“It’s sealed,” a securities analyst emailed me today about the fight to control the future of Canadian Pacific. Institutional Shareholder Services had condemned the stewardship of CP by its present board of directors and recommended that seven directors nominated by an opposing faction, New York hedge fund Pershing Square Capital Management, be elected. Few people are even aware of ISS. But within the investment community it speaks with a loud trumpet, acting as a shareholder advocate for large investors lacking the time or will to evaluate complex corporate controversies. My correspondent’s investment firm religiously follows the recommendations of ISS. So do most other institutional investors.
As if that were not enough, today’s news brings word that consulting firm Brendan Woods International, in the latest of a continuing series of polls of CP investor sentiment, finds that support for a change of management is building. Its newest finding shows that 94 percent of the shares polled want a change in CP management, up from 91 percent in March. But Brendan Woods got the responses of only about half of the shares of CP. So its findings, although authoritative, are incomplete, and the rest of CP shares are held by individual investors whose loyalties may lie in a different direction. Moreover, CP pointed out that the shareholder survey occurred before the railroad revealed sharply higher earnings for the first three months of 2012, compared with the storm-cluttered year-earlier period.
The issue is whether chief executive officer Fred Green, who has led this underperforming Class I railroad the past six years, should remain. Pershing Square founder Bill Ackman, whose firm owns 14.2 percent of CP shares, argues no. He champions Hunter Harrison, a Tennessee native who oversaw CP rival Canadian National Railway for nine years, with spectacular results. Harrison’s brusque treatment of both unions and customers in a nation that values consensus made him an unpopular figure in that country, but a hero in the investment community (and among some but by no means all railroad managers).
To those who read my blog on this subject a day ago, well, I wish I had waited a day. It seems clear to me that there will be no peace treaty short of total capitulation by CP directors. At this point, why should Ackman compromise? He appears to hold the trump cards.
Going forward, there are really two issues left. First, victorious on May 17, when CP counts the votes of its shareholders, will Ackman still insist that Harrison lead Canadian Pacific? He told the Globe and Mail this week he is open to other suggestions. And in any event, with or without Harrison, can new leadership make a quick change for the better in Canadian Pacific’s operational efficiencies?—Fred W. Frailey
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