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Crisis management moving up on the boardroom agenda

JANET McFARLAND and ELIZABETH CHURCH find companies are planning for the worst as the costs of being wrong skyrocket

From Friday's Globe and Mail

Canadian National Railway Co. chairman David McLean thought he was heading into a routine meeting one morning in December, 2002, to talk about renewing chief executive officer Paul Tellier's employment contract.

Instead, he faced one of those moments a chairman dreads.

Mr. Tellier -- who had been named Canada's CEO of the year in 1998 for his success in transforming CN from a moribund Crown corporation into North America's most efficient railway -- revealed he was leaving to head up troubled manufacturer Bombardier Inc.

Suddenly, CN's board not only had to act quickly to minimize the stock market impact from the news that its star CEO was leaving, but it had to find someone to fill Mr. Tellier's large shoes. "If we had dilly-dallied, we would have been just killed," Mr. McLean says.

It was the kind of crisis that tested a board's mettle, and highlighted the value of advance planning for different bad-news scenarios. At many of Canada's largest companies, crisis management has become a board priority in the current climate of unforgiving markets and demanding shareholder activism.

The costs of mishandling bad news have never been so high. Corporate errors now commonly generate not only demands for reform from investors, but also a flurry of class-action lawsuits against directors, and a sharp selloff in a company's shares.

"The consequences are more in the public domain," says corporate director David Beatty, who is also managing director of the Canadian Coalition for Good Governance. "And they are more serious in terms of the financial consequences to the corporation, and potentially to the directors in terms of loss of reputation."

As a result, senior directors say boards are spending more time preparing for crises, especially trying to anticipate problems before they emerge.

"More and more boards are being pro-active, not just when the crisis arises but in trying to avoid getting to that point," says David O'Brien, chairman of both Royal Bank of Canada and EnCana Corp.

Mr. McLean at CN had taken a board governance course at Harvard University in 1998, and says one of the lessons taught was that a board is like a fire department: "You have to be ready in a crisis."

CN was able to move quickly only because of the advance planning the board had done on succession strategies and even on worst-case scenarios, such as the unexpected resignation of the CEO. The board even has a backup plan in the unlikely event of the CEO's unexpected death.

The board's human resources committee met the same morning it learned of Mr. Tellier's departure to discuss appointing a successor. And the full board met the next day, agreeing to offer the top job to CN's chief operating officer, Hunter Harrison.

"The company hasn't missed a beat with our new CEO, so I think we made the right decision," Mr. McLean says. "It was a test of the board. The hose was working and the fire was out."

As crises go, CN's board could have seen far worse. In Canada this year alone, Stelco Inc. was granted court protection from creditors while Air Canada emerged from its own bankruptcy protection. CP Ships Ltd. saw its shares pummelled after revealing an accounting restatement, and Nortel Networks Corp. announced it was firing its CEO and other executives following a review of its major accounting problems. Meanwhile, Hollinger Inc. faced shareholder demands for an independent investigation, while MI Developments Inc. was forced by shareholders to back off a controversial plan to buy all the shares of Magna Entertainment Corp., and Molson Inc. saw its shareholders protest a plan to merge with Adolph Coors Co.

Some boards have faced the ultimate test. At companies like Dimethaid Research Inc. and Creo Inc., shareholders launched all-out proxy battles this year to replace the entire board of directors.

These sorts of crises are not new, but many directors are unused to finding themselves in the spotlight as investors increasingly shift the blame beyond management to also question a board's actions and decisions.

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