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The selection of Scott Thomson to become Scotiabank's new CEO has raised eyebrows over the decision not to hire one of the bank's top candidates after a three-year process.The Globe and Mail

In the latter half of June, the three leading internal candidates to be the Bank of Nova Scotia’s BNS-T next CEO made their final pitches to the bank’s board of directors, vying to land one of Canada’s most influential corporate jobs. In carefully crafted presentations, they outlined competing visions of how they would boost the bank’s fortunes and shape its strategy in the coming years should they be chosen to lead Scotiabank’s next era. Hearing them out from across the boardroom table, as a director and co-chair of the bank’s succession planning process, was Scott Thomson.

Three months later, Mr. Thomson himself was announced as the bank’s next chief executive officer. The decision to pass over top managers from within the bank in favour of the 52-year-old CEO who currently leads a major construction equipment dealer capped a highly unusual succession saga that has stunned Canada’s corporate elite.

The June presentations, described to The Globe and Mail by a source with direct knowledge of the process, might have been the logical culmination of a three-year competition among the top internal candidates. It was the fourth set of presentations that those contenders – capital markets CEO Jake Lawrence, retail banking head Dan Rees, and international head Nacho Deschamps – had made to the board since January, 2021.

Instead, the June pitches appear to have been a trigger point in an abrupt change of direction that shifted Mr. Thomson from one of the most influential voices in choosing the next CEO into a top candidate for the job himself – and eventually the winner.

The Globe is not identifying the six sources who described the bank’s succession process because they were not authorized to discuss it.

That late shift has raised awkward questions about the accelerated process that chose Mr. Thomson over the summer. Those included whether the board and outgoing CEO Brian Porter failed in their duty to identify and prepare suitable candidates from within the bank’s management, or to land a leader with sufficient external banking experience. An important job of a CEO is to manage and groom suitable candidates, and making the final choice is the board’s top responsibility.

But the outcome also highlights the privileged position Mr. Thomson had in the long-running process to choose Mr. Porter’s successor, and the potential that it could have given him an advantage.

Opinion: At Scotiabank and Finning, a swap of underachieving CEOs may be cheaper than typical leadership change

Mr. Thomson has been a Scotiabank director since 2016, and was chair of its human capital and compensation committee – the board’s human resources committee – since 2019. In that role, he was one of the two most influential and informed people on succession planning, along with board chair Aaron Regent.

The decision to make him a candidate for CEO so late in the process didn’t break any obvious rules. But it has left an uncomfortable sense that the playing field may not have been level, both inside the bank and in the wider corporate community. And that could affect the way the bank is perceived, and morale among employees.

“He was conflicted right from the start in the process and he becomes privy to confidential information on the strengths and weaknesses of the potential candidates,” said Richard Powers, an expert in corporate governance at the University of Toronto’s Rotman School of Management, who leads the school’s directors education program. “Could he use that as promoting himself as a potential candidate? The obvious answer is yes.”

Scotiabank’s management said Mr. Thomson was recused from the process once he became a candidate, according to a note to clients from Ebrahim Poonawala, an analyst at Bank of America Securities Inc.

A Scotiabank spokesperson declined to discuss when Mr. Thomson became a candidate for the CEO role or to answer questions about the process on Friday. Mr. Thomson was not available for an interview.

The bank’s pivot from a path that could have named Mr. Lawrence or Mr. Rees as CEO – both widely presumed in the industry to be the leading contenders, inside and outside the bank – appears to have happened between mid-June and August. Mr. Regent, the board chair, said in an interview this week that the bank “benchmarked our internal options against externals and we had some great choices.”

After an “assessment analysis, which is pretty rigorous,” the board decided Mr. Thomson “would be a great leader and a great CEO for the bank,” Mr. Regent said.

But Mr. Thomson’s selection shocked even senior employees at the bank. And it wasn’t until just days before Mr. Thomson was announced as the next CEO on Sep. 26 that Mr. Lawrence and Mr. Rees were told they had not got the job, according to three sources familiar with how the outcome was shared internally.

Mr. Lawrence and Mr. Rees did not respond to requests for comment.

Opinion: Who’s to blame for Scotiabank’s CEO succession mess? The clumsy board of directors

Scotiabank’s board may also have felt a sense of urgency to find a successor. When Mr. Thomson starts on Jan. 31, Mr. Porter will have led the bank for more than nine years. Over his tenure, the bank’s share price and other financial metrics lagged those of rivals, and high staff turnover and a change in the bank’s culture may have been contributing factors.

The process to evaluate internal candidates had also dragged on for three years. As time passed, the uncertainty about the outcome generated friction inside the bank, according to three sources familiar with internal dynamics. Teams became less co-operative as employees chose sides, underperforming areas weren’t as readily addressed for fear it could damage relationships, and even relations among the candidates and in their interactions with Mr. Porter became strained, according to one of the sources.

Some directors on Scotiabank’s board were uneasy about the bank’s succession plan, according to three sources familiar with the board’s thinking. In some cases, that was because of misgivings about whether Mr. Lawrence and Mr. Rees were seasoned enough to take over. In other instances, directors voiced concerns about the way the planning was governed, how information was shared internally, and the length of the process. External candidates were given limited consideration, but some other directors believed the bank had more than one qualified internal candidate who could be CEO, one of the sources said.

Meanwhile, over at Finning International Inc., where Mr. Thomson has been CEO for the past nine years, a separate succession plan was set in motion.

The first hint that Mr. Thomson was considering stepping down came in a private meeting with the company’s board chair, Hal Kvisle, about a year ago. Mr. Thomson had been running the world’s largest Caterpillar equipment dealer since 2013, and signaled that “there will come a time” when he would want to do something else, Mr. Kvisle said in an interview this week.

That spurred Finning to start in January and February this year to plan more seriously for an eventual change in CEO. In April, Kevin Parkes – who will succeed Mr. Thomson as Finning’s CEO in mid-November – returned from an absence for health reasons and was appointed the company’s chief operating officer, putting him squarely in line for Finning’s top job. At the time, Finning was expecting Mr. Thomson would retire and Mr. Parkes would replace him in January or February, 2023.

“He told me about a month ago that it looked like Scotiabank might make him an offer, and would we be willing to adjust his departure date a little bit. And I said of course we would,” Mr. Kvisle said on Monday.

It is rare for Canadian banks to reach outside their own executive ranks to choose CEOs, partly because of the financial and regulatory complexity of running these massive companies. It is even less common for them to choose a director from their own board.

But Mr. Thomson is being greeted as a thoroughly atypical choice mostly because he has not been a banker for the past two decades. Before he joined Finning in 2013, Mr. Thomson spent five years as chief financial officer at Talisman Energy Inc., and another five at Bell Canada parent BCE Inc., after an early-career stint as an investment banker at Goldman Sachs.

Scotiabank has emphasized that his time on the board – Mr. Regent called Mr. Thomson “one of our top directors” – gives him an in-depth understanding of how the bank works.

“He’s been on the board of the bank for six years, so he understands the bank, understands the challenges we have, the opportunities we have, understands our people,” Mr. Regent said. “And so he could really hit the ground running.”

However, some experts and senior industry sources say it will be difficult to hit his stride so quickly. “I just don’t believe that. He’s never run a bank before,” Mr. Powers said. Research suggests that while a typical banking executive might put in 3,000 hours of work a year, a director might spend 400 hours at best on that company, he said.

“There’s a huge information chasm. This is day one in our [directors education program]: The board will never know as much as management,” Mr. Powers said. “I think he has an uphill climb to get to the point where he can perform the job effectively.”

Mr. Thomson also faces a challenge to make sure the bank retains and attracts the senior-level talent to thrive. Mr. Powers said there is a risk that Mr. Lawrence, Mr. Rees and Mr. Deschamps could leave the bank, especially as Mr. Rees and Mr. Deschamps are unlikely to get another shot at being Scotiabank’s CEO.

“It’s likely that they’re going to lose some high-caliber talent,” Mr. Powers said.

He added that this is part of the overall risk in choosing Mr. Thomson. “They felt it was an acceptable level of risk. Only time will tell whether they made the right decision or not.”

Mr. Regent, the bank’s board chair, appears to be betting that the board has made the correct choice. On Thursday, company disclosures show, he bought nearly 29,900 shares in Scotiabank at a total cost of nearly $2-million.

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