TORONTO — The CEO of Canadian Pacific Railway Ltd. took direct aim Tuesday at Hunter Harrison, his erstwhile counterpart at the railroad’s biggest rival and the man an activist investor wants to install in his place.
Fred Green said the future of his company (TSX:CP) would be put in jeopardy if New York hedge fund Pershing Square Capital Management succeeds in replacing him with Harrison, who retired from Montreal-based Canadian National Railway Co. (TSX:CNR) in 2009.
Harrison’s successor at CN, Claude Mongeau, and his team “have been doing all they can to de-Hunter CN” since his departure, Green said at CP’s investor day.
“They have moved and migrated away from the style that seemed to be appropriate in the world when Mr. Harrison was there.”
The investor open house in downtown Toronto was held six weeks before CP’s annual general meeting in Calgary, which could be a critical turning point in the company’s 131-year-old history.
At the meeting, Pershing Square aims to have six nominees elected to the board of directors that are in favour of replacing Green with Harrison.
While much has been made of Harrison’s reputation as a strong operator during his tenure at CN, Green said his relationship with customers left a lot to be desired.
“What the shipper community is telling me is that the thought of imposing what they experienced for that period of time when Mr. Harrison led CN upon this franchise is not a welcome thought. And they will vote with their market share,” he said.
John Cleghorn, chairman of CP’s board of directors said the board fully endorses current management and its multi-year plan to improve results. Any shift in strategy — such as a management shakeup — could result in customers fleeing to its rival, he said.
“Speaking on behalf of the board, we’ve had direct communication unsolicited by major customers telling us exactly the same thing.
“That their experience at CN under Hunter Harrison was unsatisfactory and it’s a better railroad today to deal with.”
Meanwhile, Green said his company is one of the smallest railway operators in North America and needs strong customer relationships in order to grow.
He said cost-cutting and revenue-boosting initiatives currently underway are paying off, as is the company’s push to build stronger relationships with its key customers — such as No. 1 client miner Teck Resources (TSX:TCK.B).
He noted CP is “surrounded by much larger competitors to the north, south and east. Our customers have alternatives. They can and they will vote with their business.”
Pershing Square managing partner Bill Ackman retorted that CN had a better customer service record than CP during Harrison’s tenure.
“Under Fred Green’s leadership, CP lost market share to CN. As Mr. Green reminds us, customers vote with their feet. Hunter looks forward to competing hard for and earning customers’ business,” he said.
Pershing Square began amassing its CP holding last fall, with its stake now sitting at 14.2 per cent. Investors had long been frustrated with CP’s share price performance versus its peers by the time the hedge fund disclosed its investment.
“If CP as a stock had performed in line with the group over the long haul, then we wouldn’t be having this discussion,” said Canaccord Genuity analyst David Tyerman.
As Pershing Square sees it, poor leadership is to blame for the gap between CP and its peers.
CP has said numerous times that neither Harrison nor Pershing Square have laid out a clear plan to achieve their goal of an operating ratio — operating expenses as a percentage of revenues, and a key measurement of performance in the railway industry — of 65 per cent by 2015.
CP’s operating ratio was 81.3 per cent in 2011. It believes it can lower it to between 70 and 72 by 2014 and to between 68.5 and 70.5 two years later.
Investors at Tuesday’s event also heard from Allan Kaulbach, of Oliver Wyman, the firm hired to review both the CP and Pershing Square plans.
He said CP’s plan to achieve between a 70 and 72 per cent operating ratio is “ambitious, but reasonable and achievable” and found the Pershing Square proposal to be just the opposite.
In a study of other railroad operators including CN, it found that achieving the 65 per cent operating ratio proposed by Pershing Square has never been done in the proposed timeline of just two years.
Tyerman said he agrees Pershing Square has been short on details so far.
“Their position seems to be Hunter Harrison is a very strong operator — which I think most people seem to agree with — and let Hunter get to work and he’ll achieve what we say that he can,” he said.
“There really isn’t anything that Pershing has said that would provide much clarity on their plan, that’s for sure.”
CP’s management opposes the election of five of the six nominees backed by Pershing Square.
The one exception is Pershing Square’s Ackman, whom CP is recommending shareholders elect to the board at the annual meeting. A board seat had already been offered to Ackman in December, but he declined that invitation, saying it would restrict his ability to push his reform agenda.
CP said in its proxy circular that Green did not receive a bonus in 2011 because the company did not meet its financial targets. His pay dropped to $5.3 million from $6.6 million in 2010, when he got an incentive payment of $1.67 million.
In afternoon trading Tuesday, CP’s shares fell 96 cents to $77.95.
— with files from Lauren Krugel in Calgary