TSX Group chief relishes underdog role

Many of Bay Street's power brokers are content to take a back seat to the major players on Wall Street. Not Richard Nesbitt.

Nesbitt, one of Bay Street's most powerful men, isn't backing down from the daunting challenge of competing with Wall Street and the so-called Big Board for dollars in the financial markets.

As CEO of the TSX Group, Nesbitt relishes the underdog role and has his sights squarely set on competing with the powerful New York Stock Exchange, which carries even more clout now as it recently went public as the NYSE Group with a market capitalization of more than $10 billion US. In terms of market cap, that's almost four times the size of the publicly listed TSX Group, which operates the Toronto Stock Exchange and the TSX Venture Exchange.

Since assuming the reins of the TSX Group from Barbara Stymiest in 2004, Nesbitt - who has spent the past 20 years in the financial industry - has been focused on fine-tuning operations and positioning the organization to go head to head with the world's biggest financial markets in the U.S.

Brennan O'Connor, Business Edge

Richard Nesbitt, CEO of the TSX Group, has his sights set on competing with the powerful New York Stock Exchange.

As a youngster growing up on a farm near Stratford, Ont., Nesbitt aspired to be a cowboy in the mould of his legendary idol Roy Rogers, and still spends time on his small spread in the Stratford area when he isn't pitching the TSX brand on Bay Street. Well, that cowboy spirit may come in handy for a man in a street fight with the big guns across the line.

1. Growing up on a farm in the Stratford area, did you have any aspirations to be a farmer?

"No, not really. But probably in my younger days I wanted to be a cowboy. I've always liked riding and working with horses. I sold my horse last fall, but one day I will have another horse. I still own a small farm up in that area and I go up there a lot now. I just have 10 acres. You know, I was one of those teens that really didn't have a direction. I honestly think I chose to go to university because I didn't know what else I wanted to do. Remember, this was the early to mid-'70s when there was almost an anti-establishment view of life amongst people of my age. I remember my second year of university (University of Western Ontario) I thought, 'I've got to go somewhere and do something.' So I wrote the lawyers' entrance exam and the business entrance exam. I did very well on both and, since I missed the application date for the law school, I went and applied for the business school."

2. What initially appealed to you about the financial markets?

"I always felt myself to be pretty entrepreneurial and someone who liked to make things happen. As I learned about the capital markets and started to understand them, I realized that there were a lot of people like me who gravitated to that profession. They were sort of take-charge people, people who were prepared to take some risks."

3. In your 16 years working with investment firms before joining the TSX, what were the most important lessons you learned?

"Obviously, I learned a lot about the technical nature of the market. I understand trading, I understand derivatives and I think I understand the debt markets and the equity markets. I also spent three years in New York with Wood Gundy, so I got an understanding of the American market, which is important. With HSBC Securities, I learned about how a global dealer works. Then I got the chance to set up my own firm (BayStreetDirect). That was a lot of fun and pretty exciting. It coincided with the dot-com crash, but who was to know that was going to happen? The most important thing you learn in management is people. You learn about what drives people, how to get the best out of people and what makes a person successful and not successful."

4. So what led you to join the TSX Group in 2000?

"I had been on the board of the Toronto Stock Exchange in the mid-1990s and I knew (former TSX Group CEO) Barb Stymiest from the University of Western Ontario, where we were in the same business school together. Barb had a desire to create a growth story and ultimately take the exchange public, so I thought that was quite exciting. There was also a concern, going back into the late 1990s, that technology would make the exchange irrelevant. But I always felt there was a big future for stock exchanges and Barb gave me a challenge to help make sure (it happened)."

5. What was Barb Stymiest like to work for?

"Barb was great. She's very demanding but quite transparent and fair in what she wants. I think she is the top business person in Canada. I learned a lot from her and I think that I was probably able to do things ... that maybe as a CEO you might not be able to do, such as challenging some of the status quo with some of the customers. So we had a good partnership."

6. How do you think your leadership differs from hers?

"People have a little harder time warming up to me, let's put it that way. You know, I tend to be very candid and I'd like to think I'm very transparent in what I'm thinking and what I'm doing. But some people find that to be almost abrupt. First of all, I want to make sure the company has a very clear plan and that everybody knows how they fit into that plan. My experience has always been that companies usually do more damage to themselves internally than competitors ever do to them. And you do that because you don't really know what you're about and what you're trying to do. So what I think we've been able to achieve in the last year and a half is a very clear vision. We just had a survey done of our 500 employees and we got extremely high participation, as well as extremely high alignment with the fact that we have a very clear strategy. I feel really good about it. Sometimes I must admit that that does cause some people to be uncomfortable with that sort of tension in the organization. But a little tension is good sometimes."

7. How do you think you have to change to become a more effective leader?

"I think you have to listen, as opposed to talk, and I'm constantly reminding myself of that. And my management group is also reminding me of that pretty regularly. So it's important to voice a strategy and vision, but it's also important that people have their say and that they feel they can have their say. I sometimes get caught up in the day-to-day work, but what really is important for a CEO is that your employees have access to you, talk to you and tell you their concerns."

8. What's been your strategy in moving the company forward since becoming CEO?

"We're going to be an operator of electronic marketplaces on a global standard and we're going to do that across multi-asset classes in both cash and derivatives. Today, we're in senior equities, junior equities, energy and fixed income. And we could at some point down the road add different asset classes and also derivative products. Secondly, efficiency has to be one of our main objectives here as we move into this period of very significant competition with the New York Stock Exchange, Nasdaq and the Chicago Mercantile Exchange. We are a much smaller organization relative to (them). I believe the efficient producer will be the successful producer. So we have to ensure that the products and services we're delivering to the Canadian market are as good or better than what is being delivered by those organizations. We have reduced staff, I must admit. We are down from 553 at the end of '04 to 510 at the end of '05 by re-engineering the way we do things. At the same time, we have dramatically increased our volume and output on the trading side and on the listing and data side. Last year, we went through a trillion dollars in value, we had record volumes on the Venture Exchange and we're doing this all with less resources."

9. What else are you doing to meet the challenge from the U.S.?

"What we have to do in Canada is bring together the industry and have a common view that the competition for the Canadian capital markets is the American capital markets. And that cuts right across from the brokers to the exchanges to the regulars to the clearing agents. Those organizations have to understand that the competition isn't fighting with each other, or competing with each other. It is competing with the American capital markets - because if we spent all of our time competing and bickering with one another, ultimately the American markets will try to find out ways to take advantage of that. So that comes to issues like how we can have more effective and more efficient regulation. It's about how we can assure investor protection that is viewed as good as or better than anywhere else in the world, and how we can pull together our resources in Canada to take advantage of what we do have and put it up against what is truly the biggest capital market in the world."

10. If you could snap your fingers and change one thing in the Canadian financial markets that would benefit the TSX Group, what would it be?

"I would like to see the marketplace participants understand better the impact of the formation of the NYSE group as a public company and what the implications are. If the people in the regulation world and the brokers in various marketplaces across the country would just sort of wake up tomorrow and say, 'Jesus, that is a formidable set of organizations that are being assembled down in the United States, with the New York Stock Exchange, the Archipelago Exchange and the Pacific Options Exchange (the key cogs in the NYSE Group), that we have to compete with.' If I had people sort of sharing in that vision and the realization of what we have to do about that, I think that would probably be a good Christmas present."

11. What is the TSX doing to capitalize on the bull market in commodities?

"Our greatest source of new business beyond Canada is the United States, so we're very focused on marketing our products across the board there. We're seeing a lot more customer flow on all of our products from the United States. Our goal is to be the North American exchange that's regarded as every bit as important to the American market as New York (NYSE). Secondly, we are getting out around the world marketing our mining franchise and our oil and gas franchise (the Calgary-based Natural Gas Exchange). Those are our global markets and we think every company in the world in those industries should consider listing on the TSX."

12. What are the TSX Group's plans for new products or services?

"We're interested in adding more derivatives products over time. We're also interested in things like crude oil because we're watching what's going on at the oilsands and we want to provide trading for that. We're interested in foreign exchange and credit derivatives. If we found the right acquisition or the right business model, we could well pursue those kinds of areas. We're also interested in climate change and carbon trading, although the market for that is at a very early stage."

13. What are your plans for TSX Group's strong cash position?

"I think we had a little over $270 million at the end of the year (2005). Our view is that that money belongs to the shareholders. We have been increasing our dividends quite dramatically since we went public (in 2002) and we just did another major increase at the end of the fourth quarter to 33 cents a share from 25 cents. But we still continue to build up cash because we've been quite successful. So we're looking at a number of possible investment opportunities.

"A lot of the things that we look at, of course, don't meet our criteria and we put aside. But clearly if we can invest that money on behalf of the shareholders at rates of return that are favourable for them, then we will do that. However, at the point of where we determine that we don't have those projects to invest in and we have excess cash, we will definitely return it to the shareholders. We did do a special dividend in December of '03 so we have demonstrated that that's our approach to the marketplace."

14. What's your view of the new rival to the TSX, the CNQ stock exchange (Canadian Trading & Quotation System)?

"We view these new trading systems as an interesting development. Today, we sell them services. There's a couple of them operating today (CNQ and Perimeter Markets Inc.) We distribute data to CNQ and Perimeter Markets, and we get paid for that. So we see them as a business opportunity. We take all competition seriously but, really, our competition is the New York Stock Exchange and Nasdaq. We increased our market share last year relative to New York (NYSE) and Nasdaq from 47 per cent to 49 per cent. We've taken on the biggest stock markets in the world and been able to increase our market share. It's only two points but, I'll tell you, two points is a lot of work when you're taking on the Americans. If we deliver as good or better products than New York and Nasdaq, then we are world-class competitors. I don't want to say anything really for, or against, new entrants into the marketplace. Hey, we like competition, we're aggressive competitors and I think that's been good for our customers."

15. Are you in favour of a single securities regulator for Canada, as opposed to the current structure of regional regulators?

"We've always taken the position that we're in favour of a common regulator for Canada, but that would have to be based on some very important conditions. Whatever model we have in Canada has to understand that Canada is a unique market that has industries that have very unique needs, such as the energy industry or the mining industry in B.C. No one size fits all. Whatever model we come up with has to ensure it's sensitive to regional needs and the various industry needs across the country. It's important, too, that the rest of the world sees Canada has a strong regulator that is protecting investor interests. When I go out to talk to people, they are a little concerned about Canada's approach to regulation. Although I believe we have a good regulatory structure, its fragmentation doesn't sell well outside of the country. So I think it's something we have to think about in terms of this global competition in the Canadian capital markets space."

16. There's been some controversy about your personal purchase of shares in the TSX Group last Nov. 23, the same day the federal government announced its decision favouring the income trust sector (TSX Group stock rose on the news). How do you explain that transaction?

"I was travelling in England at the time and I had wanted to make a purchase of TSX Group stock before the end of the year and the board of directors of TSX Group opened what is called a trading window for the five days from the 21st (of November) to the 25th, I guess it was. And so the last I had heard, quite honestly, when I left for England on Monday the 21st was that the consultation process (on the income trust sector) would end at the end of December. That was in the press. I went through the normal approval process, starting actually at 7:45 (a.m.) London time, which was 2:45 a.m. Toronto time. I started to get the approval process going, sought approval in the normal process that we do here, had absolutely no information that there was an announcement going to come or what the content of that announcement would be and I had the trade executed by my broker early in the morning. I found out later that night of course what (then finance minister Ralph) Goodale announced and I was surprised as anybody."

17. Do you believe the popularity of the income trusts with investors can be sustained long term?

"We see them as a very legitimate product in Canada and sort of a very useful Canadian innovation. They really serve a purpose to finance mature companies with stable cashflows. They've also served a purpose to keep head offices here in Canada, and I think that's something that's missed from time to time. They're a great investment vehicle for people who want cashflow. We are very much in favour of continuing to work with the industry to have the best quality corporate governance they can have, as well as transparency around their disclosure of distributable cash. I think they're here to stay."

18. How do you view excessive CEO pay packages, such as the controversial $193 million US package paid to former NYSE CEO Dick Grasso?

"The way we set compensation here is in reference to the TSX as a public company, stacked up against other public companies of similar size and scale of operation. I think I'm well paid for what I do. (Nesbitt's base salary is $500,000.) But it leads to a compensation for me as CEO that's very much in line with what I'd be paid at another public company. And I think that's the right way to do it. Now, did the board do that at the NYSE? I don't know. And it was not a public company. And I think the real problem is that no one knew about it (Grasso's pay). In the case of my compensation, you know about it because it's filed on Sedar (public disclosure site) and the new filing will come out shortly. I don't have a view of whether he was overpaid. I just don't know because I don't know on what basis they came up with those decisions. But what is good now at the NYSE is that they will have full transparency on what their CEO is paid. We're a big believer in transparency and letting the market decide."

19. How long do you wish to remain as CEO of TSX Group?

"As long as they'll have me. There are a lot of things left to be accomplished over the next two or three years. Hopefully, they'll let me accomplish those things and then once we get those done, I'm sure we'll have an agenda that will take us even further. The TSX Group is a wonderful organization, a group of very, very high-quality people and has a reputation that is extremely strong globally. I'm very proud to be the CEO and I have no intention of going anywhere. Canada has a tremendous future, with our energy resources and our other commodity resources, our population and the fact that we have a government that is not deficit spending, having a surplus. Our (government) pension plan is well funded and we have national health care, of which I'm a very big proponent. I think it's very important to have coast-to-coast national health care as a competitive advantage in an economy."

20. What are your most important personal goals?

"I have two daughters, an eight-year-old and a 12-year-old, and I'd like to get them through school. I always say to them, 'You should take over where I left off, and if I'd have worked harder I'd have achieved more. Now it's your turn to take hopefully the advantage I can give you in terms of a headstart and get on with it.' That's probably my most important goal right now. I'd like to live a long time so I'd like to keep my health good, which right now it is. I'd like to be active in the markets for a long time. So I look at Mr. Greenspan (Alan Greenspan, who recently retired as Federal Reserve chairman at 79) and I think that's about the right time to retire. I'm just sort of getting warmed up. I also have the farm I can go to whenever I want to get away from it all. And, as they say out west, maybe I'll buy another horse."

Richard Nesbitt

* Title: CEO, TSX Group Inc.

* Born/raised/age: Stratford, Ont./50.

* Education: London School of Economics & Political Science, MSc, accounting and finance; University of Toronto, MBA; University of Western Ontario, BA (honours), business administration.

* Family: Wife Lucy, two children.

* Career: Nesbitt was appointed CEO of the TSX Group in December of 2004 after three years as president of TSX Markets. Prior to joining the TSX, Nesbitt was president and chief operating officer of BayStreetDirect, an Internet-based investment dealer, from 2000 to 2001. He has also served as president and CEO of HSBC Securities Canada (1997-2000) and held various positions with CIBC Wood Gundy (1986-1997). He started his career as a financial analyst with Mobil Oil (1980-85).

* Boyhood hero: Roy Rogers.

* Favourite escape: The farm.

* Hobby: Horseback riding.

* Recommended business book: Conspiracy of Fools: A True Story (about Enron), by Kurt Eichenwald.

TSX Group Inc.

* Brass: Richard Nesbitt, CEO; Michael Ptasznik, senior vice-president, chief financial officer.

* Profile: The TSX Group owns and operates Canada's two national stock exchanges - the Toronto Stock Exchange, the senior equity market, and the TSX Venture Exchange, the public venture equity market. A publicly traded company, the TSX Group also operates the Natural Gas Exchange (NGX), which deals in the trading and clearing of natural gas and electricity contracts. The company also provides trading and data services to the global financial community through TSX Datalinx.

* Key stats: The TSX recorded trading valued at $116.8 billion on 6.74 million transactions in February 2006, compared to $87 billion on 4.2 million transactions in February 2005. The TSX Venture recorded trading valued at $2.65 billion on 524,000 transactions in February 2006 compared to $1.63 billion on 364,000 transactions in February 2005.

* Recent Stock Price (TSX:X): $48.30 (52-week range, $29.35-$54.50).

* Websites: www.tsx.com, www.tsxventure.com

* Head Office: The Exchange Tower, 130 King St. West, Toronto, M5X 1J2.

* Phone/Fax: 416-947-4670, 800-873-8392/416-947-4662.

(Gyle Konotopetz can be reached at gyle@businessedge.ca)