Taking leadership to the bank: Canada's CFO of the year.

Like many of the world's largest banks, BMO Financial Group--established in 1817 as Bank of Montreal--has a lot on its plate. It provides a broad range of retail banking, wealth management and investment banking products and solutions in Canada through its Canadian retail arm, BMO Bank of Montreal, and through BMO Nesbitt Burns. In the U.S., it owns Chicago-based Harris, a leading bank in Illinois, as well as Harris Private Bank wealth management offices across the U.S. It also operates a leading mid-market investment and corporate bank, Harris Nesbitt.

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But BMO, which was also the first Canadian bank to open offices outside of Canada, also operates in Europe, Latin America and East Asia. It had total assets of $306 billion at Jan. 31, 2006 and more than 33,000 employees. Interestingly, it served as Canada's central bank until 1935.

CFO Karen Maidment, who joined BMO in October 2000 as executive vice-president and CFO, is responsible for BMO Financial Group's financial strategy, financial reporting and planning, taxation, treasury, investor relations, legal and compliance, corporate communications, economics, and enterprise risk and portfolio management.

Prior to joining BMO, she was CFO at Clarica (formerly Mutual Life of Canada), playing a leadership role in the demutualization of the company and in the first initial public offering in Canada for demutualized insurers. She was appointed senior executive vice-president in 2003, and has been included in the Financial Post's "Power 50" list of top Canadian businesswomen.

FE: Globalization has created many issues and opportunities for North American companies, including those in the financial services sector. We know the potential of the Asia-Pacific region in terms of growth in international trade. Can we expect North American banks to enter this market in a more aggressive way in the near future, and, if so, what are some of the major risks associated with that?

KM: The Asian region is obviously one with great opportunities for financial services companies due to the growth profile of the region. However, as it is a developing region, it is also a market that has some inherent volatility--as one would expect in any emerging market. So, a bank like ours must be very disciplined in its approach.

We have some long-term relationships in the region, principally in China. For instance, BMO has a 28 percent share of Fullgoal Fund Management Co., one of the largest mutual funds companies in China. This is the kind of strategic partnership we like: one where we can bring our expertise to the table and a modest amount of capital--in this case, our expertise in mutual fund management and currency trading.

FE: What would you see as an example of a cultural difference impacting business practices?

KM: Emerging markets take time to develop in terms of their sophistication, their standards, their regulatory environment and the business practices that go with it. One difference between North America and some of these emerging markets is the maturity of some of those practices.

FE: International financial markets are closely linked. What are some of the most pressing risks, given the interconnected nature of the financial system around the world?

KM: When I sit back and think about international financial markets and their linkages, I think about it from a banking perspective. Generally, I think that the banks in North America have managed risks over the past number of years very effectively--credit risks, market-type risks or, in fact, operation risks. Certainly, there are some emerging products like credit derivatives that have grown very quickly and have been untested through the cycle, which does create some international risk.

When I look at the banks, and particularly BMO, one of our real strengths and one of our sources of competitive advantage is the management of credit risk, market risk and operational risk, particularly credit risk. In its five-year global ranking of large-cap financial services companies, The Boston Consulting Group ranked BMO second in the world with an average risk-adjusted total shareholder return of 12.9 percent, and BMO has led the Canadian banking industry in credit performance in 14 of the past 15 years.

If you looked at our performance compared to the Canadian peer group and our North American competitors, you'd see that right through the cycle our credit losses, typically, would be lower by a significant margin. We believe this strength will increasingly differentiate BMO as the credit cycle progresses and investors recognize the value of our ability to maintain consistent underwriting standards through good times and bad times.

FE: Is some of that due to off-balance-sheet status of, say, your mortgage assets?

KM: No, it's actually imbedded in the culture and the practices of the organization, from having a sophisticated risk management practice to begin with, to the experience of front-line staff who know the client and have earned the responsibility to have very high limits. [That's], supported by a strong credit risk discipline, good workout teams, early identification of issues and performance measurements and management systems that are aligned to the practice. So, it's a historical strength.

FE: Do you see any differences in the credit risk practices between countries like the U.S. vs. Canada and the U.K.?

KM: All I would say [is that] if you take on a credit simply to off-load it, I think there's certainly more risk than if you use credit derivatives as part of a portfolio of management and diversification practices.

FE: What do you see as some the differences between the characteristics of the U.S. banking system and market and the Canadian system?

KM: I think both systems are very efficient and effective systems, but there are some differences that primarily relate to their history. The Canadian banking system was one that was federally regulated and also one where we have a large geography and relatively small population. As a result, we were early adopters of technology. We are quite used to having a national real-time banking system operating through many time zones and in different languages. That's something that is unique to Canadian banking.

When we look at the U.S. market, it's much more fragmented because, historically, banking was regulated at the state level; therefore, you have many smaller banks across the U.S. It's still a very competitive market, and obviously banks there are well run, but I do think that the Canadian banks, particularly BMO, bring some unique strengths to the table.

FE: Would you expect that this would better prepare Canadian banking interests to enter markets like the Euro zone, for example?

KM: It's possible. However, we're largely focused on our North American business because that's where we see a great opportunity. The Chicago area alone has 40 percent of the GDP [gross domestic product] of all of Canada. It's a very strong, competitive market where we've been very successful over the past years. To a large extent, it relates to assisting our clients in North America with their off-shore needs.

FE: The evolving international regulatory environment presents significant issues for Canadian and American companies alike. What are the key implications/challenges for North American companies in implementing global standards like Basel II and the International Financial Reporting Standards (IFRS)?

KM: All these things, in theory, are very desirable and have very worthy objectives. For instance, Basel and its economic-based capital allocation system: At BMO, we've already been using an economic-based system to make many of our decisions, so we certainly support it.

The practical difficulties come out in the implementation. One of the challenges we all face is in situations where local regulators may apply the rules differently, which may result in some challenges with respect to competitiveness between banks. So, the goal is very worthy; as I said, the challenge is in the implementation.

FE: Will this have significant implications for risk management, or reporting, or bottom-line financial results?

KM: It's too early to speculate. It will depend on how local regulators apply the rules. What we would encourage is for all regulators to work together towards a common application of the rules. With respect to international reporting standards, for example, we would support uniform accounting and reporting standards globally, as long as they apply to all businesses in a fair and uniform way. Practically speaking, it's going to take a long time to get there. In the interim, it's important that we, as a Canadian bank, harmonize with U.S. GAAP [generally accepted accounting principles] because the U.S. capital markets are so important to us.

FE: You have been chosen as Canada's CFO of the Year, not only for your strengths in strategic financial management, but for a unique style, business acumen and your ability to lead. What are the major challenges facing senior finance officers today versus 10 years ago, and what are the key characteristics of a successful leader now and in the future?

KM: There are lots of new challenges, but there are lots of new opportunities. Senior financial officers are able to provide a leadership role in companies from a strategy point of view and from an operations point of view and also touch many stakeholders, whether it's our internal stakeholders or our shareholders. So, while we have the challenge of all the corporate governance and all the accounting changes, we also have an opportunity to be an integral part of the leadership team to create shareholder value.

I also think the need to have a vision around the business, and around the financial management that supports the business, will be as critical five years from now as it is today. I also believe it's all about the people. In financial management, it's about having very strong people, developing strong relationships, having the right management tools and constantly staying ahead of the changing environment in which we operate, both from a regulatory and a strategic point of view.

Ramona Dzinkowski is a Canadian economist and business journalist living in Toronto. She can be reached at [e-mail].