tough enough

Long criticized as too timid to make the difficult decisions, Royal Bank CEO Gord Nixon just engineered a bold executive shakeup. Now comes the hard part

Maybe it's true. Maybe nice guys really do finish last. Maybe the mistake John Cleghorn made nearly four years ago when he picked Gord Nixon to run the Royal Bank of Canada wasn't choosing a successor who was too young and aggressive, as some had feared, but one who was too cautious, too reluctant to upset the status quo. The joke about Nixon, and it's a rather mean one, is that when he played rugby at Queen's University, he was the only guy who would go into a scrum and come out with no dirt on his uniform. "Bright guy. Super guy," says one Bay Street analyst who follows the banks. "Too nice."

But now the mud is flying, and it's sticking. Nixon can talk until he turns royal blue about his desire to increase revenue and cut costs and do the only thing that will satisfy the spoiled shareholders of his bank, which is to raise the bank's profits and get the Royal's share price out of neutral. The cold truth is, he's starting to lose his audience. They see a company that has spent more than $8 billion in the past four years to give itself a place to grow outside Canada. They see that the bank has not much to show for that investment, all of it made in the United States, and they don't quite understand why. They see that the once-mighty Royal's growth engine is sputtering and, rightly or wrongly, they see a chief executive who doesn't seem to know what to do about it. "He talks good talk," says Bill Dye, chief investment officer at Leith Wheeler Investment Counsel Ltd. in Vancouver, "but there seems to be a disconnect between talk and action."

Nixon does not enjoy being second-guessed, nor is he accustomed to it. His career has been one of steady progression, with hardly a misstep. The grandson of a former Royal Bank director, he walked straight out of business school at Queen's and into a job as an investment banker with Dominion Securities. At 29, he was dispatched to run the firm's Tokyo office; that was in 1986, near the height of Japan's economic power. The next year, Royal Bank bought control of DS, but the change of ownership did nothing to slow the prodigy's rise. By age 42, he'd replaced the legendary Tony Fell as chief executive of the firm. He had barely settled into that job when, in 2001, Cleghorn and the board plucked him off its short list and made him the youngest Royal Bank CEO since the 1870s.

He was a surprise choice. For all his success, he had kept a low profile outside the fishbowl of Bay Street. Nixon also had no experience in retail banking, the division of the bank that employs most of the people, generates most of the profits and is the bank's public face. His life has been spent with corporate Canada's power brokers, the CEOs and finance guys who run DS's biggest clients. Never did he have to get his hands dirty dealing with, say, a computer glitch like the one that struck the bank this year and left thousands of customers without access to their paycheques.

At the time he was hired, that hardly seemed to matter. Royal Bank didn't need a leader who knew how to process a credit-card application. The bank was in fine shape. What it needed, and what Nixon would give it, was a dealmaker at the top who would close more acquisitions in the U.S. and continue building on the ambitious strategy Cleghorn had set out. It began with a bang. On his first day as CEO, Aug. 1, 2001, Nixon announced that the bank would spend nearly $1 billion to buy Tucker Anthony Sutro Corp., a mid-sized Boston-based firm with about 1,000 stockbrokers.

And there it stopped. Nixon has made no large acquisitions since, and until recently he declined even to shake up his executive group, keeping in place largely the same team Cleghorn had left him. Too nice? Too cautious? Not so, says Nixon. "There was no reason, nor mandate, to make changes at the time," he says. "I took over an organization that was performing very well. It had just announced or closed three or four major acquisitions. It had a management team in place and, I think, it made sense to operate the way we had operated." But it doesn't make sense any more, Nixon says, which is why after three years, the man of smooth talk has taken some pretty dramatic action. It's a cloudless September afternoon, 11 days since he engineered the biggest management change of the bank's recent history, and the Street's chattering classes are still speculating about what really happened. Out the door went Peter Currie, the respected chief financial officer Cleghorn had brought in from Nortel Networks. In came Barbara Stymiest, the chief of TSX Group. In effect, Nixon decided to give many of Currie's responsibilities to Stymiest, leaving Currie no choice but to quit or accept a demotion in all but name. Then, in mid-October, the bank announced the departure of Kel Landis, head of RBC Centura, Royal's U.S. consumer banking operation.

Nixon also cut five operating divisions down to three, creating a new unit to house Centura and the bank's other U.S. and international consumer business, with a new boss, Peter Armenio. Jim Rager, who had run retail banking in the U.S. and Canada, is leaving. "If we didn't make these restructuring changes, we would continue to perform reasonably well," says Nixon, who hired Boston Consulting Group to examine the bank's inner workings and give him advice. "But we had to make some changes, we had to look for different ways to do things, if we really wanted to ensure we're going to be a top-quartile performer [among banks]in terms of total shareholder returns." Still, the reaction to Nixon's moves shows the degree to which investors' confidence in him has eroded. It didn't escape notice that in the new scheme, Nixon's four most senior people--second-in-command Stymiest, Armenio, new Canadian banking head Jim Westlake and Chuck Winograd, Nixon's successor at DS--have, like him, spent little or no time in traditional branch banking. Steve Cawley, the bank analyst at TD Newcrest, declared that Armenio, who began his career as a stockbroker, was not the man to run the bank's U.S. problem child, the centrepiece of which is RBC Centura, a retail bank with 272 branches. "We are puzzled by the decision to have Peter Armenio head up this operation. We do not believe Mr. Armenio holds retail banking experience, either in Canada or the U.S.," he wrote in a note to clients. (Armenio has kept a copy of it: "One of these days I'll send it back to him and say, 'Puzzle solved.'") One senior portfolio manager at a major mutual fund company dumped his Royal Bank stake. His was not an uncommon response. Royal's stock fell on five of the next seven trading days after the new management group was introduced. "You're running the largest bank with no bankers [at the top]" said the portfolio manager, who spoke on condition of anonymity. Of Nixon, he says: "There's no substance behind anything. There's consultant-speak." So the pressure is on Nixon to prove that the management shuffle was more than cosmetic, and fix his own image in the process. The right sentiments are there. The bank, Nixon admits, has grown flabby around the middle. Royal insiders are "frustrated" by the amount of bureaucracy they must deal with, he says. In the U.S., they fret about too much meddling from head office. No one is happy, it seems, least of all shareholders. These things will change, he promises, even if he was a little slow getting around to the Big Fix. "I think it's important to impose cultural change," says Nixon. "Whether the timing should have been now or should have been six months ago or a year ago or a year from now, I think that's a judgment call."

Ridding the Royal of its fat and complacency will not be a bloodless task. It's expected that the bank may cut thousands of jobs, many of them from the middle-management ranks in Canada. In the U.S., some argue, the bank has to change its scattershot approach--it must close some weak businesses and sell others to concentrate on expanding its branch-banking operations in the Southeast, or its stock brokerage. One bank analyst, Ian de Verteuil of BMO Nesbitt Burns, said in a September report that there was a "reasonable chance" the Royal would take a one-time restructuring charge of $1 billion.

This is no job for a nice guy.

On the edge of Rocky Mount, N.C., is an old meat factory. It's a squat, almost windowless industrial building that sits between the headquarters of RBC Centura and the railway line that divides Nash and Edgecombe counties. The plant was once occupied by Hardee's, the fast-food chain.

In 1999, Hurricane Floyd blew in and flooded the place, and Hardee's moved out. Centura executives had it fixed up and converted into office space and meeting rooms for bank employees. The facility is nice enough to have played host to some esteemed company: North Carolina Governor Mike Easley, Clinton administration chief of staff Erskine Bowles, and the Royal Bank's board of directors. "At first this place just smelled like sausage," said Landis, the former boss. "But when we put paint and carpet down, it kind of turned out okay."

Nixon would like to rid Centura of a different kind of stench, namely the perception that it is a failure as RBC's vehicle for growing in the U.S. In 2000, its last full year as a listed company, Centura Banks made a profit of $99 million (U.S.). In June, 2001, Royal Bank paid $2.2 billion (U.S.) to acquire Centura, and has since invested at least $400 million (U.S.) to acquire other small banks in Florida and Georgia, and to open new Centura branches across the Southeast. And with all that, Centura made just $5 million (U.S.) in the first nine months of fiscal 2004. Even in its best year under RBC, it earned only slightly more than it did at its peak as an independent. It became a source of frustration to Landis. "It has not been fun to read about your company as if it's a dog or some kind of broken entity, because it's not," he said in a September interview. Three weeks later, RBC said it would not be his company any more, announcing he would retire. He is 47 years old.

Both Armenio and Landis claim the veteran banker was not forced out. "This just was the right time for me to kind of do something different with my life, after 25 years in this business," says Landis. "I have other interests outside of banking and I'm going to pursue those." When asked if he offered Landis more money to persuade him to stay, Aremenio would not comment.

Several things have conspired to crimp Centura's profits under RBC. One was timing: The deal closed three months before 9/11, and the U.S. economy was weak for the next two years. But the new owners might have compounded that problem by taking a heavy hand with its progeny.

Centura was a very different beast from its parent. Canadian banks are accustomed to their market dominance. At home, they are the biggest purveyors of mortgages and chequing accounts, and among the largest sellers of mutual funds. They rule the stock brokerage industry, corporate loans, investment banking. They are, in short, deeply involved in financing every nook and cranny of Canadian life.

Regional U.S. banks like Centura tend to be niche players. Centura had some of the same pieces as Royal Bank, but its real specialty was collecting deposits from individual customers and lending money to small- and medium-sized businesses. In the U.S. Southeast, real estate developers are particularly important customers. North Carolina and Florida were two of the 10 fastest-growing states in population between 1990 and 2000; they're also the two states where Centura has more branches than anywhere else. With that population growth goes a lot of construction: homes, strip malls, office buildings, hotels. Large commercial real estate loans are a critical part of the business.

But at Royal Bank, memories of the early-1990s property collapse still haven't faded. Real estate losses wiped out all of the bank's profit in 1992 and much of it in 1993. In response, the Royal, like the rest of the Big Five, installed tight limits on property lending. After the Centura acquisition, head office reined in the North Carolina bank's commercial real estate lending unit, suffocating one of its most obvious avenues of profit growth. Similarly, the bank shifted responsibility for Centura's investment portfolio to Toronto and began to manage the money more conservatively, cutting into returns.

All of these decisions were made for sound reasons, but at Centura, they chafed. Saddled with the cost of new, unprofitable branches, but lacking the freedom to run Centura as a true U.S. regional bank, its executives found it impossible to show the kind of profits Bay Street analysts expected. Even Nixon concedes head office might have gone too far. "Operationally, we would have been better off. . .to have run them more based on their core strength," he says.

More autonomy would be useful to Centura's new CEO, Scott Custer, who was Landis's second-in-command. But Centura remains stuck with one business that was thrust on it from head office. Under its umbrella is RBC Mortgage, the main culprit in Royal Bank's pitiful U.S. financial results this year.

To understand the problem, it's helpful to understand Americans' obsession with home ownership and the lengths to which their politicians will go to make that as easy as possible. Two government-created corporations, known by their nicknames Freddie Mac and Fannie Mae, exist solely to buy mortgages from banks and other lenders so that they will have the money to make mortgage loans to more people. For individual homeowners, the rules on getting out are loose. Most Americans buy 30-year mortgages that they can renegotiate at any time. There is no loyalty. It's not like in Canada, where many people will look first to their local bank when shopping for a mortgage. America's third-largest mortgage seller isn't a traditional bank at all; it's Countrywide Financial, a mortgage specialist.

Mortgage "originators" like RBC Mortgage typically don't make home loans to hang on to them for five years and collect interest payments. They sell them to Freddie or Fannie or another investor, usually within 60 days. The originator takes an upfront fee and collects interest--the difference between what it's charging the home buyer and its cost to borrow those funds--for just that month or two before it sells the loan. In short, it's a business that can be lucrative only if you're good at processing large volumes of paperwork, and only if you hedge your risk so that you don't lose money if interest rates move suddenly.

In 2003, with interest rates near 40-year lows, Americans refinanced their mortgages en masse--about $2.2 trillion (U.S.) worth. At RBC, they couldn't handle it. So thick was the backlog of paperwork that mortgage loans got stuck in the so-called warehouse--that is, they were supposed to be sold but weren't, at least not quickly enough--which raised the cost of interest-rate hedges. When they finally were sold, RBC sent buyers the documentation late or, in some cases, not at all.

So harmful was the mortgage fiasco to Centura's financial results that it quickly became synonymous with the supposed failure of Royal Bank's entire U.S. strategy. But it also began to drag down Royal's share price, which is funny, considering its size. Though RBC Mortgage is meaningful to Centura's bottom line, it has little impact on the Royal Bank's. "We believe that if everything went well, the mortgage origination business will make $25 million annually," or less than 1% of the parent bank's profit, said BMO analyst de Verteuil in a research report this year. He urged Nixon to shut it down. "The business is too small to matter and it is consuming valuable management time." It was, arguably, Nixon's first real test on the U.S. strategy. That he chose to keep RBC Mortgage, rather than sell or close it when things went awry, illustrates what some see as his chief failing so far as a CEO. He has dithered.

Most bank watchers seem to agree that the Royal Bank is trying to do too many things in the U.S. It has Centura, RBC Mortgage, brokerage house RBC Dain Rauscher, Liberty Life Insurance, plus some RBC Capital Markets offices serving corporate clients. If it's a mile wide, it's also an inch deep. Centura is the 41st-largest bank in the United States. In dollar terms, Wells Fargo did 18 times as many U.S. mortgage originations as RBC Mortgage did in 2003. Liberty and RBC's other U.S. insurance operations have never made more than $29 million in a year. Clearly, the bank can't afford to be big in all of these sectors. De Verteuil believes insurance should be sold and Royal should concentrate on retail banking and brokerage, or perhaps only one of those.

Asked if RBC is too spread out, Nixon says, "I think the answer is yes--the honest answer." He believes de Verteuil's prescription is essentially correct. He is talking seriously about divesting some businesses to concentrate on one or two. "One of the things we have to do is be far more focused on those areas where we really feel we have the opportunity to compete and earn superior returns for our shareholders," namely stock brokerage and branch banking. "That doesn't mean everything else is going to go, but everything else is going to have to fit into those [two]areas--or not." It's the right message, but two questions remain: Why has it taken so long to figure it out and when is he going to act? "They've been in the U.S. 3 1/2 years and it looks like they still haven't decided their strategy," says one bank analyst who asked not to be named. "The whole world is changing around them, and they just watch." Nowhere is the bank's size disadvantage more evident than when comparing Centura to Wachovia, its North Carolina competitor. At the end of 2000, Wachovia was about seven times as large as Centura. Today, after its merger with First Union, it is nearly 20 times as large, and is about to get bigger still by merging with Alabama's SouthTrust Corp., which is itself more than twice Centura's size. If you believe economies of scale matter in financial services--and most people do--then it's fair to ask: Has Nixon fallen hopelessly behind in the U.S.? Centura was never meant to stand on its own, says a former Royal insider who spoke on condition of anonymity. Ever since then-finance minister Paul Martin killed Royal's plan to merge with Bank of Montreal in December, 1998, Royal has been working on its plan for a U.S. invasion. Phase 1, which Cleghorn completed just before he retired, was to establish the beachhead. In phase 2, the bank would make bigger acquisitions that would be easier to pay for because of the money it could save by merging them with the assets acquired in phase 1, closing offices and laying off staff. That's when the payoff would come.

All the financial models were built on the assumption the bank would carry out the second part, says the ex-insider. But it hasn't. It's widely speculated that Currie pushed hard for Nixon to be more aggressive; Nixon resisted, and the rift contributed to the CFO's demise. "There was never any doubt in Peter's mind they needed to go forward," says one Bay Street veteran who knows Currie. "Any time you asked, 'Peter, what do you need to do?' he would say, 'We've got to get a lot bigger in the U.S.'"

Nixon denies that he disagreed with his CFO. "I think that's more myth than reality. I don't think there's been a big inconsistency. He may have a different view on that." In any case, it's a moot point, Nixon says, because Royal Bank found nothing at a good price. "We know all of the assets in the United States. We have not stayed away from looking at them over that period of time.. . .Larger acquisitions haven't presented themselves on reasonable terms, and we haven't been in a position where we felt confident in terms of moving forward with them."

It's the classic trade off that every financial-services CEO wrestles with. If he makes a big acquisition at a high price, the bank's return on equity (ROE), a critical measure in banking and insurance, will fall. But if he doesn't, profits will merely creep higher. What's more important: high returns or fast growth in profits? "You can grow your earnings per share and drive your returns lower, but if you get penalized for having lower returns, it doesn't create a lot of value for your shareholders," says Nixon.

Plenty of other CEOs have concluded that it's worth taking a hit to ROE for a few years to put your company in a better long-term position. Sun Life Financial's Don Stewart saw that his company was small enough to be a takeover target, so he made a deal for Clarica Life Insurance. More recently, Dominic D'Alessandro, a former Royal Bank executive vice-president, propelled Manulife Financial past his old employer to become Canada's largest public company with the audacious $15-billion takeover of John Hancock Financial. Manulife's ROE instantly dropped to 14% from almost 18% in 2003, yet no one seems to mind, and D'Alessandro is regularly hailed as a brave genius. Manulife's share price went up 36% during the year after the deal was announced.

One of Nixon's biggest frustrations, other than the high price tags attached to U.S. banks he would like to buy, is investors' relentless focus on Centura's woes. In its best year since the acquisition, 2002, Centura earned just over $200 million, which would represent roughly 6% of the bank's record $3-billion profit last year. Put another way, Royal's retail-banking operations in Canada can earn about as much money in two months as Centura would in 12, even if the latter was running smoothly.

"The market reaction to Centura is much bigger than the dollar or financial impact," says Nixon. "Because we isolate our U.S. numbers the way we do, and because it's viewed by the marketplace as the growth asset of the bank, it tends to get a lot of profile relative to the overall size." Even now, with all of its problems Stateside, the bank is earning a 17.6% return on equity. Stock analysts are far more concerned with short-term issues than long-term results, Nixon says, and he has his supporters on that point. "If you can have a problem with a $7-billion investment, and the most of a ripple that it creates is that you've got lower than [other banks']ROE, but it's still 17.6%, there isn't a problem," says veteran money manager Kim Shannon, who has made Royal shares one of the biggest holdings in the funds she manages for CI Fund Management Inc.

But there are two flaws with Nixon's lament. First, he must take some of the blame for the market's myopia, because until the U.S. strategy went sour, it was the main thing he and other Royal executives talked about when they spoke of the bank's future. Second, the U.S. is the only logical place for the Royal to grow, because things are getting tougher at home. After moving aggressively into securities, mutual funds and insurance over the past 20 years, the big domestic banks have few areas left to exploit in Canada. They all have the same problem, and they're all looking abroad. But Nixon's need to find new sources of revenue is more urgent than that of his rivals, because his bank has stagnated more quickly. In the first nine months of fiscal 2004, Royal Bank's revenue was just shy of $13 billion, a gain of just 2% from a year earlier. (Costs went up 8%, hence Nixon's view that the bank has "too much infrastructure in the middle.")

In Canada, the bank is the victim of circumstance and a few self-inflicted wounds. Four years of volatility have scared a lot of people away from the stock market (for now), which hurts Royal in areas where it's strong--mutual funds and stock brokerage. In turn, individual investors have turned to income trusts, an area of weakness for Nixon's old haunt. In the past few years, DS has lost market share to CIBC and Scotiabank in the lucrative business of underwriting public companies, partly because those two banks embraced the income trust concept first, and partly because Royal became stingier with its lending and offended some potential corporate clients. As for retail banking, rising interest rates won't make life any easier.

The U.S. market has its own pitfalls, but it's probably better than the alternatives. Bank of Nova Scotia is making solid profits in Latin America, but that's a higher-risk strategy that sometimes brings huge losses. For a conservative institution like the Royal, America is it. There is no Plan B, at least not one that Nixon has articulated.

Replacing virtually the entire executive suite should go some distance to answering those critics who see Nixon as too timid. Previously, the bank was organized on business lines--retail banking, investments, insurance and the corporate business, led by Chuck Winograd at DS. Now it's geographical. Westlake, the former insurance boss, is in charge of all the consumer business in Canada; Armenio has the same responsibility in the United States and internationally. Winograd keeps his old job as Royal's banker to big companies. In theory, putting all the U.S. consumer businesses together under Armenio ought to make it easier to stitch the far-flung pieces together--to make sure that Dain stockbrokers send their clients to RBC Mortgage for a home loan, for example.

But no one, not even Nixon, believes the reorganization is a cure-all. So-called cross-selling to U.S. customers is notoriously difficult, and will bring only minor gains. "It's an opportunity for us. We want to take advantage of it," says Nixon. "But it is not going to create as much value for our shareholders as ensuring that Centura is competing and doing well relative to its competition in the Southeast, and Dain is competing and doing well relative to its competition."

Of all the new senior executives, none will have the clout of Stymiest. Her role is unique. Officially, she is the chief operating officer; in practice, she will be Nixon's clear second-in-command and have many of the usual responsibilities of a chief financial officer.

Currie, the former CFO, had his fans in the investment community, and replacing him with Stymiest is a gamble, given her perceived lack of relevant experience. But her roots in banking are a lot deeper than some people might realize. An accountant by training, she was a partner at Ernst & Young, and audited the books of Scotiabank and Toronto-Dominion in the 1980s and early 1990s. She was CFO of Nesbitt Burns, Bank of Montreal's brokerage arm, and had a side gig as chairman of the Toronto Stock Exchange when, in 1999, president Rowland Fleming resigned, reportedly after a feud with the board. The search committee spent months looking for a new boss and concluded that the best person for the job had already been working among them.

Her appointment thrust her into the middle of an organization in turmoil. The exchange was caught in a time warp. Its computerized trading system, CATS, was ancient and prone to crashing at the worst possible moments. Meanwhile, the TSX faced fresh assaults from U.S. exchanges, which were winning new listings--and trading activity--in Canadian companies. Two months into the job, Stymiest wrote an opinion piece for The Globe and Mail. "In recent weeks, a number of stories have surfaced in the business press portraying the Toronto Stock Exchange as a fading and irrelevant institution in Canada's financial sector," it began. "These myths need to be exploded."

It took a woman to shake up the ultimate Bay Street old boys' club. Those who work with Stymiest say she is a pleasant person to deal with, a collegial boss who genuinely listens to others' advice. Yet she also wielded a sharp knife. After she arrived, big names at the exchange--senior vice-presidents Adam Conyers and John Carson, and external affairs VP Keith Boast--departed. She hand-picked every member of her new executive team (and unlike Nixon, she didn't take three years to start). Stymiest reorganized the company, cut dozens of staff and brought in Richard Nesbitt, the CEO of HSBC Securities in Canada and a former heavy hitter at CIBC, to run the trading- and market-data side of the exchange. Critically, she also sent the old CATS system to the garbage dump. She guided the exchange's transformation into a for-profit company and took it public in late 2002 at $18 a share. At press time, the stock was at $51.90.

Her time at the TSX showed she takes a clinical approach to problems, typical of someone who was trained as an accountant. The wrong managers are in place? Get new ones. The trading system breaks down? Replace it. The CDNX, which replaced the Vancouver and Alberta Stock exchanges, provided annoying competition for some junior listings and wasn't helping Canada's reputation as a home of penny-stock scams. She bought it and renamed it. Her colleagues at the exchange say she never failed to set out specific things they needed to get done, and never failed to call them to account when deadlines came along.

Even in her spare time, Stymiest has always chosen pursuits that require precision. As a student, she was a competitive diver at the University of Western Ontario. Today, golf's her thing, and she has won the TSX staff tournament in two of the past four years. People who know her say she is a vicious competitor. In 2000, Nasdaq announced it would start its own version of a Canadian market, called Nasdaq Canada. This summer, it closed its Montreal office. The venture failed for a lot of reasons, most of which had nothing to do with Stymiest, but even as Nasdaq Canada was turning to dust, she never relented in her campaign to encourage brokers to trade interlisted stocks in Toronto rather than New York. She simply hates to lose.

Nixon began courting her in the summer and Stymiest waited until she had been in the job for exactly five years to announce, on Sept. 9, that she was quitting. "Outside of TSX Group, there are very few jobs I would have considered," she says. But the role Nixon laid out proved to be "really irresistible....Obviously, you don't a make a move like this unless you have complete confidence in the guy at the top, and I have that confidence in Gord." For all of her strengths, though, it's far from certain Stymiest will be able to have the same impact at the Royal Bank as she did at the TSX. The exchange has about 500 employees, and she knows a good many of them by name; the bank has about 60,000 employees. It's like going from being the mayor of a small town to deputy prime minister. Plus, she's not the boss any more. The three operating heads, Armenio, Westlake and Winograd, will report to Nixon, not to her. She's a chief operating officer with no responsibility for operations.

When she arrives on Nov. 1, she will be handed control of most of the bank's head-office functions--things like marketing, corporate finance and the legal department. Head-office departments have been allowed to become "big empires," Nixon says. It's obvious he wants Stymiest to bring them down to size and make them work as one. "From a leadership perspective and a personality perspective, she'll be able to bring the areas together," he says. One thing already seems clear: When it comes time to cut middle-management jobs, it will be Stymiest, not Nixon, who swings the hatchet. (Stymiest will say little about what she intends to do, but, typically, tries to project total confidence: "I don't have any fears, and if you knew me, you'd know that I seldom hesitate.")

Aside from cost cutting, though, it's still not apparent what the reorganization will achieve. Nixon is not exactly a clear communicator, and his frequent lapses into consultantese--"cross-enterprise leverage," "maximizing the value proposition," "management bandwidth"--make it hard to get a read on what his priorities are.

For Royal Bank, all roads lead back to North Carolina. Investors' faith in Nixon will return not when he sets out a new strategy for the U.S., but only when he carries through with one. Speculation abounds that Royal's directors have given him a year to produce better U.S. results; Nixon denies he is under any such deadline. "I suspect that if we're unsuccessful, or we're not able to meet the budgets or the plans that we take to the board, then that will be something the board will want to deal with. But it's not as though the board has put a time frame in terms of turnaround or performance."

The alternative to fixing it--selling Dain and Centura and returning to being just a slow-growth Canadian bank--isn't a very palatable option, because it leaves Royal with the same problem Cleghorn was trying to address when the U.S. invasion started. Naturally, Nixon doesn't foresee a retreat. But, he adds, "I think it'isn't a very palatable option, because it leaves Royal with the same problem Cleghorn was trying to address when the U.S. invasion started. Naturally, Nixon doesn't foresee a retreat. But, he adds, "I think it's important that you never say never." The U.S. market will either be his legacy or his undoing. If he succeeds, he will have done what was expected of him. If he fails, and the bank is compelled to sell its U.S. assets, it likely wouldn't be long before Royal Bank's directors have something else on their agenda: finding a new CEO, perhaps one who isn't such a nice guy.

Tough talk, Quick Action

Martha's Vineyard is a lovely place in the fall, but when Ed Clark went there in late September, it wasn't for a vacation. Clark walked into a room full of Wall Street types to defend Toronto-Dominion Bank's controversial move to buy 51% of Banknorth Group Inc., a New England bank with nearly 400 branches, for $5 billion in cash and shares.

A question came from the audience. Whose idea was it for TD to buy just 51%?

It was a simple query, but Clark wanted clarification. "So the question is, whose idea was it to come up with it? Or, if I can read into your question, whose dumb idea was it to come up with the 51%?" Typical. If Royal Bank's Gord Nixon is accused of indecisiveness and ambiguity, then Clark is the anti-Nixon. In less than two years as TD's top executive, Clark has enhanced his reputation for blunt talk and quick action.

The contrast between the two men has been apparent for a long time, but even more so since Clark took over from Charles Baillie in December, 2002. Under Baillie, the bank had sought to capitalize on the North American success of TD Waterhouse by expanding the discount brokerage in places like Australia and Britain. One of his last moves as CEO was to acquire two U.S. companies that specialized in trading equity options, for about $450 million. Within four months, Clark took a $784-million writedown on both ventures. "My style is clear--if any areas of weakness warrant significant action, the action is going to be decisive and widely communicated," he explained.

As for the U.S., Clark's approach has been the opposite of Royal Bank's. While the Royal bought Centura Banks and sought to mould it in its own image, Clark has promised autonomy to its new subsidiary--that is, if he can get the deal done: At press time, it had run into opposition from two large Banknorth shareholders and a director.