TORONTO/VANCOUVER (Reuters) - Storied Canadian Pacific Railway Ltd faces tough challenges as a grueling proxy battle nears its end, and a likely new boss must meet investors’ high expectations as well as keeping staff and employees happy after a four-month battle for control.
With sweeping board changes all but inevitable, current chief executive, Fred Green, appears to be headed for an embarrassing defeat at the hands of William Ackman and his Pershing Square Capital Management, CP’s biggest shareholder with a 14.1 percent stake.
Ackman, who has nominated seven candidates to the CP board, wants to replace Green with Hunter Harrison, the tough former CEO at rival Canadian National Railway Co.
Ackman says he is ready to conduct a search for the best candidate. But he has built his turnaround strategy for CP around Harrison, and industry watchers are hard-pressed to put forward other names.
“The dissident shareholders have created such an expectation that they are going to have to deliver something in fairly quick order,” said Ian MacKay, a transportation lawyer based in Ottawa.
With many votes already in for Thursday’s shareholder meeting, it is likely that Pershing’s slate of nominees will supplant just under half of the current directors. Their first priority will be to turf Green, a lifetime employee of CP and its CEO since 2006.
At stake is the future of a Canadian institution. CP, built in the 1880s to link the young country from east to west, moved some 2.6 million carloads of freight in 2011, employs more than 15,000 people and has a market capitalization of $12.5 billion.
CP’s performance has long lagged that of Montreal-based CN, and Ackman says new leadership is the only way to fix the problem.
CP’s operating ratio, a closely watched industry metric, was 80.1 percent in the first quarter, the weakest of North America’s Class 1 railroads. The lower the ratio - the percentage of revenue needed to run a railway - the better. CN’s operating ratio was 66.2 percent in the first quarter.
CP management says it faces unique challenges in that its steep Rocky Mountain routes are costlier to run, but agrees the ratio can and should fall, if not to CN’s levels.
Other challenges include a steep annual pension bill and the need to keep skeptical customers on board and win over CP’s employees after a bloody boardroom assault. Many of them may be loyal to Green.
“He will have a cadre of senior-level managers who will undoubtedly feel some loyalty to Green, and will resent Ackman and Harrison for having thrown Green overboard,” said transportation writer Tom Murray, a 25-year veteran of four major U.S. railroads.
A compromise CEO could face less in-house animosity but analysts say candidates, other than possibly Keith Creel, CN’s chief operating officer, are thin on the ground.
“There are only six or seven Class 1 railways. There is not a lot to pick talent from. ... I think it’s going to be hard to find anyone who has a better resume than Hunter has,” said Edward Jones analyst Brian Yarbrough.
Many credit Harrison with turning around two railroads - Illinois Central and Canadian National - by cutting costs and boosting efficiency. He will likely do something similar at CP, said Sterne Agee analyst Jeffrey Kauffman.
“Under Hunter’s leadership, Illinois Central grew and prospered and Canadian National grew and prospered and a lot of employees moved up the ladder and took on new jobs that resulted in better income. And the companies’ stock went up,” he said.
Harrison is also credited with transforming the culture at a recently privatized and heavily unionized CN.
But establishing a good working relationship with CP unions may prove harder, and Harrison he has little time to act. The union that represents some 5,000 conductors, trainmen, yardmen, locomotive engineers and traffic controllers at CP moves into a legal position to strike from May 23.
Lawrence Kaufman, once one of Harrison’s colleagues and a former vice president at Burlington Northern, has plenty of praise for Harrison. But he concedes that the rail boss’s main weakness is customer relations.
“He is not a marketing guy, and you know, some of that was revealed over the last decade by his relationship with customers. They don’t all tell you what a wonderful guy he is,” Kaufman said.
The same cannot be said of Green, who built a reputation for going the extra mile to keep customers happy.
Several of CP’s biggest customers, including miner Teck Resources and potash marketing consortium Canpotex, have come out in support of Green.
Canpotex CEO Steven Dechka told Reuters in March that he would not be using CN’s services “if Hunter was still there,” [ID:nL2E8EQB8D] leading to speculation that shippers might switch their business to CN if Harrison takes over at CP.
Sterne Agee’s Kauffman said he thought worries about Harrison’s details-oriented management style are overblown and the railway veteran, who hails from Memphis, Tennessee, understands how to do business in Canada.
“This is a man who ran Canadian National for a long, long time out of Montreal,” said Kauffman. “It’s not as if he is coming from a U.S. organization and saying ‘this is the way you do it, you silly Canucks.'”
And not all unionized employees are hostile, given the number of management changes they saw under Green, said William Brehl, president of the Teamsters Rail Conference, Maintenance of Way Employees Division.
Brehl said he looks forward to sitting down with the new CEO, something he has never been able to do with Green.
“I have heard Hunter is good that way - that you can meet with him and talk with him,” said Brehl.
Editing by Frank McGurty and Janet Guttsman