TORONTO (Reuters) - Activist investor William Ackman's push to shake up Canadian Pacific Railway Ltd (CP.TO) gathered more steam on Wednesday, with a third advisory firm endorsing his entire slate of board nominees ahead of the company's annual meeting next week.
The backing by Glass Lewis & Co, which mirrors recent recommendations by advisory firms Institutional Shareholder Services and Egan-Jones, points to a poor outcome for CP, Canada's No. 2 railroad, in its bruising proxy battle with Ackman's Pershing Square Capital Management hedge fund.
"We believe the company's serial underperformance from a total shareholder return perspective and its industry-worst operating performance require a far-reaching overhaul of the board and senior management," the Glass Lewis report said.
New York-based Pershing and CP management are locked in a bare-knuckled proxy fight over who should lead CP, the least efficient of North America's big railroads.
Pershing says CP Chief Executive Fred Green must be replaced, ideally by Hunter Harrison, the hard-driving former CEO of Canadian National Railway (CNR.TO).
Pershing, which is CP's biggest shareholder with a 14.1 percent stake, has presented a fairly straightforward and realistic plan to achieve results, Glass Lewis said.
The firm advised its clients to back Pershing Square's slate of seven nominees and withhold votes to re-elect CP Chairman John Cleghorn and Green as directors.
"The dissident presents a compelling case for the need to overhaul CP's current leadership," the report said. "Simple board representation isn't likely to produce the results that shareholders desire. Rather, an injection of all seven of the dissident's nominees is warranted."
It said shareholders should also withhold support from six other incumbent directors based on their unyielding support of Green, lengthy tenures during periods of poor performance, or "culpability" in allowing the company to remain a laggard.
"The record shows that under Mr. Green's and the current board's leadership, CP's shareholders have suffered through most periods, whether in times of boom, bust or recovery, relative to the performance of other railroads," the report said.
Proxy advisory firms, whose advice to large institutional investors ahead of shareholder votes can shift votes for or against management, rarely support an entire slate.
"All three of the major North American proxy advisors recommend that CP shareholders vote on the blue (Pershing) proxy for all seven of the nominees for management change," Ackman said in a statement.
"We are unaware of so powerful and uniform an endorsement for change in the history of large-cap activism."
CP, which has adamantly refused to consider replacing Green with Harrison, urged shareholders to vote in favor of the best 16 directors "including any of the Pershing Square nominees".
But it recommended against voting for all seven Pershing nominees, saying that would be a vote for "risk and disruption".
CP also reported improved operating results for the month of April on Wednesday, which it said proves it has the right turnaround plan.
Egan-Jones, which endorsed Pershing's slate and recommended shareholders withhold votes from all 15 CP incumbents, said it does not believe CP's plan will maximize shareholder value.
"We believe that voting on the dissidents' ballot for the dissidents' nominees is in the best interest of the company and its shareholders," its report said.
"It appears at this stage that Pershing Square Capital Management could win all seven board seats as a result of this proxy contest," said BMO Capital Markets analyst Fadi Chamoun in a note to clients.
Ackman has ruled out a compromise with CP, which last week indicated it was willing to negotiate ahead of its annual meeting in Calgary on May 17.
Glass Lewis noted that while CP recently suggested it was open to a search for a new CEO, that selection should be determined by a new board.
Earlier this week, Ontario Teachers' Pension Fund, a large Canadian Pacific shareholder, said it would vote for Ackman's slate instead of the incumbent board. [ID:nL1E8G79QF] Its support for Pershing is line with recent polls that indicate most institutional shareholders favor Pershing's slate. [ID:nL2E8FQFMC]
Holders of about one-third of CP shares have already voted, Ackman said at a Toronto event on Tuesday, with more than 95 percent of those shares cast in favor of Pershing's slate.
"It's beginning to look like no matter how it's interpreted the Pershing group is going to basically win the day," said Michael Sprung, president of Toronto-based Sprung Investment Management, who plans to vote "selectively" for certain members of Pershing's slate.
"It's my hope that people are really voting in this manner for the long-term benefit of the firm and not just on the basis of a short-term blip in the share price."
Shares in CP dipped 44 Canadian cents, or 0.6 percent, to end at C$73.25 on the Toronto Stock Exchange on Wednesday.
Reporting by Euan Rocha and Allison Martell; Editing by Janet Guttsman, Dave Zimmerman and Peter Galloway