Monday, March 3, 2008

National Bank Execs Under Fire For Being Right?

By Ross Hendin, Hendin Consultants

Saturday's The Gazette published this article covering the attack that National Bank CEO Mr. Louis Vachon and his executives are receiving because they "bought back $2.1 billion of paper from individual and corporate clients and its mutual funds after the ABCP market froze last summer".

When accused of the fact that he used shareholder money to save select people from the exposure to the ABCP, he replied:

"Shares of the bank have been more volatile than some of our competitors', and I take responsibility for that. But do I regret the decisions we took? No. I suspect hell will freeze over before I change my mind on that. The perception is that people in senior positions in the bank always do things for the short term. What we did in August was not for the short term. We took a hit. We knew it would be a difficult thing in the short term. But it was absolutely the right thing to do for the long term."

From a PR perspective, I have to say that a situation where shareholders are taking action against a CEO for protecting their brand is rare and unwise. No executive should be chastised this publicly for trying to protect the bank’s more vulnerable clients, or showing the bank stood behind the product it sold.

To put this in another context, imagine that you heard that a few bottles of children's vitamins were poisoned at a manufacturing plant in China, and that this poison affected some of the brands that you use. Hearing about the poisoning, only one company does a recall of the product in question from the shelves (let's say that's Centrum for arguments sake). The other companies sit quietly while the manufacturing authorities investigate the situation. The head of Centrum then gets up and says that not only have his customers been wronged through a product with the Centrum name, but he is a Centrum user too and has been using the same products that his customers have. To make sure the customers know they can trust Centrum, he's going to do a recall of the product outstanding to the groups that need refunds the most.

And then that CEO, who is also a user of the company’s products, is trying to defend the brand and protect clients and is chastised for his actions.

CEOs of corporations today need to be champions of their brands, and need to defend them and keep the trust of their clients. It's paramount to any success in business.

The message that National Bank shareholders are sending to the market is that anyone who tries to buy back ABCP - or more fundamentally tries to stand behind their product and the integrity of the paper - will be reprimanded. What does this say about the perceived integrity of the notes? What will happen when no other bank CEO will want to do the right thing and be criticized for it? And probably most importantly, will shareholder actions against the executive actually cost the bank more than the buyback would have been in terms of bad publicity, last of consumer confidence, and potential legal action?

At a critical time in the restructure, with BMO about to let 2 conduits meltdown, questions arising about who will fund the margin facility, who will provide liquidity to noteholders in need, etc.; Mr. Vachon's critics could not have picked a worse time to challenge what he and I agree is the right decision.

No comments: