Former CEO of Canadian National Rail Hunter Harrison sits on stage during a town hall meeting for Canadian Pacific Railway shareholders in Toronto - 6 Feb 2012 Photographer unknown.

7 February 2012

A Change of CEO at Canadian Pacific Railway Doesn't Guarantee Success

Toronto Ontario - In a large room at Toronto's Hilton Hotel, steps away from the centre of Canadian finance, a decidedly un-Canadian event took place Monday morning.
 
It was a meeting held by Canadian Pacific Railway's largest, and most activist, shareholder, Bill Ackman of Pershing Square Capital, to make his case for ousting CP's current chief executive, Fred Green, in favour of former Canadian National CEO Hunter Harrison. Ackman also used the meeting to introduce the four individuals Ackman wants to stand for election at CP's May annual meeting.
 
The fact things went longer than the allotted two hours is testament to the interest shown in what is truly an iconic Canadian company.
 
People in the room wanted to hear whether Ackman is on a green mail run, the answer was no, and whether he has any intention of putting the company in play. Instead, Ackman made it clear to the 300-plus audience that included shareholders, analysts, and at least one Canadian Pacific customer who was also a shareholder, that he was there to effect change, starting with management.
 
Was it a Harrison "love-in?"
 
Well, it was two-and-half hours of hearing all about CPR's failings on everything from asset utilization to the dollars generated per revenue mile that have contributed to its share price under performing.
 
There was also a chance to review the changes Harrison put in place at Canadian National, which has made it the envy of other railway companies.
 
According to the analysis presented Monday, on an all-in basis, CPR shares have lost 18 percent of their value under Green's watch. After debuting at $24.25 in 2001, the shares hit a high of $91 in 2007 and have been on a downward slide ever since.
 
When Ackman started buying last September, the stock was at $56. It closed Monday at $74.34.
 
The stock price, says Jim Huang, who runs T.I.P. Wealth Manager in Toronto, is primarily a reflection of the fact CPR's operating ratio remains at the bottom of the continent's railway companies.
 
In CN's case, as of 2011, the operating ratio was 63.5 percent while CPR's was 81.3 percent, the lower the ratio, a measure of efficiency, the better.
 
Huang has watched Canadian Pacific through the years, and participated in analyst trips, but only recently bought shares, when Ackman moved in. The reason is because he, too, sees the potential for upside at CPR if there is a change in management.
 
"You have an "A" team and a "B" team. Which way are you going to go? It's not a slam-dunk," said Huang, who is a longtime shareholder of CN.
 
"You have issues with the economy, labour. But give it three to five years. Can he (Harrison) make a significant improvement? I bet you, yes."
 
No disrespect to the current guys, but they haven't delivered. Green has been CEO for more than five years. How long can you keep giving management the benefit of the doubt?"
 
The issue, of course, is whether Harrison can deliver as he did at CN. After all, changing a corporate culture, especially at a place like Canadian Pacific, won't be easy.
 
And, despite working out five days a week, he is older and industries do change, even in the almost three years since he left CN.
 
Still, Harrison said he is committed to staying at the helm to see the change take root, and ensure there is a team to carry on, but didn't exactly commit to a hard time frame. And, of course, being a part of the horsey set, Calgary, through Spruce Meadows, holds some appeal for Harrison, too.
 
"I love Calgary. Spruce Meadows is one of the best venues in the world. It's a beautiful place," said Harrison, while being queried on moving to Calgary.
 
One factor that often comes in comparing CPR and Canadian National are the differences in the tracks and the fact Canadian Pacific has more challenges going through the mountains than does CN.
 
But Harrison doesn't buy it, nor does he support the excuse that weather can compromise performance.
 
"It snows everywhere," he said. But not like it does on the Prairies or in the Rogers Pass through the winter months.
 
That was the point made by the one CP customer who stood up to defend the company Monday.
 
Ron Tepper, a CPR shareholder who is also CEO of Consolidated Fastfrate, a company that ships several billion tonnes of cargo via rail every year, offered an impassioned defence for Green and the railway, while also pouring some cold water on Harrison's CN track record following the meeting.
 
According to Tepper, CN's competitive advantage and operating ratio come from the fact it has double stack containers that basically allow it to ship twice as much cargo at half the cost.
 
As to Green's track record versus Harrison's?
 
"Whatever he has promised us has happened. And he's been a great partner to work with and he's very, very focused on customer retention," said Tepper.
 
"That's something Hunter is not. No matter what he says."
 
"I mentioned in my remarks his own board didn't support him at CN. The reason they didn't support him was because the government was chomping down CN's throat and threatening to regulate it because almost every single customer they had were complaining about him."
 
"It was basically, this is my railway, this is the price you pay, and if you don't like it, tough luck. Go somewhere else and there is nowhere else to go. Under those conditions it's not hard to get an operating ratio down to the level he got it to. And here we are today, trying to do the same thing with CP." One criticism coming from Canadian Pacific, and Ackman's initiatives, is that shareholders have yet to see a detailed plan showing what form the changes would take. Trouble is, anyone who knows anything about these issues understands that putting together detailed plans on the basis of publicly available information is next to impossible.
 
One aspect that keeps being mentioned is a practice called co-production, where essentially surplus assets are shared between the two companies to maximize efficiencies. Apparently it already happens, but clearly not on the scale that Harrison and company believe it could.
 
Fastfrate's Tepper, however, thinks bringing down the operating ratio using a broader scale of co-production is unrealistic, because of the inherent conflict it will create.
 
"They are competing for business. I think co-production is a pipe dream. I think you'll see it in areas where there is no choice, like the Port of Vancouver, but you won't see it as a general rule," he said.
 
For his part, when asked how amenable CN might be to increased co-production, based on his tenure at the company, Harrison was not very specific.
 
"I can't tell you where they are today. I can tell you a couple of years ago they were pretty excited about it. I think they would still share the same interest," said Harrison.
 
"It's just sharing of surplus assets, if you will. It would lower both costs and if you lower the costs you have an opportunity to lower the price for the customer, which is good and at the same time preserve the competitive environment that you should have," he said.
 
Fittingly, perhaps, on the day following the Super Bowl, there were plenty of football analogies used Monday, who you'd want on the team, who you'd rather throw the ball to (Harrison versus Green), and the need for a team to work together.
 
If Ackman succeeds in his quest to change management, the sports analogies will have to be applied on a concrete level, not just in the abstract. When new coaches are moved in to improve a team's fortunes, the change has to be carefully managed. This holds true as much in the corporate world, when CEOs are appointed, as it does the realm of sport.
 
In both cases, a change at the top doesn't always guarantee success on the field or in the market.
 
Deborah Yedlin.