Canadian Pacific chairman John Cleghorn, left, director Ed Harris, and CEO Fred Green in Toronto - Date unknown Fred Lum.

27 March 2012

CP Railway Boss Fred Green Defends his Turf Against Activist Investors

Toronto Ontario - Canadian Pacific Railway Ltd.'s embattled chief executive officer has come out swinging against an American investor's proposal to oust him, arguing that it is based on a flawed analysis of the company.
 
Fred Green said CP will be launching an aggressive counterattack against criticisms levelled by Bill Ackman, CEO of New York-based Pershing Square Capital Management LP. That campaign gets under way on Tuesday, when CP fires back by outlining its recovery plans at a presentation in Toronto to institutional investors and analysts, as well as detailing what it calls Pershing Square's misguided turnaround strategy.
 
"It's an unfortunate thing. It's not the way one would want to proceed, but I think in light of the serious, serious, flaws in the Pershing analysis, it's my responsibility to the CP shareholders to make sure that they understand they've been misinformed," Mr. Green said Monday.
 
His comments came in his first interview since Pershing Square publicly disclosed last October that it had invested in CP. The hedge fund, which began buying the railway's shares last September, now holds a 14.2 percent stake in CP, making it the largest investor in the Calgary-based company.
 
Mr. Ackman argues that a management shakeup is needed because CP has been a laggard among North America's Big Six railways. One survey conducted by Brendan Wood International found a high level of support among CP shareholders for Pershing's views.
 
But Mr. Green said CP retained an independent railway consulting firm, Oliver Wyman, to assess the freight carrier's own proposal to become more efficient. The firm concluded that CP's goal to reduce its operating costs-to-revenue ratio is realistic, but Pershing Square's targets are unachievable.
 
Being placed on the hot seat comes with the territory of being the leader of a major Canadian corporation, Mr. Green said.
 
"If you take on the job of CEO, it comes with all kinds of things. This happens to be one," he said. "It's just part of the landscape and you just have to power through it and be as strong as you can be. If there's a quality that's important in roles like this, it's perseverance and this team is going to persevere. My job is to do a great job for the shareholders and that's exactly what we're doing."
 
CP invited Mr. Ackman in December to join the railway's board of directors, but those talks fell apart, and he began campaigning publicly to replace Mr. Green with Hunter Harrison, the retired former CEO of rival Canadian National Railway Co.
 
Last week, CP said it sweetened its invitation to Mr. Ackman, recommending him as one of 16 nominees to its board. The activist investor, however, is proposing his own slate of six alternative directors, including himself.
 
The proxy fight is headed for a showdown at CP's annual meeting in Calgary on 17 May 2012, when shareholders will be asked to choose from competing slates of directors.
 
The railway formerly was a subsidiary of Canadian Pacific Ltd., a massive hotel, shipping, rail, mining, and energy conglomerate that was broken up in 2001.
 
"We're the last of the Canadian Pacific companies. We're still independent. We're led by a hell of a CEO here and a management team. They've got a plan that's working," said CP chairman John Cleghorn, who sat next to Mr. Green during Monday's interview.
 
"We've got customers who like us and want to grow with us. We don't see the need for the kind of management change that Pershing sees. We are changing. We're a better railroad today than we were before."
 
Mr. Cleghorn said CP has a multi-year plan to reduce its operating ratio, a key indicator of productivity that measures costs as a percentage of revenue, to the range of 70 to 72 percent for 2014. "This is a company that continues to change and is reinventing itself," he said.
 
Pershing Square, by contrast, has "rather thin aspirations" to chop CP's operating ratio to 65 percent by 2015, Mr. Cleghorn said.
 
CP had an operating ratio of 81.3 percent last year, when severe winter weather and spring flooding hampered its operations in the West.
 
Mr. Cleghorn said Mr. Ackman's portrayal of Mr. Harrison as a turnaround specialist needs to be put in context because Paul Tellier deserves credit for beginning the streamlining at CN. "Hunter Harrison was very fortunate to have that already started for him," Mr. Cleghorn said.
 
Ed Harris, a former CN executive vice-president who joined CP's board of directors in December, said CP faces steeper grades in the Rockies than CN does, as well as tough terrain in northern Ontario. Despite such challenges, "we're driving to some very strong results here coming into first quarter and on into the year, operationally," he said.
 
CP's recovery strategy includes running longer trains, upgrading tracks on the Edmonton-to-Winnipeg route, and installing new sidings along stretches of single-track territory.
 
Brent Jang.