Interview with David O'Brien
IBR talks with a Canadian business legend, as he reflects on his distinguished career
DOB: My view is that you must have a retirement age; I think it is good for renewal of the board, but it’s a difficult issue. The world is changing, people are living much longer and CEOs now can rarely take on more than one board, which wasn’t always the case. Consequently, it has become harder and harder to find experienced board members. On the other hand, what has happened in two cases with me is I’ve gone past the age of retirement requested by the board, at both Encana (due to special circumstances) and the Royal Bank of Canada. I think it’s important to have a retirement age because it is difficult to turnover a board if you don’t, but you need flexibility to allow for circumstances where you may want to keep someone on beyond normal retirement. For instance, at TransCanada, I suggested to them that if they were recruiting someone new who was 65 or older, they give them a seven-year run on the board regardless of age so they would have a meaningful time to participate.
IBR: Have you given any thought to the succession planning for the Chairman role and the timeline for your retirement from Encana?
DOB: Yes, I had it all set. I was going to step down at the Annual Meeting coming up in April. I have been Chair of Encana and predecessor companies for 20 years starting with my role as CEO at PanCanadian Energy. I’ve done this a long time; I don’t need to do it any longer. I had persuaded my friend Clayton Woitas that he should replace me as Chairman at the Annual Meeting. Then, as you know, Clayton went in as Interim CEO, so I will stay on while we conduct a search for a CEO and when Clayton is freed up from his interim role he will step in as Chairman.
IBR: Speaking of CEOs, how do boards think about succession planning for, and motivation of, long-serving CEOs?
DOB: So much depends on the person. For example, Gord Nixon at the Royal Bank came to the CEO role at a very young age (I think he was about 43 at the time). He’s been there almost 12 years now, but he’s still very energetic and everything seems to be going right for the Bank right now. It’s not really a problem for us. The only issue is that at some point you get tired in the job – and Gord may come to that even though he’s a younger guy – so boards have to be ready with succession planning. We spend a fair amount of time on that; we have potential successors identified, and we give them the experiences they require so when Gord says it’s time to go, we’re ready.
IBR: What role do you think the CEO should take in their succession planning?
DOB: So much of it is dependent on quality. If you’re not happy with the performance of the CEO, then you really don’t want a lot of input about who they think should succeed them. If they are a very good CEO, like Gord Nixon is, then absolutely. In most circumstances, it’s preferable to choose an internal candidate because of cultural fit and knowledge of the company. An outside hire is generally riskier, but becomes necessary when there are no qualified internal candidates and/or the company needs a major fix or a culture change.
IBR: You have served quite successfully in the roles of CEO, Board Member, and Chairman over the years. What do you view as the most challenging situation you’ve faced, and why was it so challenging?
DOB: I think the most challenging thing that ever hit me in business was sometime after I became the CEO of Canadian Pacific – which, as you know, was a conglomerate comprised of about six different businesses – when it became apparent to me within about two years of being in the role that the conglomerate format was not going to survive in the long-term. So, I looked at the businesses, and I said “what I have to do is get each of the businesses strong enough to be able to be independent, freestanding companies in the public market.” The pressure was starting to grow because CP was facing shareholder discontent over the conglomerate discount in the marketplace, so I had to play for time. It took three years or so to make sure each of the companies was in strong enough shape to stand independently. When I had arrived at CP, four of the six had no chance of being an independent public company. By the time we got to the “starburst”, all the companies did reasonably well. Some were acquired, but shareholders had a huge double-win: the conglomerate discount disappeared, and additionally some of the companies got taken over at very healthy premiums. Looking back, people made enormous sums of money from it. People think the challenge was the split, but that was easy – getting the companies ready for it was the challenge.
IBR: Could you speak to the specific tactics you used with public market investors to buy yourself time to disaggregate CP?
DOB: We narrowed the focus of CP by selling Marathon Realty in 1996 and later selling our billion-dollar investment in Laidlaw. We accelerated the pace of improvement at the remaining companies so that CP, as a whole was performing better (net income in 2000 was $1.8 billion vs. a net loss in 1995). With these initiatives, the street was somewhat pacified allowing us to choose our own timing.
IBR: Recently, shareholder activism seems to be forming as a theme in Canadian Business. How would you characterize the shift in dynamics between shareholders and boards?
DOB: Generally, I think it’s not a bad thing. I would call some boards somnolent in the sense that they are there and they do their job, but they aren’t driving the company forward. When that happens and it’s apparent for a considerable period of time, having an outside activist shareholder isn’t always a bad thing. When I was running CP over 10 years ago, I felt pressure from the shareholders on the conglomerate discount. Shareholders in the last 20 years have become much more strident in terms of what they want, and boards have generally become much more engaged.
However, there are different kinds of activist investors. There are some who are actually trying to improve the company, and they bring new ideas and work with management to implement. I would have to say that seems to be the case with the CP Rail/Pershing proxy battle. There are others that look for a chance to make a quick buck on the market by putting a bid in; I would put someone like Carl Icahn in that category. He has no intention of running the business. He identifies what he views as an undervalued company, makes a bid, and looks for someone else to take him out. That is what happened with Fairmont Hotels.
IBR: Governments are a more significant force on corporations than activist investors. Have you seen regulatory changes that significantly altered the strategy of a company you represent?
DOB: I’ve seen this expressed in several ways. For instance, the change in taxation of income trusts made the high payout model much more difficult and companies are forced to reinvent themselves in a growth and income model where the payout is lower. In the banking industry, new regulation since the banking crisis has imposed higher capital requirements on some businesses with a view to reducing risk, but in turn this reduces return on capital.
IBR: Do you think that government should intervene and stop the take-over of Canadian national champions like Encana?
DOB: This is a difficult question when you look at a company like Encana: it is Canada’s biggest natural gas company. I think it would be unfortunate if too many Canadian companies in Calgary become subsidiaries of foreign companies because you lose a lot in the process. When people are here and are members of the community, they support the community in different ways. The vitality of the community is different when you compare head offices versus branch offices. I think there is a place for national champions; the difficulty is determining who gets protected. We saw how the politics in Saskatchewan played out with Potash Corp. On the other hand, you need some pressure on performance. It’s a tradeoff and you can’t start protecting everyone. In many jurisdictions, they simply don’t allow their biggest companies to get taken over. It’s a fight between efficient capital markets and having national champions; there is no perfect answer. The way that we have tried to deal with it at Encana, at least to date, is by bringing in joint venture partners in major projects so that they participate with us – they bring their capital, but don’t take us over.
IBR: In hindsight, given the collapse of natural gas prices, do you think that the spinoff of Cenovus from Encana was the right call?
DOB: Well, had I known that natural gas prices were going to go from $7-8 down to $2, I would have thought hard about it. After the split, people ended up with two pieces of paper, and my guess is those two pieces of paper combined today would be worth more than if we had not split up. There are two reasons for this: before the split, Encana would go on the road trying to sell natural gas to investors and we would get all kinds of questions about our oilsands holdings – which distracted from our narrative. Also, we were viewed as a natural gas company, and the oilsands got lost in the shuffle when we were all together. We thought, “this is a good time to go and split the company.” Things turned out not as well in the short-term because of what’s happened to natural gas prices.
IBR: Has there ever been a time where you felt that you over or under reacted to changes in the oil patch in North America?
DOB: Yes. I under reacted as the Chairman of Encana in 2010 to the coming glut of natural gas. Two things deceived me. First, I was focused on how well we were doing. All of a sudden we had our 10 trillion cubic feet (Tcf) of gas grow to 100 and we were just rubbing our hands thinking, “isn’t this wonderful?” I failed to fully appreciate that the same thing was happening to other producers, and the impact on the overall market. I was also deceived by the fact that we were good at hedging. Even though the prices were coming down, we had hedged 50% of our production for three years out, which gave me comfort that even if there was a glut, maybe it would reverse itself and we would be okay. I just didn’t realize how severe the glut could become and that we were running out of hedges. I under reacted to a change in circumstances of monumental proportions.
IBR: There is a disruptive shift in banking with non-financial institutions such as Rogers or Wal-Mart creeping into the market. How do you see RBC responding to the threats of these non-traditional players?
DOB: We are very active now in the e-Wallet idea and we’ve had conversations with various technology and telecommunication companies such as Bell and Rogers. In the future, I think most of the solutions are going to be combined with a telecom. It’s certainly an area in which you don’t want to be disintermediated – so we’re about to launch some products to prevent that.
IBR: RBC is a conglomerate in a fashion, comprised of many business units. Would the Board consider spinning-off a group that investors have expressed concerns about, like RBC Capital Markets?
DOB: We think that Capital Markets is an essential ingredient to our service to our clients – and there are different pieces to capital markets. For instance, investment banking and M&A are healthy, essential services. With trading, a lot of it is pretty straightforward: its interest rate swaps, foreign exchange and fixed income trading. All of these, in our view, are very important ingredients of what we call the “universal bank” – the ability to provide all the services. What we have done though, is de-risked our Capital Markets group by getting away from some of the more esoteric products: the structured credit products, where there was too much potential high-impact tail risk. In 2011 and 2012, all the analysts were saying they didn’t like our Capital Markets because they couldn’t predict its earnings well, and the truth is you can’t. But now, Capital Markets is humming again. We are doing well and our stock price has gone up; we’ve hit $90B market cap and now we’re the shiny boy on the mountain.