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CN Rail (Andrew Vaughan/Andrew Vaughan/The Canadian Press)
CN Rail (Andrew Vaughan/Andrew Vaughan/The Canadian Press)

Case Study

Raising the bar at CN Rail Add to ...

This article is the third part of a series that profiles boards that stand out for their drive to constantly raise their game. The authors, who are partners at Guided Futures, have interviewed over 75 directors, chairs and CEOs on how boards must evolve to make a real difference to their company’s future success. Read part one Taking on global leadership at Methanex , part two EPCOR tackles hard choices with ambitious board and part four Related contentCorporate Governance: From golden rules to golden principles.

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The directors of Canadian National Railway oversee one of North America’s most successful corporations. Since its IPO in 1995, CN’s stock has risen 17 times and its operating ratio of 63.1 for the first nine months of 2011 leads the industry.

CN’s $8-billion of strategic acquisitions since privatization have given the company a true North American footprint spanning Canada and mid-America, from the Atlantic to the Pacific to the Gulf of Mexico.

Its commitment to operational and service excellence – anchored on its precision railroading model – has captured increasing market share by giving customers a competitive edge.

Does this sustained success lighten the board’s task: to govern a company that could thrive without them? Or does it get tougher each year: making a difference to a business with such strong momentum? We found no adherents to either view.

In our interviews, CN’s directors and senior management emphasized their drive to continually raise the bar on performance, including operations, customer satisfaction, market share, health and safety, and investor returns. Predictably, this board measures itself by how well the business performs.

Though the standards are high and the hours long, commitment runs deep. Many directors go on contributing long after they retire. David McLean has chaired this board since 1994. Directors portray his sustaining role as part orchestra conductor, chemist and mentor, adding:

“He fosters the right environment.”

“Doesn’t let egos get in the way.”

“Symbolizes our relationship of trust and respect with management.”

“Hears people really well.”

“His feedback has helped my own growth and development.”

Such positive perspectives naturally invite scepticism. Does the longevity of senior directors risk complacency? How much of this progress has the board made possible? How much would have happened without them?

Certainly, most accounts of CN’s progress stress the able direction delivered by three CEOs since 1995 – Paul Tellier, Hunter Harrison, and today, Claude Mongeau. Each represents a different management style, drawing on his own strengths and priorities. So how can we tease apart the special value contributed by their directors?

The first two CEOs brought great strengths and initial gaps that the board could offset. As Mr. Tellier, a former senior civil servant, rebuilt CN, he often tapped into their deep business experience. Mr. Harrison was an entrepreneur and rail operations leader. Directors added complementary value in financial policy, health and safety, and public affairs.

The board also earned management’s high regard by:

1. Developing a membership of high distinction; rich experience; and strong collegiality. CN directors volunteered these words:

“Vast business experience; diverse skills.”

“In-depth insight into customers, competitors, logistics and public affairs.”

“Judgement and wisdom.”

“Cohesiveness; good chemistry and trust.”

“Rigorous; hard-working; gaining a deep knowledge of the company.”

“Taking time to prepare for the big future decisions.”

“Caring passionately about CN’s success.”



2. Fostering a board environment conducive to candid discussion and principled decision-making. To directors, the board’s culture shapes the value they experience:

“People who speak candidly, who don’t hold back.”

“An open and critical environment but not hostile.”

“Open and honest debate – everybody understands it’s all coming from the right place.”

“No big egos making big speeches – we prefer to reach conclusions.”



3. Overseeing two seamless CEO transitions. On succession, the board is solely responsible. They first moved with alacrity when Mr. Tellier resigned at short notice to pursue other interests, retaining market confidence by swiftly appointing Mr. Harrison, then COO, in his place. Next time, a long and thoughtful succession process led to the unanimous choice of Mr. Mongeau as Mr. Harrison’s replacement.

4. Observing the distinctive roles of board and management. This board also leads through disciplined oversight of financial reporting and control, strategy execution, and risk. Still, its most valued contributions come when management initiates and directors respond. Inquisitive directors challenge management thinking about:

• Each proposed acquisition. Does it fit with company strategy, is it the right time and price, how will we negotiate, and how will we integrate? Such debates once led the board to defer a deal to which they later gave approval, but on more favourable conditions.

• Each strategic plan and major strategic initiatives. Company strategy is the prime focus of the whole board – digging into details, looking for issues needing greater attention, but also debating how CN can sustain growth into the future. Emerging leaders bring major projects for intensive review to this seasoned ‘sounding board’, benefiting from scrutiny at the highest level.

• Forward-looking financial strategy – This capital-intensive business relies on strong cash flows and access to capital. The board’s special expertise shapes such key policies as share repurchases and dividend growth.

Looking ahead, however, this board must find new ways to contribute. A new generation of executive talent presents a suite of new priorities with which to wrestle. On top of the ongoing pursuit of acquisitions and efficiencies, Mr. Mongeau has highlighted several ambitious strategies to drive the next wave of profitable growth:

• An amplified business model, promoting CN’s enablement of the end-to-end supply chain, “from the first mile to the last mile.”

• “Customer First”, a portfolio of programs now boosting customer satisfaction and market share.

• A wholesale renewal of the company’s labour force, half of which will retire over the next five years.

Meanwhile, this board will undergo its own renewal, as retirement looms for several members. The open question lingers: What mix of skills, insights, and personal chemistry will equip this board – and CN – to make its next big leap forward?

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