A dose of investor activism rarely fails to invigorate a company’s managers. Canadian Pacific Railway ranks dead last among North America’s big six railways on a key measure of productivity, and Bill Ackman’s Pershing Square Capital Management wants to unseat the company’s chief executive.
The Children’s Investment Fund, run by Chris Hohn, tried something similar with CSX, a U.S. railway, a few years back. Though the hedge fund gained board seats, the bruising fight ended ignominiously for the fund, also known as TCI, thanks to a combination of its questionable tactics and the financial crisis. Yet the engagement still forced CSX’s entrenched executive team to be more ambitious. Meanwhile, Warren Buffett’s huge acquisition of Burlington Northern Santa Fe in 2009 underlines the long-term investment potential many see in the sector.
As things stand now, CP’s operating ratio, a key metric relating expenses to revenue, is 11 percentage points higher (meaning worse) than its peers, according to Moody’s Investors Service. In 2007, the gap was just two points. Among other changes, Mr. Ackman – whose fund owns 14 per cent of the company – wants to remove current CEO Fred Green and replace him with Hunter Harrison, the former head of Canadian National Railway. The idea would be to hammer the operating ratio down to 65 per cent by 2015 from around 81 per cent. The current bosses think that’s unrealistic – hence the proxy fight.
Only about a third of proxy battles in 2011 went to a vote, according to FactSet SharkWatch, which suggests the odds are against Mr. Ackman’s candidates. Yet his public war of words with CP chairman John Cleghorn may be enough to reshape the debate in the company’s boardroom. Management’s current plan is to cut the operating ratio to the low 70s in the next three years. That would only bring CP into line with its peers three years late, but could still translate into an 11-per-cent annualized gain in the company’s value, according to JPMorgan.
Mr. Ackman’s more aggressive plan, if achieved, could add significant extra value. That should be enough to focus shareholders’ attention on the possibility of bolder action, with or without Mr. Ackman’s picks on the board. But to fully convince investors who remember the TCI-CSX controversy, the hedge fund boss and his preferred CEO may need to lay out a far more detailed plan.