Board members plugging the CEO succession gap Companies are drawing on their directors to take the reins in a pinch

As a company keen to be at the vanguard of corporate governance virtue, Ballard Power Systems Inc. prides itself on its progressive succession-planning policy.

The board of the Vancouver-based fuel cell maker, through a special committee, regularly meets to ensure budding leaders are identified and offered training, not just for senior-executive positions but also for lower-level departmental posts.

Yet when the board suddenly decided to force out Ballard's chief executive officer, Dennis Campbell, two weeks ago after a challenging three-year tenure, it resisted naming a permanent successor.

Instead, the members elected one of their own, non-executive chairman John Sheridan, to take over as temporary CEO.

The reason? Board members wanted to buy more time to scour outside the company -- not just within -- for all available candidates.

Ballard, it turns out, was lucky. Mr. Sheridan, a former president and chief operating officer of Bell Canada, with decades of experience running large organizations, was able to jump in on short notice, despite holding directorial posts with several other companies.

As the average tenure for CEOs shrinks and companies increasingly face the dire prospect of a vacant executive suite, management experts are stressing the importance of populating boards with seasoned leaders who can step in to take the reins on an interim basis in an emergency. Call it leadership disaster recovery.

"CEO turnover is higher than it's ever been and board accountability is higher than it's ever been, including having an awareness for succession strategies," says Stephen Mader, vice-chairman and leader of the board practice and CEO search service of Christian & Timbers, a New York-based consulting company. "For a firm to be caught flat-footed is extremely embarrassing."

Mr. Mader likens board preparedness for such upheaval to the concept of fault tolerance in the computer world, where redundant systems are kept running to get the bit stream flowing again in the event of a system failure.

Mark Palmer, president of Palmer & Co. Executive Recruitment Inc. in Toronto, says every company would do well to have a leadership contingency plan in place even while grooming its next generation of leaders. "Even the best-laid plans for succession can run amok if the CEO isn't delivering on the bottom line," he says.

Ballard is just one of several companies that have recently been inspired to deal with sudden departures at the top by temporarily tapping into the leadership resources of their boards.

Days after Mr. Sheridan moved into the corner office at Ballard, Newell Rubbermaid Inc., the Atlanta-based maker of storage containers, announced that its CEO, Joseph Galli Jr., was resigning by "mutual agreement" with the board after a disappointing 4½-year run.

His temporary replacement: Mark Ketchum, a Newell director recruited for the board by Mr. Mader after Mr. Ketchum retired as president of Procter & Gamble Co.'s baby and family-care division.

In 2004, Bill Owens, a director of Nortel Networks Corp., took over as interim CEO of the Brampton, Ont.-based company on the same day that Frank Dunn was ousted amid concerns over accounting irregularities. Mr. Owens is slated to be replaced next month by Mike Zafirovski, the former president of Illinois-based Motorola Inc.

And back in 2003, Hamilton-based Stelco Inc. brought in chairman Frederick Telmer to act as temporary CEO after the abrupt departure of Jim Alfano, who had been CEO since 1997. Mr. Telmer, too, was subsequently replaced by a director, Courtney Pratt, who continues to lead the steel maker through bankruptcy protection.

Luis Navas, managing director of Executive Risk Governance Advisors, a Toronto-based independent consulting firm focused on governance issues, says that directors are ideal candidates for interim positions because they have close familiarity with the company's management and strategic direction.

"Since they've been sitting on the boards, they know the insides and outsides of the organizations, which is a big plus," he says.

He also says shareholders often get a good bargain out of the deal because interim CEOs usually earn much less than their permanent successors. As an example, he cites Mr. Owens at Nortel, whose total annual compensation package of about $2-million is expected to pale in comparison with that of Mr. Zafirovski, whom Nortel has agreed to pay $1.2-million (U.S.) in annual base salary plus the possibility of an additional $3.6-million in performance bonuses. He will also receive five million stock options along with $7.5-million worth of restricted stock units.

Interim CEOs, Mr. Navas says, generally don't receive performance bonuses or stock options.

Mr. Mader says companies should be prepared not only for management shakeups where a CEO is shown the door because of poor performance, but also where someone exits for greener pastures or, worse, because of ill health or death. Directors who assume executive positions, even for finite periods, are not without their detractors, however. Some shareholders have objected to the practice, arguing such insiders are bound to fall into a too-cozy a relationship with their board colleagues, who are, in effect, their employers.

Still, directors with a proven leadership track record who can step in to maintain stability "at the drop of a hat" are crucial to a well-rounded board, says Jay Rosenzweig, managing partner of Toronto executive recruiter Rosenzweig & Co. "You never want to be beholden to one individual in an organization. That's the bottom line."

Back at Ballard, Mr. Sheridan, 50, says he has no intention of continuing as CEO beyond the interim period of about six months.

He says he's happy to be playing a "continuity role," but "I'm not a candidate for the permanent job."