Binkley Report — Brawling in CP boardroom


Alex Binkley is a foremost political and economic analyst. Readers will be aware that his columns in True North Perspective have foreseen political and economic developments in Canada. This week in ... 

The Binkley Report

Brawling in the CP boardroom

By Alex Binkley
True North Perspective

A brawl has broken out in the normally gentle boardroom of Canadian Pacific (CP) set off by a US hedge fund investor and it has shippers who rely on the railways readying for another push on the federal government for effective rail freight service rules.

Pershing Square Investments, headed by Bill Ackman, acquired a 14.2% stake in CP last year with the intention of pushing for drastic improvements to its poor financial results under current CEO Fred Green.

Ackman wants Green replaced by former Canadian National (CN) CEO Hunter Harrison whose cavalier attitude towards customers as he boosted that railway’s productivity was a main driver in a concerted campaign by shipper organizations for regulations that would balance the market place of the two national railways and their customers.

Harrison retired from CN in 2009 and his successors have worked hard to smooth the troubled relations with shippers and blunt federal regulatory plans.

Ackman has proposed two new directors to represent Pershing on CP's 15-member board, plus two to three independent directors.

CP Chairman John Cleghorn says the railway already has a plan to boost its financial performance and the board stands behind Green and his team.

Shoving Green out the door would cost CP $27.4 million in termination charges. Other senior managers would also be eligible for hefty buyout payments.

CP’s woes were compounded when management underestimated the strength of the economic recovery after the 2008-09 recession. Shippers, including the grain industry, complained about delayed movement of their products.

CP has an operating ratio in the high 70s while CN’s is under 60%.

CP was caught flatfooted in late December when Pershing-inspired stories appeared in the business section of major newspapers critical of the railway’s senior management and financial performance.

Two weeks later, the company released an open letter from Cleghorn insisting a plan was in place to bring CP’s operations into the same league as other railways.

The CP letter quotes the two most recent appointees to the Board to defend the railway’s plan. Veteran railroaders Tony Ingram and Ed Harris were considered as appeasements for Pershing because of their success on the operational side of other railways.

Ingram says Green “and his management team have developed a well thought-out plan to improve CP's operating ratio and I look forward to the opportunity to work closely with management to ensure that the plan is executed with appropriate accountability.”

Harris, who has served as Executive VP of Operations for both CP and CN, says, “It is a mistake to underestimate the differences between the infrastructure of CP and CN. On the one hand, in CN you have a railroad that was built by Canadian taxpayers with twice the proportion of sidings and double track and that therefore benefits from significantly enhanced operating flexibility. On the other hand, CP has to contend with greater geographic challenges. I am pleased to see significant improvement in CP’s operating metrics as a result of planned initiatives.”

In the letter, Cleghorn says Pershing doesn’t have “a detailed, credible plan” for rejuvenating CP, “Pershing Square suggests an unrealistic operating ratio reduction at pace never before achieved by any railway management team.”

CP faces unique challenges and has to contend with “rising annual pension costs associated with CP’s legacy pension plans,” he added.

Cleghorn says CP aims to cut its operating ratio to the low 70s from the current high 70s within three years. “We will not stop there – as we achieve our goals, we will set new targets. As early as 2010, the results of management’s execution against the Multi-Year Plan could be seen in a four hundred basis point improvement in the operating ratio.”

To deal with the steady growth in rail traffic, CP has added new locomotives and boosted manpower. “We expect to deliver meaningful improvements in CP’s financial performance starting in the first quarter of 2012.”

Replacing Green with Harrison “is not in the best interests of CP or its shareholders,” Cleghorn asserted. CP is also working on boosting its traffic levels through “innovative relationships with customers and supply chain partners.”

CN has waded into the dispute with a statement that the terms of his retirement agreement preclude Harrison from taking on the top post at CP. In a January 12 statement, CN says that Harrison’s contract with CN bound him, upon retirement, to a broad range of confidentiality and multi-year non-competition and non-solicitation provisions.

Harrison should respect his commitments and drop his media hyped interest in the CP job, CN says. The railway also wants Ackman, “to cease any efforts to induce breaches of Mr. Harrison's contractual obligations to CN.”

Ackman has poopooed CN’s claims and promised a legal fight if CN persists.

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