cleghorn actually talks about the greater access to ATMs for Royal and BMO customers that the merger will bring. Even he's had the frustration of losing a card in a Bank of Montreal machine, he says. The merger means that he will be able to use the BMO machine in Knowlton rather than driving to the nearest Royal Bank in Cowansville.
As Cleghorn continues his crusade about Canada's need for a globally competitive banking system, his PR emissary prods him gently to bring the interview to a close so he can attend an early evening reception that the bank is holding to celebrate the Chinese New Year. Asian customers are an important part of the bank's client base.
Cleghorn isn't ready. He's warming to the attention, and has more to say about competition, about banking, about life. "I have a simple philosophy that comes from being a Y camper and counsellor," he says. "You leave the campsite better than when you found it. This is not a threatening statement to tell people to clean up the mess. It's more like, `What did that place look like when you got there? Can you make it look better?' Not better than the next person can make it, but better than you found it."
Cleghorn admits that the banks have done a poor job of explaining themselves. He says he welcomes the debate to debunk banking myth. Even so, the exercise is seen as a technicality. The principals are confident that the merger will go through. "What's going to stop it?" Taylor asks. Cleghorn can't afford to appear as cocky. He's careful to send out the message that the two banks are still in direct competition. "Matt's wining and dining our clients as we speak," he says.
"We're regarded as arrogant and standoffish and not in touch with what Canadians want," he concedes. "If we can get our day in court, we can convince Canadians it's in their interest in the long run. If we can't, we don't deserve it." And he says he's not a politician.
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