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Professor says TD's board should discuss 'tenure of the CEO' amid regulatory probes

Governance expert on the intersections of control failure and CEO succession planning Richard Leblanc, professor of governance, law and ethics at York University, joins BNN Bloomberg to comment on TD's current situation and some governance considerations for the board of directors.

A professor says Toronto-Dominion Bank’s board of directors should consider succession plans for the lender’s chief executive officer as its U.S. money laundering woes are a top concern ahead of its earnings release Thursday.

Richard Leblanc, a professor of governance, law and ethics at York University, said in an interview with BNN Bloomberg Wednesday that the U.S. Department of Justice's investigation has cast a “shadow” on TD Bank. Earlier this month, Jefferies Analyst John Aiken said that TD potentially faces a “lost decade” due to its role in an alleged money laundering scheme.

Leblanc said that given the situation, TD Bank’s board should have a conversation on the “tenure of the CEO.”

“So Succession planning should be on the TD board's radar screen and in particular, ‘should we go outside (the organization)?’ (or) ‘Do we have internal talent that is CEO-ready?’” Leblanc said.

He noted that Bharat Masrani, TD Bank’s CEO, is 67 years old and has been in his current role for 10 years.

“The argument for waiting it out is that you've got a seasoned CEO at the helm and they understand what has occurred. They're able to make it right,” Leblanc said.

“The counterpoint to that is, it's a time for change and the board sets the tone from the top. The argument also is that the people that got you into the mess are not the people to fix the mess, hypothetically speaking.”

On Thursday TD Bank reported its second-quarter earnings beating estimates with strength in its capital markets division. The company also said its U.S. anti-money-laundering program is undergoing a “comprehensive overhaul.”

TD Bank reported it earned $2.04 a share on an adjusted basis, higher than the $1.85 average estimate among analysts in a Bloomberg survey.

Net income during the quarter was slightly below expectations due to loan-loss provisions and higher costs, some of which were related to its anti-money laundering situation. Second quarter net income reached $2.56 billion compared to an average estimate of $2.58 billion.

According to Leblanc, TD is alleged to have laundered hundreds of millions of dollars at U.S. locations through employees accepting gift cards. He also highlighted that the Office of the Superintendent of Financial Institutions (OSFI) regulates anti-money laundering and internal controls and the the system should have worked.

“However, when you get large very quickly and you acquire and have a foray into the U.S., those are risks that any good board of directors would be asking the CEO about,” Leblanc said.

In an interview with BNN Bloomberg Wednesday, Peter Routledge, superintendent of financial institutions at OSFI, said he would not discuss the TD case directly but spoke broadly about the regulator's role when anti-money laundering issues occur.

“When an AML (anti-money laundering) problem arises, whether it's here in Canada, we consider it a threat to an institution's integrity and security. And we would expect a board of directors to address that threat promptly and seriously, he said.

“When we have situations where that doesn't come to pass, we follow our regulatory discipline and our supervisory discipline and engage privately but very seriously.”

Routledge said integrity and security risks are rising due to geopolitical tensions and emerging technologies.

He added that the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) handles anti-laundering policies and procedures and gathers necessary information.

“Our job is to understand what FINTRAC finds or what a foreign regulator finds and engage with boards of directors, so they're putting in place enhanced protections for their institutions’ integrity and security in the face of intensifying money-laundering risk,” Routledge said.

Since the allegations, TD said it has already invested over $500 million to enhance its anti-money laundering controls and hopes to come to a global resolution.

Earlier this month, Bloomberg News reported that TD Bank is facing probes from three regulatory bodies as well as the U.S. Department of Justice, which is investigating the Toronto-based lender over ties to a US$653 million drug laundering case in New York, New Jersey and Pennsylvania.

Analysts at National Bank estimated the fines related to the alleged activity could be around US$2 billion. The analysts also noted that in a worst-case scenario, the lender's future earnings potential could be reduced by over $1 billion.

With files from Bloomberg News.