THE BANKERS PART TWO

Peter C. Newman March 1 1972

THE BANKERS PART TWO

Peter C. Newman March 1 1972

THE BANKERS PART TWO

Whenever Canada is examined as a society, it is almost always considered in terms of its identity crises, bicultural problems, or its agonies as a small raw nation in thrall to one or another overdeveloped empire. It is rarely viewed through the prism of its status as one of the world’s most successful capitalist states. Yet, that’s what we are — a capitalist society run, as are all such societies, by a cluster of interlocking elites.

A case could be made that the most important of these elites — certainly if measured by its financial power — is made up of the 261 directors of the eight Canadian-owned chartered banks. They put their mark not only on banking policies but on just about every significant business decision in the country. The banks distill business power; their board members hold among them some 3,000 corporate directorships, representing assets of about $581 billion.

The bank directors are almost unknown publicly but they deserve as much praise or blame for the state of the Canadian economy as the finance minister himself. They have no spokesman and are only vaguely accountable for their actions. Still, they go about their business in a remarkably similar manner, reflecting shared ideals in habits of thought and action. They are drawn from a self-perpetuating and enormously powerful social enclave. Yet theirs is a paradoxical kinship for they belong to an elite which maintains its dynamism through an incessant, exacting jousting for position within its own careful confines.

A large measure of the bank directors’ power is derived from the fact that Canada’s banking system itself is probably the most concentrated of any western democracy. The three largest of the eight Canadian-owned banks — the Royal, the Commerce and the Montreal — control 70% of all banking assets. According to R. G. D. Lafferty, a Montreal investment counselor and an ardent critic of the banks, “the banking system is a highly concentrated, monolithic structure with interlocking interests that employs restrictive practices to prevent new initiative and enterprise from challenging its dominant position.”

That may sound like a harsh judgment, but it would

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PETER C. NEWMAN

be difficult even for Lafferty to exaggerate the importance of bank boardrooms as concentrating forces of corporate power. The Bank of Montreal, for example, has 53 board members who, among them, hold 455 corporate directorships, representing holdings of $124.9 billion. Each bank has a special relationship with selected underwriters, law firms, auditing houses, and large life insurance companies (some 67 bank directors sit on the boards of the 17 largest Canadian insurance firms). Under the 1967 revision of the Bank Act, the banks are allowed to own only 10% of trust companies, but each of the Big Five maintains very close contacts with one of the large trust organizations.

When you’re operating in stratospheric financial altitudes like these, what matters is who you know, what entrées you can provide, how you can turn deals to the mutual advantage of both lenders and borrowers. The idea is always to be extending your reach, consolidating your contacts, trading information, knowing something that somebody else doesn’t know — then watching competitors jump when they find out about it. There is no shortage of money at this level; what counts is knowing exactly how to move it to achieve the most effective results. That’s why it’s knowledge, not money, that really creates power.

The men who supply this knowledge are the bank directors. They are agents of the intelligence network which keeps any bank in competition. Each member of a bank board knows exactly what’s happening in his own industry — who’s on his way up, which companies are in trouble, what the prospects are for new banking business.

Businessmen aspire to bank boards the way politicians aspire to the Senate, and once appointed seldom surrender the honor until the mandatory retiring age of 75. (The late Colonel R. S. McLaughlin, for instance, was a Toronto-Dominion director from 1917 to 1959 and 20year associations are not uncommon.) “For a Canadian, becoming a bank director,” says Charles Rathgeb, the head of Canadian International Comstock Company, who recently joined the board of the Royal, “is the summit of one’s business career. The banks are very powerful in the sense that no individual in Canada, to my mind, can do much without the support of the chartered banks. I hope there’ll always be room in this country for the banks to support the individual entrepreneur.”

The affection pulls both ways. “Our directors are of considerable help to management,” says John Coleman, deputy chairman of the Royal. “The product of banking is

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THE BANKERS from page 30

the same, so it’s the personal contact that counts. If we hear of some corporate business coming up, if necessary we’ll look at the names of the company’s directors and try to get at them through our own directors and their connections. If we heard a big deal was coming up in the West, we wouldn't hesitate a minute to call up one of our prairie directors to see if he could get us some of the action.”

Whether the banks make more use of their directors or the directors make more use of the banks is a moot point. The directors certainly add their knowledge to boardroom considerations but they also gain a great deal of business intelligence themselves — from their fellow directors, from bank executives who study the economy’s general trends and from the bank chairmen who maintain regular contact with the Bank of Canada.

Procedures differ, but most bank boards or their executive or regional committees get together at least once a week. Each meeting is followed by lunch in the bank's dining chambers. The Bank of Nova Scotia has the most formal procedure: each director is allotted a large agenda book especially prepared for the meeting and his own blue-satin-lined, name-plated, birchwood chair, which he gets to keep when he leaves the board. All loan requests for more than a million are reviewed individually. The only time a director must leave the boardroom (and there’s a $5,000 fine for the bank and the director if he doesn’t) is when a loan to his own company is being discussed. The banks will not disclose any figures on how high a proportion of their credit is extended to their own directors, but the Royal Commission on Banking and Finance reported in 1962 that about 30% of all authorized credit lines of $100,000 or more were “to directors, their firms or corporations of which they were officers or directors.”

Directors are paid various amounts, never less than $75, for every board meeting they attend, and they must own at least 2,500 shares in a bank before they can be named to its board. At today’s market prices, this can mean an investment of about $50,000. Bankers like to point out that it’s this requirement that prevents the boards from reflecting the real character of the communities in which they operate. But the fact is that the banks don’t really want their boards to include anyone but representatives of big business. An enlightened exception is Senator John Aird. a Bank of Nova Scotia director who says: “I would like to see the banks gamble with more younger directors from many walks of life. It’s not an easy thing to change, but too many boards are self-perpetuating; they should have a much wider representation.”

Bank directors are entitled, among other privileges, to use the bank’s private aircraft on banking business (the Royal, the Montreal and the TorontoDominion operate their own jets) but exactly how much they have to do with actually running the banks is unclear. “There are a lot of policy things you consult your board on,” says Earle McLaughlin, the Royal’s chairman, “but the day-to-day running of the bank is in the hands of the professionals, same as any company.” Allen Lambert, chairman of the Toronto-Dominion, sees the main functions of his board as “assessment of management and replacement of it when needed, so that management can’t just get into place and stay there regardless of how it performs, plus examination of all major loans.”

No one, in or out of the banking system, ever recalls a board actually reversing any important bank policy. “I haven’t heard even by the grapevine of any director who has ever made things difficult for management,” says E. P. Neufeld, the University of Toronto economist who is Canada’s best-known banking authority. Some directors complain that they are asked merely to rubber stamp management’s decisions. But few bank shareholders seem worried about not being adequately represented by the directors they elect. At the 1970 annual meeting of the Banque Canadienne Nationale, a resolution was passed by shareholders congratulating “each and every one of the bank’s directors for the excellent results achieved during the past financial year.”

“Almost the sole purpose of appointing directors to banks is because of the business they bring and retain,” says A. G. S. Griffin, head of Triar^ch Corporation, a Toronto - based international investment house. “The thing that really bothers me is that the banking system, through constant consolidation, has become a pretty monolithic structure, and this is bound to have an effect in institutionalizing attitudes, making the banks much less flexible. So far, the banking system has served Canada not too badly, but I’m wondering, looking down the line a little, whether this monolithic structure is going to serve as well in the future.”

Though the bankers agree with each other on each and every principle in their system of values, competition among them for large corporate accounts can be fierce. The late James Muir, one of Earle McLaughlin’s predecessors as chairman of the Royal, once heard that a group of American pipeline financiers were coming up to Montreal in a private car on the overnight train from Chi-

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cago with a lot of investment capital and no established banking connections in Canada. He decided to meet their train at the Windsor Station, but as he was pacing the platform he spotted a rival bank's Cadillac pulling up. According to the ARRIVALS board, the train was 20 minutes late. Muir leaped into his own limousine and drove to Montreal West, the second to last station at which the train would stop before reaching the Windsor terminus. He jumped on the private coach just as it was pulling out, and persuaded the Chicago investors to get off at Westmount, the next stop, rather than face fighting the traffic of midtown Montreal. He signed them up, while back at Windsor Station his competitor was still puzzling over the visitors’ mysterious disappearance.

“There is no business in this country any more competitive than banking,” says Donald Anderson, who until recently was executive vice-president of the Royal. “To get new accounts, you offer your personality and demonstrate your familiarity with the client’s business.” When Anderson was manager of the Calgary branch, he and an associate, John Bankes, now vice-president in Toronto, decided to donate a trophy for the proposed Oilman’s Golf Tournament, being sponsored by a group within the Petroleum Club in Calgary. Because there was an agreement among banks at that time that no bank-sponsored trophy could be worth more than $25, Anderson and Bankes decided to buy the cup out of their own pockets. When their boss, James Muir, heard about it, he immediately arranged for the purchase of an heirloom sterling-silver rose bowl for $1,800. It became the Royal Bank Trophy which is still awarded every year at the Oilman’s Golf Tournament, though the means by which the Royal circumvented the $25 limit were never made clear.

Since most wooing of new accounts takes place at the elegant lunches bankers hold for prospective clients in the dining chambers off their head office boardrooms, guest lists for these lunches are discreetly guarded. Earle McLaughlin, Canada’s most influential banker, stood recently with a visitor in the Royal’s private dining room on the 41st floor of the Place Ville Marie complex in downtown Montreal. “Look, over there,” he said, pointing to the relatively minute Bank of Montreal headquarters on Place d’Armes, which is presided over by the much more conservative Arnold Hart. “I’m always kidding Arnold that all I have to do is get out my binoculars to tell who he’s lunching with.”

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Whenever a bank captures a major account from a competitor (like the Labatt’s switch from the Nova Scotia to the Commerce in 1967), it’s an event that shakes the business world. Such a switch is rarely made abruptly; usually, it’s a gradual process. “The business community is pretty small and nobody smacks anybody in the eye deliberately,” says a former bank executive. “What usually happens is that the president of a company may be a member of the same club or have a summer cottage near an executive or a director of the bank that’s trying to get his business. Discreetly it's suggested to him that he start a small account with the new bank — 'just to get the feel of it." He’s flattered by all the attention being paid to him, and more and more credit lines are switched to his new banking connection. The process is so gradual that his existing banker often doesn't realize he has lost the account until it’s too late.”

Corporations deliberately play banks off against each other to get the best deal possible, and some of the more aggressive corporate giants — Argus Corporation, Power Corporation, International Nickel and Noranda among them — now have representatives on more than one bank board. “Public criticism of the banks usually focuses on the lending side of our operations, accusing us of all having the same rates, but i don't see how you can have a different rate for any given credit line,” says R. M. Macintosh, deputy chief general manager of the Nova Scotia. "Let’s say that Bell Canada was getting its money for 7% from the Bank of Montreal and we were to come along and offer 6 V2 %. First of all, the Montreal would match it, because they wouldn’t want to lose the account, and then they might try to retaliate by undercutting us with somebody else. The same kind of thing happens in the consumer field. If one bank raises its rate on deposits or lowers its interest on loans and you don’t, you start to get calls from branches all over the country, saying: ‘You jokers, what are you up to down there? We’re going to lose seven depositors across the street this afternoon.’ So you quickly come into line. There can really be only one price for money; it’s an undifferentiated product.”

An example of how the competition among banks works was provided in 1970 by the abrupt decision of Leonard Walker, president of the Bank of Montreal, to cut the prime interest rate from 8!/2% to 8%, effective June 15. Nothing happened for a week. Walker began to get nervous and placed full-page ads in dailies across the country, appealing to the public to support his decision with new deposits. That broke the resistance. By noon of the day the ads appeared, the Royal then the Toronto-Dominion tumbled into line and were followed by all the others by the end of the day.

“Banking isn’t a business in which you can change consumer habits very quickly,” says Dick Thomson, vicepresident and chief general manager of the Toronto-Dominion. “The time when you're most likely to switch bank accounts is when you’re moving, recently married or taking a new job — otherwise, a bank connection is something of a professional allegiance, like the relationship with your doctor or lawyer. And this goes for corporations as well as for individuals. [The bulk of banking business is in the form of loans to small merchants, realtors and builders.] When people do switch, location is one way to attract them and we try very hard to get as close to our customers as possible. If we hear that Safeway in Calgary, for example, is going into a new area, we’ll try and go in with them.”

Banks often use corporate loans to large firms as leverage to get their payroll accounts and the right to install branches on the companies’ street floors. (The quickest way to find out who any big company's chief bankers are is to look for the name of the bank branch located on the main floor of its head office building.) The banks’ regional representatives are some of the best informed financial men in Canada, continually collecting

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data on potential business developments. “I size up my competition all the time,” says Gordon Lennard, the Commerce’s regional vice-president in Calgary. “Also, I search the footnotes in annual reports of companies to find out what major developments are projected to see whether or not we might be of assistance in financing them.”

Because they are big, powerful and omnipresent, the banks are ultra-sensitive to charges of collusion. Bank chairmen act as if they didn’t know one another’s first names (“Earle whoT they say with wintry humor). While banking is no monopoly (in the sense that competition for new business is very real) the bank chairmen do see each other quite frequently. There is no private hideaway where they meet (though there were rumors in the Fifties that Gordon Ball and James Muir, then chairmen of the Montreal and the Royal, used to get together away from prying eyes at Longchamps racetrack near Paris), but the chairmen belong to the same clubs, move in similar circles and once every four months meet formally as a group with Bank of Canada Governor Louis Rasminsky.

One joint enterprise of the banks is their charitable donations. They advise one another what fund requests they’ll honor. The Royal, Montreal and Commerce will each usually contribute 1% of the target figure of such national campaigns as hospitals and universities, with the Nova Scotia and the Toronto-Dominion giving approximately .6% and the smaller banks a pro rata amount. Because most other businessmen want to know how much the banks are giving before committing themselves, capital campaigns can succeed or fail according to the bankers’ initial reactions.

The banking industry’s official coordinating organization is the Canadian Bankers’ Association with headquarters in downtown Toronto. The CBA also lobbies on behalf of the banks with the federal government. It is considerably aided in these activities by having as its executive director J. Harvey Perry, who was a senior official in the Finance Department between 1936 and 1952 (along with Mitchell Sharp, Louis Rasminsky and Bob Bryce) and knows his way very well along Ottawa’s corridors of power.

Any banking system has four main functions: keeping safe the funds entrusted to it; facilitating commerce by making loans available at the appropriate moment through lines of credit; transmitting the central bank’s credit influence; and using its prestige and financial resources in a creative way

to serve the national interest. On the first three counts, Canada’s bankers get top marks even from their critics. But in the making of altruistic decisions based on even a hint of social conscience, the bankers simply opt out of any involvement. After all, they say, we hold in trust the savings of millions of people and can’t play fast and loose with their money. Take loans to build factories that will pollute the environment, for example. “It is not the responsibility of the banks to sit in judgment on these matters,” says Arnold Hart, the Bank of Montreal’s chairman. “This is a government responsibility, or something for the courts. Now if the government said we should not lend to a certain industry because they are going to pollute the atmosphere, we might disagree thoroughly, but we would have to abide by the edict. It’s not up to us to make such decisions.” Neil McKinnon, chairman of the Commerce, concurs. “We decide who is worthy of credit and who is not,” he says. “That is the basis of our decision. We cannot make political judgments.”

With a few exceptions, the senior bankers take a similar approach to the issue of foreign domination of the Canadian economy. Very often the

best credit risk is the subsidiary of a U.S. corporation, which has the assets of its parent company to fall back on, while the independent Canadian operator finds himself discriminated against. “The banks,” claims Max Saltsman, financial critic of the federal NDP, “have been one of the chief contributors to the foreign take-over of the Canadian economy because they’re more willing, in many cases, to give money to American-owned firms than they are to Canadians.” “When we lend money to a subsidiary of a U.S. or foreign corporation,” says R. M. Macintosh of the Nova Scotia, “I doubt whether it is appropriate for us to make a decision based on our judgment of what the public interest or the national interest is. But I would have no objection to the national interest being defined and working within it.”

Surprisingly enough, Walter Gordon, the patron saint of Canadian nationalism, agrees with this view. “Bankers can’t be expected to have consciences, social or otherwise, when it comes to making loans,” he says. “You can’t expect the banks to do something when there’s no clear-cut directive from Ottawa. It’s perfectly

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understandable that the banks are lending to the safest risks. For one thing, making a large loan to an American-owned company costs a lot less in overhead than making 20 smaller loans to 20 Canadian companies. So, as well as less risk there is less cost for the banks. Still, I think it’s wrong that the money put up by individual Canadians, in the form of their savings, should be used by American firms to buy out Canadian enterprises.”

Max Saltsman of the NDP criticizes the bankers for maintaining that they’re practising good citizenship merely because they pay income tax, but he agrees that if one bank chairman suddenly developed a social conscience his bank would go broke while his competitors stood by laughing.

The chief restraint imposed on the banks comes through the august personage of Louis Rasminsky, the Bank of Canada’s governor for the past decade. He meets with the bank chairmen three times a year, gently but firmly issuing the edicts that implement this country’s monetary policies, as opposed to federal fiscal policies which are largely set by the Finance Department. Rasminsky seldom hands out marching orders, preferring to discuss priorities (“Are you doing enough about mortgage loans for housing?” “How about getting more credit out into some of the underdeveloped regions?” “Don't you think that your advertising campaigns are driving consumer credit too high?”). Among themselves the bankers refer to this process as “immoral suasion,” but they regard the governor’s every muted hint as law. “We are uniquely sensitive to the wishes of the governor,” says Fred McNeil, the Bank of Montreal’s executive vice-president. “Over teacups he almost makes his suggestions and we sometimes almost dispute them, but when he says, ‘Gentlemen, I think we ought to do it this way’ — we do it.”

“The smugness of the banks,” says Max Saltsman, “derives from the fact that they are virtually an instrument of government policy; as long as they follow it, they can’t fail. They are almost inseparable from government activity, not only in terms of carrying out monetary directives but because so much of their deposit-creating powers are at the discretion of Ottawa. At the same time, the banks are completely and absolutely dependent on the goodwill of governments, because their power rests on the renewable charters they are granted, charters that are the equivalent of a license to print money.”

Nationalizing the banks was for years a top priority item in the CCFNDP platform, and whenever the bankers come up before a parliamentary committee they expect the subject to be raised. “Last time,” says Saltsman, “I decided to have some fun. I knew they were waiting for me, as the NDP’s spokesman on banking, to come out for nationalization, and you could tell by the rustle of papers when I got up to speak that they were ready. So I told them I wouldn’t disappoint them by not asking a question along those lines, and there was some polite laughter. But then I said: ‘Rather than my making a statement that you might think outrageous, let’s be reasonable today; you tell me why banks shouldn’t be nationalized.’ Well, that seemed to throw them right off, because their answers weren’t oriented that way, so they started saying things like ‘You’re asking us to say, stop beating your wife,’ and stuff like that, but they never answered my question in a satisfactory way.”

The younger bankers, particularly the university men beginning to move up through the system, are aware that basic reforms are required if nationalization in some form is to be avoided. They worry about the fact that management’s accountability now seems largely limited to returning an adequate profit to shareholders and they feel the banking system must become much more creative and responsive to the society in which it operates. “We can do better,” says André Bisson, the impressive young former dean of Laval University’s School of Business Administration who was recently named to head the Bank of Nova Scotia’s operations in Quebec. “We must do better. I predict that Canadian banking will change more in the next 10 years than it changed in the past 150 and change more than any other industry I know. For one thing, a completely new breed of people will be taking over at the top. Also, as automation and computerization take hold, most of the clerical jobs will be eliminated or reduced and the manager of the local bank branch will become a kind of financial consultant, with a staff of experts, who can advise his customers on every financial aspect of their lives. Banks will become more important for the brains than for the money they represent. If we don’t wake up to these new trends and improve both our accountability and social responsibility, we’re not that far away from vastly increased government controls.” ■