TORONTO (Reuters) - Activist investor William Ackman argued once again on Thursday that only a new chief executive can lead Canadian Pacific Railway to recovery, in a proxy pitch to shareholders that also seeks support for his slate of seven board nominees.
Ackman, whose Pershing Square Capital Management hedge fund is CP’s largest shareholder with a stake of more than 14 percent, said in the filing that nothing more than a new CEO, a major board restructuring and cultural “reboot” will put the railway back on track.
Pershing wants Canadian Pacific to replace CEO Fred Green with former Canadian National Railway CEO Hunter Harrison, citing “dismal” operating results under Green’s leadership.
“For the past six years, the board and Mr. Green have led CP down the wrong track,” Ackman wrote. “Since Mr. Green became CEO ... CP dropped to dead last in operating performance among Class I North American railroads.”
Green has presided over a 3.6 percentage point deterioration of CP’s operating ratio, Ackman said. Last year, CP’s operating ratio was 81.3 percent, the weakest of North America’s Class 1 railroads.
The lower the ratio - or percentage of revenue needed to run a railway - the better.
Over the course of his tenure at Illinois Central Railroad, Harrison pushed that railway to an operating ratio improvement of 16.6 percentage points, Ackman wrote. He added that while Harrison led CN, operating ratio improved by 11.7 percentage points.
Pershing promises to reduce CP’s operating ratio to 65 percent within four years of Harrison’s appointment as CEO. Some analysts say that is too ambitious and unrealistic.
CP is targeting an operating ratio of 70 to 72 percent by 2014 and of 68.5 to 70.5 percent by 2016.
“The numbers speak for themselves,” said Edward Jones analyst Brian Yarbrough. “It may have some impact for individual investors. I think most institutions already know the story.”
In a statement, CP said that Pershing’s circular failed to present a concrete plan to achieve operating efficiency gains and that its repeated calls to replace Green undermine the railway’s efforts to improve operations and profit.
“A number of CP customers have expressed concerns about the risk and disruption that would occur should Hunter Harrison be installed at CEO,” CP Chairman John Cleghorn said.
Ackman also urged shareholders to reject CP’s executive pay plan, which he argues has excessive management and CEO compensation with overly low performance targets.
In its circular, CP said it would reintroduce this year an operating ratio target as one of the performance measures to determine annual and long-term incentive remuneration for executives.
Pershing’s filing said that given CP’s performance under similar plans in the past, it is clear that the board has either set the wrong goals, or been too lenient in assessing management’s performance.
CP paid CEO Green C$5.3 million ($5.35 million) in 2011, including a base salary of C$985,873, with share and option awards valued at more than C$3 million. Green did not receive any payments under CP’s annual or long-term incentive plans.
“Long-term shareholder return is the best judge of the performance of a company’s board of directors and its management,” Ackman wrote.
“Under the direction of the current board and Mr. Green, CP’s total return to shareholders prior to our investment was negative 18 percent, while the other Class 1 North American railways delivered strong positive total returns to shareholders of 22 percent to 93 percent.”
On Monday, Pershing announced its seventh nominee to the CP board, former Norfolk Southern Corp executive Stephen Tobias. Before the announcement, CP had said that Pershing’s slate lacked railroad expertise.
The other nominees are Pershing CEO Ackman and his partner Paul Hilal, management consultant Gary Colter, energy executive Rebecca MacDonald, former Onex Corp executive Anthony Melman and Paul Haggis, former CEO of the Ontario Municipal Employees Retirement System, one of Canada’s largest pension funds.
The Pershing circular did not recommend voting against any specific CP nominee. But, in addition to voting for Pershing’s slate, it recommends shareholders withhold votes from all 15 of CP’s incumbent directors.
Alternatively, it suggests shareholders vote for Pershing nominees and up to nine CP nominees that shareholders believe could “work cooperatively” with Pershing’s slate.
“It’s a strategy that has a dual-edged sword,” said Brad Allen, a senior vice president at proxy solicitation firm Laurel Hill Advisory Group, which is not involved in the conflict.
By not targeting specific directors, Pershing eliminates the risk of alienating any CP directors who do get elected, but it also represents a “throw of the dice,” Allen said.
CP, which holds its annual meeting May 17 in Calgary, Alberta, has nominated Ackman to its board as well as its incumbent slate of 15 directors.
CP shares closed 34 Canadian cents lower at C$75.00 on the Toronto Stock Exchange on Thursday.
Reporting By Susan Taylor, Allison Martell; Editing by Peter Galloway and Richard Chang