Taking Disruption to the Bank

David McKay, President and CEO of the Royal Bank of Canada

As head of Canada’s biggest bank, David McKay faces disruptive forces on numerous fronts. Appointed President and CEO of the Royal Bank of Canada in 2014, he is leading one of the world’s largest financial institutions on a transformative journey, aiming to ensure RBC—which recently posted record net income of $12.4 billion for the fiscal year ended Oct. 31, 2018—remains relevant to consumers as the Digital Age forces old business models to go the way of the dodo.

An RBC lifer, McKay—who holds a Bachelor of Mathematics from the University of Waterloo and an Ivey Business School MBA—joined the bank full-time as a computer programmer in the late 1980s. After moving to retail banking, he held progressively senior roles in Canada and Japan. In 2012, he was appointed Group Head, Personal & Commercial Banking, as well as being named “Retail Banker of the Year” by Retail Banker International (an honour repeated in 2015). As a champion for Canada’s innovation ecosystem, McKay leads RBC’s support for and partnerships with universities, start-ups, and accelerators, particularly in transformational technologies such as artificial intelligence and blockchain. He is also a passionate advocate for youth, promoting the benefits of work-integrated learning and supporting the development of RBC Future Launch, a 10-year, CA$500-million commitment to helping young people build the skills and capabilities required to succeed in a changing world. In addition to serving on the Board of Trustees for the Hospital for Sick Children, McKay is a member of the U.S. Financial Services Roundtable Board, the Business Council of Canada, and the Catalyst Canada Advisory Board. He is also a co-chair of the Business/Higher Education Roundtable, which harnesses the strengths of Canada’s top businesses, universities, and colleges to deepen collaboration and improve opportunities for young Canadians.

Committed to building innovation into RBC’s DNA, McKay recently sat down with Ivey Business School Professor Gerard Seijts to discuss how his organization is managing digital-era challenges by harnessing disruptive forces to reimagine banking.

Gerard Seijts: Some people argue that the corporate challenges of today and tomorrow are not all that different than the ones faced in decades past. How do you see it?

David McKay: The digital age is different. The forces of disruption today are broader, deeper, global, and their impact is being felt across the business world, our societies, our economies, and we are facing change that is happening faster than in the past because of new technologies and the amount of capital fostering disruptions. As a result, we are experiencing quantum, secular change.

GS: What do you consider the major macro drivers of disruption?

DM: I see two. First, we’ve entered the platform era in which a disproportionate share of people’s lives is interconnected via social media, e-commerce, online entertainment, workplace networks, etc. As a result, consumers are communicating globally who they are, what they want out of life, what products and services they like, what they don’t like, what they believe, what they don’t believe. This is a historic shift. Our customers used to talk to friends and family members about their lives and financial needs, then they told us. To do this, they would walk into a branch or pick up the phone or visit our website. But they never broadcast what was happening in their lives. Today, they do. In the platform era, consumers essentially let the world know when they are getting married, having a kid, getting divorced, starting a new job, launching a company, going back to school, buying a car. All of this information is essentially broadcast to the world via social media posts, online searches, entertainment purchases, work platform usage, etc. That’s not only new—it is highly disruptive to traditional business models because it changes everything about how you maintain relevance to customers. In the past, we competed on convenience. To make it easy for customers to come to us, we built bank branches on every corner possible. We hired good people and trained them how to explain what we do. We built efficiencies of scale, so we could offer value. But now individual consumer needs are broadcast to a global audience of bidders, such as Amazon bank, seeking to translate this revolutionary flow of information into profit. That is the new world we live in and we need to adjust to it. We need to reinvent banking by picking up on the signals sent in the platform era and using them to provide relevant value through new channels and new capabilities.

GS: And the second major macro diver?

DM: Well, there are numerous drivers of disruption competing for second place, but I will give the nod to climate change. Climate change isn’t just impacting our planet physically. It impacts how societies are organizing and feeding themselves. It’s driving migration and political change like Brexit. All of this presents significant economic and governance challenges because jobs are on the line and the related political pressure, not to mention potential for social upheaval, has some actors more willing than others to help address the escalating carbon footprint. Simply put, there is not yet a level playing field across the world, so achieving the goal of seeing the global economy develop a safe and sustainable growth platform is far from certain. As a result, climate change is a very significant driver of disruption that should not be ignored by business leaders.

GS: How are you preparing RBC to face the clear and hidden challenges of the Age of Disruption?

DM: I could spend hours discussing this, but the short answer is we are fundamentally changing what we do. For at least the past century, our industry has been built from the bank out to the customer. While we focused on our regulatory, processing, and data management needs, and ensuring the security of customer bank accounts and cash, we built consumer interfaces. We tried to keep things simple and we tried to adjust to changing needs, but there was always a mismatch between bank needs and consumer needs. We never nailed customer ease, access, and convenience. As a result, we now see a secular opportunity to reimagine the role banks play in a customer’s life. Deploying new technologies, ranging from AI and the cloud to blockchain, we can redefine our organization building from the customer to the bank. We are living through a period of enormous change and business model transformation. And we are moving at a cadence driven by the rise of the platform era and non-traditional players. As a result, I don’t think there has ever been a more exciting time to be in banking or any B2C [business to consumer] services industry. In particular, I find the transition to customercentricity very exciting. At RBC, we’ve spent the last five years flattening our organization and going through a culture revolution on how we work. We recognize the need to work in agile teams and co-locate engineers—with architects, process designers, business owners, and PNL owners—to design products, services, and process channels out from the customer. In other words, customers are helping us redesign our bank for them. We are listening to them tell us, “I’d like more of this and less of this.”

GS: How does this change impact human resources?

DM: Put simply, we need different skills across the organization. We’re now working with big data, blockchain, and AI, while interacting with customers in diverse ways. So, the required skill sets—across leadership, sales, systems, product design, etc.—are all different.

GS: How are leadership skills changing?

DM: As part of our cultural change program, we set core needs for leadership in the disruptive platform era. We highlighted the need for more collaboration and curiosity across the organization. We want leaders who can work in dynamic teams with short-term deliverables that can constantly change, so we want leaders open to being challenged in a certain way. Curiosity is important because we want leaders interested in continuous learning, and not just skills. We want people who invest time in building networks that keep them informed about new trends and technologies, about how others are competing and creating value. This helps leaders develop what we call a “north star” to guide them. It also helps prevent leaders from being paralyzed by the cadence and complexity of changes taking place in society and the marketplace. If you don’t have a north star today, you can easily get lost. But we don’t want micromanagers. We want people who can set a destination and lead teams that they trust to get them there. Some might call it having “vision,” but it’s not a fixed thing. It’s about having the confidence to guide others through unknown obstacles on a bumpy path. This requires resilience because—given the volatility of today’s market, how fast competitors change, how quickly new ventures launch, and how fast new technologies emerge—you are rarely on a fixed path. Being able to handle setbacks at an increasing cadence is a must because something can always usurp your expectations when you appear to have a clear path to launching a product. So, you need to have curiosity to recognize change and then have what it takes to quickly adjust your route to ensure your destination remains compelling and offers real value. Some people call it failing fast, but we call it pivoting. Making the call to shift direction in a big organization is not easy because people want to build their brands as individuals. And when working to get promoted, it takes real courage to stop and admit something didn’t work, then apply your resources in a new direction. But not having the courage to do this today can squander a lot of resources.

GS: What about humility?

DM: That’s another core need for leadership today. Among other things, it facilitates commitment to continual learning. Learning can’t finish the day you walk out of an MBA school. You need to constantly learn on the job, and that requires humility. We certainly don’t hire people who have answers to past challenges. We hire people who can find new answers to changing challenges and that requires both humility and curiosity because the solution might require turning your organization upside down. Ego and hierarchy have no place in effective strategy making—they are a liability.

“When change is imposed, it tends to foster fear, which drives resistance. But when you empower people to challenge the status quo, you control how change is perceived. Instead of a threat, it is seen as an opportunity.”

GS: Do you think leadership skills differ for a start-up?

DM: In some ways, yes. A company founder is driving to create a winning customer solution by solving a few select problems. They’re typically moving fast while trying to create some type of traction on one idea, and doing it with less structure and fewer systems. Survival and speed to scale is mission critical and the skills required are about that focus. Leading an organization with millions of customers and stakeholders and economic influence is less hands-on—at least, operationallyand requires an evolved skill set. You’re responsible for everything, but you control much less than a company founder in the early days. An entrepreneur probably controls 90 per cent of decisions being made. That evolves to probably 5 per cent. It’s very, very different.

GS: In one of your speeches, you noted: “Complacency and ego are killers of shareholder value in organizations.” How do you create a sense of urgency to fight complacency?

DM: Fighting complacency is one of the toughest jobs of a leader. Creating transformational change in response to a crisis is relatively easy. There is a powerful call to action that is easily understood. Creating a sense of urgency when business is thriving is something difficult. It requires clearly articulating the challenges and what needs to be done to address them. That isn’t easy, especially when the challenges include uncertainty and technology is one of the drivers. The key to getting people to buy into a call for action is effective communications. You need to clearly articulate how you see the world changing, and describe clearly how the various elements of change will have an impact. Describing a different future must be done in a compelling way, with a deep understanding. It also typically requires bringing in outsiders to reinforce your perspective. Whenever we have success, I ask my team to question why. People love to question why a failure occurs, but it is also important to question why we were successful at something to determine if that success is repeatable without change. That helps eliminate complacency because it forces an examination of what might need to be done differently. So, I always challenge people to examine why good results might not be replicated in the future.

GS: So, fear of change doesn’t have to paralyze an organization, right?

DM: Right. When change is imposed, it tends to foster fear, which drives resistance. But when you empower people to challenge the status quo, you control how change is perceived. Instead of a threat, it is seen as an opportunity. Empowered people don’t just buy the need for change, they help drive it by identifying changes that need to take place. So, the key is to get buy-in for change across the organization while sharing some of the related decision making and maintaining control over implementation at the same time. This, of course, pays additional dividends.

GS: Can you give us an example?

DM: Certainly. Let’s look at the lower end of an organization, where there is often more clarity about how customers are changing. The front lines are typically waiting for the opportunity to shout up the line, “No, we need more of this and less of that.” So, I am talking about creating an empowering culture that offers them the opportunity to speak up and welcomes the input given. This helps people accept change as natural while serving as a catalyst for changing the products and services you offer to meet changing customer needs. Keep in mind that some of RBC’s most successful products over the past 10 years have come out of employee surveys. So, whenever we do these things, I pay attention to the written comments. I look for common themes, or people asking for certain products or services. Then I challenge managers to see the potential in what is being proposed instead of counting off reasons not to change, and this often leads us to strike agile development teams, which offer additional benefits.

GS: How?

DM: Our old way of working was very much a matrix with everyone focused on their roles, but that’s not an agile team. An agile team is cross-functional, it owns the entire process, and everybody has input across the project’s journey. That makes a huge difference. I’ll never forget an agile team presentation of outcomes that I once heard. The team had a great outcome with a customer solution, but that’s not why the presentation stuck with me. It was a team member comment that I found so memorable. One of the mid-level team leaders stood up and said, “I’ve been with this company for 20 years. I’ve played functional roles. I’ve played business roles. But working on this project is the first time you got the whole me.” When I asked him to explain, he added, “I’ve been a risk manager most of my career, but I’ve got marketing intuition that has never been tapped until I landed on this agile team, so it’s the first time you’ve gotten the whole me.” I left that meeting asking myself, “How can I do that 80,000 times across the organization?” because I realized most companies and institutions across the Western world don’t get 100% of employee potential. So, empowering people to propose change not only increases the readiness to adopt change, it serves to unlock trapped employee potential.

GS: A lot of people fear massive job losses as the Digital Age progresses. What about you?

DM: Well, I think the impact of disruption on employment changes with time horizons. As things stand, we are seeing significant new demand for skills related to AI, blockchain, cloud-based data gathering, driverless car technologies, robotics, fintech, etc. So, the short-term transformation phase is net positive. The retirement of boomers also supports demand for labour. I also think we will eventually get to a good place with more opportunities created than lost. But as the pace of change increases, I do worry about socio-political upheaval, which may require management in the medium term. Universal income may not be the right solution. But we need to learn from history. Figuring out how to reposition disrupted people and bridge the transition phase is important so we don’t see a repeat of past levels of social upheaval.

GS: In a report entitled Humans Wanted, RBC notes 50 per cent of Canadian jobs will require a skills adjustment. The report highlights increasing demand for critical thinking, collaboration, social perceptiveness, active listening, complex problem solving, etc. Why?

DM: Machines are not a threat. But we need to focus skill development on where we can really add value in the workplace. And in the future that will be where complex decisions are made, where relationships are needed, where empathy is needed, where creativity in a different capacity is needed. These are areas where machines will support humans, not replace them. Machines can enrich our lives, while making us more productive, healthier, and smarter. But we will need to adjust how and what we do for work to control our destiny.

GS: What role should the business school play to remain relevant in the Age of Disruption?

DM: That’s a great question. When I went through my undergrad and graduate programs, it was a static system of learning certain skills based upon what led to success in the past. After the skills in question were delivered to students in very rote, formulaic ways, graduates were sent off to deal with the world. Most of my generation never really returned to school to review, change, or transform the skills they developed. And I think continuous learning needs to be entrenched in formal education programs. Perhaps it makes sense to deliver less business education upfront. It took me six years to get my graduate and undergraduate degrees. Maybe take half of that time before working and then return in three years to advance what you’ve learned via a mix of class time and experience. Whatever the timing, I think educational institutions have a huge mission-critical role to play in helping society face the unique challenges ahead because transformation requires continuous learning and everyone from banking executives to medical professionals will need to transform to meet changing skill-set requirements. Helping individuals disrupted from jobs that cease to exist is an even greater challenge that will require educational professionals to play a leadership role. These people will need completely new training for new jobs. So, educational institutions will be playing an even greater role in society than we have seen in the past.

GS: But some people believe educators are too bureaucratic and slow-moving to do what you are talking about. The economy’s future is digital, with emerging technologies such as AI and blockchain creating new opportunities. So, do you really think universities can keep up?

DM: To remain relevant, educators will have to transform themselves like everyone else. As I stated earlier, I think the transformation involves a greater focus on continuous learning, which means changing how you train and how you distribute that training because you can’t expect everyone to come to you. You’ll also have to think about who delivers the training. That means asking if the researcher on campus is the best person to train others or do you need someone else? The good news is that the industry is already starting to change. For example, schools are building more convenient locations and investing in digital capabilities. But more change will be required as the industry is forced to redefine its what–how–who. In other words, to remain relevant, business schools and universities will have to go through the same process that I’m going through at the Royal Bank.