The railroad to watch in 2012

Posted by Fred Frailey
on Saturday, December 31, 2011

Hunter Harrison run another Class I railroad? This one Canadian Pacific, the main competitor to the railroad he retired from three years ago? It seems altogether possible as the new year begins, and there appears to be little that Fred Green, CP’s current chief executive, can do to stop it.

Bloomberg News and Canada’s national newspaper, Globe & Mail, both reported that investor William Ackman’s Pershing Square Capital Management, which owns 14 percent of CP’s stock, has approached Harrison about replacing Green at CP’s helm. My sense is that Ackman leaked the story to the two news organizations because both reported substantially the same confidential facts. In corporate skirmishes, this is how you put your opponent on the defensive. The news stories said that Harrison is held back only by a non-compete agreement with Canadian National, which he led until the end of 2009; that agreement expires on January 1. The Globe & Mail added this tidbit: “It is understood that some of CP’s directors have expressed enthusiasm for Mr. Harrison and requested a meeting with him.”

You’ve got to give Green credit for trying. Just two weeks ago he persuaded two retired railroad operating executives, each with golden reputations for turning around troubled companies, to join Canadian Pacific’s board of director. Tony Ingram was a seasoned Norfolk Southern operations executive who Mike Ward recruited to come to CSX, to bust up the Old Boy Network that inhabited Ward’s operating department. This Ingram did with a certainty and determination that must have surprised many of the general managers and division superintendents he fired when they failed to take him seriously. CSX became the Class I success story of the past decade, and I give Ingram and his boss Ward credit. Tony is as sophisticated as a Tennessee moonshiner, but he is smart, tough, and wizened in equal measures.a

Ed Harris I’ve never met, but his story is in some respects even more interesting. He was a Hunter Harrison protégé at Illinois Central. Harrison rose to the presidency of Canadian National after that road bought IC, and Harris became his right-hand man, becoming executive vice president of operations. As such, he was a central player in the “CN miracle” as the former government-owned enterprise became the most efficiently run freight railroad in North America, and maybe the world.

By the time Harris retired in 2007, Canada had two very different railroads. One was the super-effective CN, the other the somewhat ineffective CP. So in 2010 Harris was lured out of retirement to become CP’s chief operating officer, reporting directly to CEO Green. Reportedly, Green wanted Harris to repeat the “CN miracle” at the other railroad.

But it never happened. Less than a year after arriving in Calgary, Harris retired again. He told friends he was frustrated at being unable to accomplish much. The insinuation is that CP had an operating department every bit as set in its ways and unwilling to change as the Old Boy Network at CSX, and that either Harris or Green was unwilling to change the culture in the blunt manner that Ingram did at CSX.

So you’re left to wonder: After the humiliation Harris got from Canadian Pacific’s bureaucracy, which caused him to turn tail and leave, why would he consent to come back as a director? Maybe to exact his revenge. We’ll find out soon enough. Between Ingram and Harris, Green has two expert directors capable to telling him precisely what needs to be done. If CP’s directors decide that Hunter Harrison is the man to take that railroad to the next level, he would probably enjoy having former colleague Harris on the board. How Harrison would get along with his fellow southerner (Harrison grew up in Memphis, Ingram in lower Alabama), I can’t pretend to know.

All this is prologue to the point I made in the title of this essay. The railroad to watch in 2012 is Canadian Pacific. Big changes are almost guaranteed. We and just starting to get an inkling what those changes will be. — Fred W. Frailey

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