The Nation’s Business

Making the case for bank mergers

Peter C. Newman July 20 1998
The Nation’s Business

Making the case for bank mergers

Peter C. Newman July 20 1998

Making the case for bank mergers

The Nation’s Business

Peter C. Newman

Two political campaigns are disrupting the lazy hazy days of this long, hot summer. The first, of course, is the contest for leadership of Canada’s dormant Conservative party. To choose between Joe Clark and Hugh Segal should be as simple as having them draw straws, with the loser taking the job.

The other campaign is more complicated and much more significant. John Cleghorn, the chairman of our largest bank, the Royal, is travelling the rubber chicken circuit, trying to persuade Canadians to love their banks—to love them enough that they will be allowed to become at least twice as large and many times more powerful than they already are.

His dilemma is reminiscent of the Canadian soldier on peacekeeping duty in the Middle East who stumbles onto a genie in the desert. “I’m not like most genies,” warns the little magician. “I only grant one wish, not three. What’s yours?”

The soldier pulls a map of the region out of his back trouser pocket and says: “Look, genie, here’s Iraq, Jordan, Syria, Israel and the Palestinian territories. Everybody’s fighting all the time. My wish is that you bring peace to the Middle East.” The genie is shocked.

Most people demand well-endowed cars or sleek blonds, and here is this Canadian asking for peace in the Middle East.

“Sorry,” replies the genie, “it’s very difficult, even for genies, to bring peace to a whole region.”

The soldier is visibly disappointed. He refolds his map, puts it back in his pocket and starts walking away.

“Come back,” says the genie. “Since you’re so unselfish, I’ll grant you another wish.”

The soldier is delighted. “Look,” he says, “I come from Toronto, and I want the Maple Leafs to win the Stanley Cup.”

“Oh, all right,” says the exasperated genie, “let me see that damn map again.”

That’s a fairly accurate assessment of Cleghorn’s dilemma. He knows the public perception of Canadian banks is set in concrete: that they are too big and too powerful; that they make huge profits and pay minimum taxes; that they short-change small business, charge their customers extravagant service fees, and would gladly tax sex if that would expand their already bloated bottom lines.

Is he the genie who can transform such Canadian misconceptions? Don’t bet against him. Mergers are in the air, and if he can make a credible case by going over the politicians’ heads, it might just work.

Cleghorn is the point man for the quartet of Canadian banks with the urge to merge. He’ll never be a television star, but he does have

Allan Fotheringham is on leave.

Shy and introverted he may be, but John Cleghorn’s belief system is not negotiable. Don’t bet against him.

remarkable heft. (A definition of “heft” is what Joe Clark doesn’t have.) His determination is based on conviction, not whim or anger.

Shy and introverted he may be, but Cleghorn’s root belief system is not negotiable. Somewhere in his past he became convinced that big was beautiful.

To make his case, Cleghorn needs to explain that banks have lost their unique ability to create money, credit or anything else. Their rivals are no longer other banks but firms like Steve Hudson’s Newcourt, which replicates most banking functions with minimum overhead, or Microsoft, which, if it had been allowed to acquire software rival Intuit, could have transformed itself into a virtual consumer bank.

As it is, the Royal isn’t exactly a mom-and-pop operation. The bank has 10 million customers and total assets of well over a quarter-trillion dollars. In 1997, it earned a net profit of $1.68 billion, the largest of any Canadian enterprise, ever. Despite the growth of electronic banking, there are probably more bank branches than pubs and taverns in this country.

No matter how high they rise, Canada’s bankers retain a kind of green-eyeshade, good-boy-who-got-terrific-marks aspect about them. They are dutiful soldiers, dutiful sons, dutiful husbands—steadfast ecclesiasts in a heretical world. Just like John Cleghorn.

The man with the best clues to what makes Cleghorn tick is former Royal Bank executive VP Don Wells. The two men go back more than 30 years. Back in 1974, they had a long, liquid evening at the Hilton Hotel bar in Quebec City and by about 5 a.m., Cleghorn, who was then with the Mercantile Bank in Montreal and was being groomed for promotion to its U.S. head office, admitted he’d like to stay in Canada and join the Royal. Wells recommended him to deputy chairman Doug Gardiner, who hired him shortly afterwards. (Wells was so hung over the next day that he had a minor car accident that cost him a $150 fender repair job.)

“He’s a genuine person,” says Wells. When Wells was invited to the 1976 wedding of Cleghorn’s daughter Andrea, long before his friend became chairman, what struck him was that he was the only Royal Bank guest there. Instead of trying to exploit a social occasion to impress his peers, Cleghorn had used it to salute his friends.

In November, 1994, when Cleghorn became CEO, he handed Wells a cheque for the $150 fender bender. Wells jokingly asked for interest on the amount—$1450—which Cleghorn finally paid up at Wells’s retirement party earlier this year. Wells was touched by the gesture and wished his friend godspeed.

He’ll need it. So far, neither Cleghorn nor any of the big bank advocates have explained what, precisely, the amalgamated banks could accomplish that they can’t do now—except, of course, bring peace to the Middle East.