TORONTO (Reuters) - Hunter Harrison, the former railroad boss that an activist investor wants to take charge of Canadian Pacific Railway (CP.TO), said on Monday CP has to transform its complacent company culture if it wants to improve its lagging operating performance.
At a town hall-style meeting hosted by William Ackman’s Pershing Square Capital Management in support of his proxy battle with CP, Harrison said he has invested $5 million of his own money in Canada’s No. 2 railway. He said the investment showed he was confident in his ability to make CP click.
“Ninety percent of this is about people,” Harrison told a packed ballroom at a Toronto hotel, where an audience of about 300 investors, lawyers and journalists took in more than two hours of presentations and questions.
“It’s a wonderful franchise that’s got a lot of potential and a lot of opportunity. The problem is execution, and we’ve just got to get to a point where we can make the cultural shifts that need to be made to get the railroad to execute like it should be,” said Harrison in his Southern drawl.
Pershing is pushing Harrison, credited with turning around rival Canadian National Railway (CNR.TO) during his tenures as operating chief and CEO, as a remedy for CP’s worst-in-class efficiency levels.
The closely watched New York hedge fund holds a 14.2 percent stake in the railway. It called the Toronto meeting, branded “CP Rising,” to promote Harrison as well as its minority slate of nominees for CP’s board.
CP said in a statement after the meeting that Pershing Square “continues to offer no plan or clear timetable to improve CP’s operations, or even any concrete suggestions.” It repeated that it was sticking to its own multi-year plan for improving performance under Fred Green, the current CEO.
For graphic comparing the operating performance of
Canadian Pacific and Canadian National, see:
Initial reactions to the meeting, an open-house event that is rare in corporate Canada, were positive. CP’s stock rose 1.7 percent to C$74.71 on the Toronto Stock Exchange.
The atmosphere in the room remained friendly even as Ackman and his colleagues laid out tough criticism of Green’s record. Then Harrison joined Ackman on stage, and sat with Ackman to discuss his record at Illinois Central and CN.
“I thought they did the meeting in a very professional manner. They didn’t discredit Fred Green and the board. They were just laying out the facts,” Edward Jones analyst Brian Yarbrough said.
One dissenting voice was Ron Tepper, chief executive of Fastfrate, a local transport and logistics company that is a longtime CP shareholder and customer.
Green has “been a great partner to work with and he’s very very focused on customer retention and customer satisfaction. That is something Hunter is not, no matter what he says,” said Tepper at the meeting.
PERSHING “IN IT TO WIN”
While Ackman and CP may not see eye-to-eye, their fortunes are bound together by Pershing’s investment. The $11 billion fund, which slipped 2 percent in 2011, has 16 percent of its capital in the railway.
“We own a large, illiquid position in the company. We’ve made the bet that we’re going to be successful,” Ackman said at a press conference. “We’re in it to win.”
The boyish looking Ackman, known for its investments in J.C. Penney Co Inc (JCP.N), Wendy’s WEN.N and Fortune Brands Home & Security Inc (FBHS.N), among others, lost his last proxy fight, at Target Corp (TGT.N) in 2009.
“On Target, we waited way too long before we told other shareholders what we had in mind, and that was a mistake,” Ackman told Reuters after the CP event. “By having this town hall today, we’re letting shareholders know what the opportunity is.”
Ackman, known for his shock of prematurely gray hair, said he expected CP’s board would “get a few phone calls from shareholders” after Monday’s meeting. “That might accelerate the process,” he said.
Ackman said he was not claiming the current board was incompetent, otherwise he would have been trying to remove all 15 members.
“These are smart people ... who unfortunately have not been able to get the job done,” he said.
Paul Hilal, a partner at Pershing and one of its nominees for CP’s board, said that under Green’s 5-1/2 year tenure, cost control was weak, assets were poorly utilized and labor mismanaged.
Pershing’s nominees include Ackman and his partner, Hilal, management consultant Gary Colter, energy industry executive Rebecca MacDonald and former Onex Corp executive Anthony Melman.
Ackman believes Harrison, 67, who turned CN into one of North America’s top railroads, can repeat that with CP.
With only a minority slate up for election, Ackman will need to win over at least part of CP’s current board. The company will hold its annual meeting and board vote on May 17 in Calgary, Alberta.
Directors have publicly backed Green and his plan to improve the railway’s operating ratio - a key industry measure - to 70 to 72 percent in 2014. The current operating ratio, at 81.3 percent, is the weakest of North America’s six big railroads.
A lower operating ratio, which measures what percentage of revenue is needed to run a railway, indicate more efficient and generally more profitable carriers. Best-in-class CN boasts a ratio of just 63.5 percent.
Much of its efficiency gains came during Harrison’s tenure, first as chief of operations and then as CEO. He retired in 2009.
Additional reporting by Nicole Mordant in Vancouver and Cameron French in Toronto; Editing by Rob Wilson and Frank McGurty