Strategy

All-Star execs: Top CEO: Gordon Nixon

Maintaining a fine balance has helped RBC through the financial crisis.

Top CEO

Gordon Nixon • Born, Jan. 25, 1957, Montreal • Chief executive officer, Royal Bank of Canada (TSX: RY)
Years at company: 21 • Age: 51

1979 Graduates Queen’s University with a degree in commerce.
1986 Heads up Tokyo office of Dominion Securities at the height of the Japanese boom.
1999 Named chief executive officer, RBC Capital Markets, at age 42.
2001 Replaces John Cleghorn as chief executive officer, Royal Bank of Canada.
2004 Initiates corporate restructuring. Reduces head count and introduces major new management process.
2007 Earns $8,767,229 in compensation and bonus. Realizes gain of $29,033,072 on exercised stock options. Awarded Order of Ontario.

Next challenge: Weather the upcoming recession and, after seven years at Royal’s helm, turn his mind to his succession.

On Bay Street one recent afternoon, the sense of dislocation and unease is palpable. Throughout the morning, the Dow has plunged several hundred points. The global financial crisis that collapsed Wall Street continues to hammer markets, and an electronic sign hanging off of one of Canada’s battered banks tallies the damage in real-time: another dozen points — and millions of dollars — are gone in just minutes.

Yes, these are scary times for investors — or for that matter, anyone relying on the financial system (which, is all of us, really). But at 200 Bay St., headquarters of the nation’s largest financial institution, Royal Bank of Canada, the mood isn’t as despondent as you might think. A steady stream of serious-looking people shuffle in and out of the building. But, hey, at least they’re walking, not jumping. And up on the eighth floor of the south tower, the executive suite is a veritable oasis of serenity and calm. “I wouldn’t overplay the stress on the CEO,” says Gord Nixon, RBC’s chief executive, seated in his spacious office, discussing the world financial crisis as if it were just another day on the job. “The stress I face is the same as a lot of other people down through the organization.”

Nixon, this year’s All-Star CEO, along with Royal’s head of communications, is sitting down for a chat around a low coffee table, a light-blue couch and two chairs near the window of his office. If you thought he’d be running his hand nervously through his hair, or rapidly tapping his foot as he spoke, you’d be wrong. His deportment is studied, mannered, measured. Obama-cool. Patrician. Which is remarkable. This is the guy, after all, who is running a banking giant during the worst financial meltdown of a generation. Every last ounce of volatility, chaos and change sparking through the markets is, at some level, channelling through this office, as Nixon and his lieutenants make enterprise-wide decisions about how to pick their way through the mess.

You can safely bet the adrenalin levels have, at times, been intense. But whether it’s Nixon’s breeding, education or experience, there is little outward indication — today anyway — that the world financial system is flirting with destruction. Only when he’s pressed does Nixon open up and describe what it’s been like to head a multibillion-dollar financial institution steering its way through the biggest disaster since the Great Depression. “There is no question it has been more stressful over the last 18 months than during a normalized period,” he says calmly. “This has truly been the most challenging crisis for the financial industry during the postwar period. We’ve been through periods of more severe economic turmoil, whether it’s recession, deflation, stagflation. And we’ve been through difficult real-estate markets. But there has never been a period where the financial system itself has been in such a state of crisis and dysfunctionality.”

What stands out for Nixon is the speed at which events have unfolded. “There’s been a major restructuring in the industry almost every week for the last couple of months,” he says. “Every day there’s been a new crisis, new news in the marketplace that has had a big impact on the financial system. I would say that one of the most unique things about this period is that it has been so unrelenting.”

Unrelenting, indeed. But not “out of control” or “too much too handle.” Those are words you just won’t hear coming from Nixon. It’s been tough, sure — but manageable, nonetheless.

That is precisely the kind of attitude shareholders want in a person running a bank in difficult times. CEOs who panic at the sight of red ink aren’t going to get anyone through a serious downtown, let alone a Depression, which, incidentally, the Royal Bank has already survived. No, they want someone at the helm who is fully prepared when the bad stuff happens, who can deal with the fallout without losing his head or getting ruffled.

Gord Nixon is that man.

Gordon Nixon was born in Montreal in 1957 to Melbourne Nixon, a partner in an engineering firm, and his wife Elizabeth, a homemaker. He was raised in the city’s tony Mount Royal and Westmount neighbourhoods and schooled at prestigious Lower Canada College. After graduating from high school, Nixon was shipped off to Queen’s University in Kingston, Ont., where he took a degree in commerce and played a bit of rugby.

For a modest country like Canada, it was a decidedly blue-blooded upbringing. And so it wasn’t a surprise to see Nixon move on to a job as an investment banker at Dominion Securities (DS), the storied Canadian investment bank that financed much of the country’s industrialization in the years before the First World War. Nixon made the most of his time at DS, and rose steadily through the ranks, managing its offices in Japan at the height of that country’s economic boom in the late 1980s. He eventually returned to Canada and was appointed managing director of investment banking — even though big and stodgy Royal Bank had bought a majority stake in DS in 1987.

It was a propitious pairing. Talk at the time was that a hot-blooded investment banker was exactly what Royal needed in the top office, not another cautious career banker from the retail side. And so, as luck, talent, skill and patience would have it, Nixon took over from John Cleghorn and was officially named chief executive officer on Aug. 1, 2001.

Since then, he’s carried out a much-needed housecleaning of the hidebound institution. He reduced the bank’s business lines to four from five; they now include Canadian banking, wealth management, U.S. and international banking (along with insurance), and capital markets. Thousands of longtime employees have been pruned from the upper ranks. Nixon brought in Royal’s “Client First Initiative” (a new management strategy designed to engage employees and improve customer service), while overseeing one of the longest, richest runs in corporate performance at the bank — nearly a decade of annual double-digit revenue increases that have provided a windfall to many investors. Total shareholder return over the past five years has been 14% annually.

And for all of that alone, Nixon qualifies for inclusion on our All-Star executive team. But what really clinched it is his handling of what has become the biggest test of his tenure: the global credit crunch that descended on his industry a year and a half ago, and which, in recent weeks, has taken on a life of its own.

Royal went into crisis mode last summer when the first Bear Stearns hedge funds tied to the sub-prime mortgage sector began blowing up. Nixon shifted his time and energy over to the operations side of the organization (as opposed to, say, visiting customers, or working on broader strategic issues) to deal with the crisis. His attention, he acknowledges, has now narrowed to day-to-day issues: What will the impact of the latest central bank decision be? What is the fallout from yet another financial institution being restructured?

To navigate the minefield, Nixon works closely with the “control parts” of his organization, the risk managers and the treasury officers managing the bank’s overall balance sheet. That is not to say, however, that he, like the rest of us, hasn’t been taken aback by the ferocity of the crisis. “I think the industry, all of us, anticipated the ability of the markets to recover from those events and to move out of it much more quickly than it has actually happened,” Nixon says. “I think we’ve misjudged the severity of the liquidity crisis.”

It’s a rare admission from a senior executive. But it’s definitely candid. After all, it’s more than a little unnerving that so few saw this coming, despite voices out there that forecast trouble. Still, Nixon is confident we have moved through the worst of the disaster. “Having said that,” he adds, “there’s no question that the peak, if you will, happened over the last month or two, and culminated with the dramatic steps that came out of the IMF meeting in Washington.” On Oct. 10, finance ministers from the industrialized nations agreed on a five-point action plan (including the injection of public funds into banks), that Nixon says are now “starting to have an effect.”

As it stands, we’re now likely heading into a global recession that may further buffet the banks. RBC’s stock has already dropped from highs of around $60 a share in the spring of 2007 to somewhere in the neighbourhood of $45 (at press time). And there are those who think there’s more pain to come. Dundee Securities, for instance, recently downgraded its rating on Royal from Buy to Sell. Still, others think the fundamentals make Canadian banks a good investing option. (See “Strong By Comparison,” page 63.)

From Nixon’s perspective, though, the big shake-out has passed. While there will still be some dark skies ahead, the fact that Canada’s banks have come through the eye of the storm with their financial power intact speaks volumes. The World Economic Forum recently cited Canada for having the most stable and secure banking sector on the planet, post-crisis. And if Royal can spin its stability into some new growth through this period, as Nixon suggests it can, it just might be his biggest victory yet.

So why have Canadian banks, and RBC in particular, held up better than those elsewhere? Nixon credits a culture of risk-management, good regulators and a general lack of excess here in Canada. “Sub-prime is now something people understand with respect to the U.S.,” he explains. “But right across the real estate market in the U.S. and U.K. and other countries, there has been far, far greater leverage. The lending standards have been much different.”

Stateside, much of the housing bubble resulted from the split in origination and ownership of mortgages. Independent mortgage brokers knew they wouldn’t be holding on to home loans (they would be packaged into mortgage-backed securities and sold off to, say, some pension fund in Japan), so they lent wildly and collected their fees, even though they knew full well that some people wouldn’t be able to pay back the debts. “It’s very different than here in Canada, where mortgages tend to be originated by banks, or brokers [related to banks],” says Nixon. “Ultimately, the vast majority end up on the balance sheet of banks. So, what is the weakest asset class in many other countries for financial institutions is actually the strongest asset class for the financial institutions in Canada. And I think that structural difference is an extremely important part of why Canada has more stability in this environment than other participants.”

Nixon also points to the fact that Canadian banks carry far greater Tier 1 equity ratios than those elsewhere, which means they weren’t as tippy when the storm hit, and remained well-capitalized when banks in the U.S. and Europe did not. “I think that regulation in Canada has been very solid and responsible, and that our system has stood out as being well-managed,” Nixon says. “And not just during the crisis, but leading up to the crisis. That should be a source of pride for Canadians.”

That said, if the worst of it is indeed beginning to clear up, we’re now seeing the emergence of a new set of post-crisis issues, such as a reassessment of the deregulation that has taken place over the past 30 years, which many now blame for the recent meltdown. Oddly, some have even begun to banter about a new buzz-phrase that is attracting attention: the idea that we could be facing the end of capitalism in its current form. No less than French President Nicolas Sarkozy has been talking up this point — and the one-time free marketeer has even suggested the world needs a “new capitalism.”

Are we really staring down the end of business as we know it? Or is this just overheated rhetoric from the French elite and the mainstream media? “I’m not sure what a new capitalismmeans, either,” Nixon concedes when asked about the notion. But there is no doubt, he continues, that we’re going to see an entirely different banking sector. “There will be much greater regulation across industry, including the financial services, in particular,” he explains. Nixon predicts, however, that Canada may be in for a smoother transition than other places. “I think [re-regulation] will be less so in Canada than in other countries,” he says, “just because our starting points are different.”

What is set to change, Nixon says, are business conditions — not the system itself. He expects the cost of capital to go up — as capital ratios at the banks are hiked — and leverage across the system to come down. But he expects government ownership of some of the world’s banks to be relatively short-lived. “I think a lot will depend on how quickly the system stabilizes and how quickly the economic situation turns around,” he says. “I don’t think many governments have the intention of being long-term investors in financial services.”

The big question, of course, is who will get what out of the financial-services restructuring. RBC has already picked up some new employees let go from other organizations. And there will be opportunities in both the domestic and international arenas, as troubled institutions withdraw from markets or come up for sale. Nixon, however, is careful to temper any idea that there will be a massive buying spree. “This is not a market in which one wants to be overly aggressive or overpay, given what has happened,” he says. “We are going to continue to be very conservative, to make sure we don’t lose our ability to have the flexibility in the marketplace.”

Nixon seems keenly aware that we’ve recently all had a valuable lesson about growing businesses at the expense of stability. After all, his industry has learned the hard way. “I think, to some degree, you have seen a separation between organizations around the world, depending on their philosophies around management,” he says. “One thing that has come through loud and clear through this period is that revenue growth without paying attention to risk has proven to be a very short-term philosophy. That may have looked good at a certain point. But, at the end of the day, ensuring the right balance of risk and reward, between growth and control functions, is actually the essential thing in all of this. I think all of us would have loved to emphasize control functions to a greater degree relative to growth. But, I think, those organizations that have got that balance right have come through in much better shape.”

Most importantly, they’ve lived to tell about it.