The world according to Michael

Posted by Fred Frailey
on Thursday, February 16, 2017

I had an email today from a friend who complained about a certain op-ed columnist for the Wall Street Journal. My friend even wondered if this person’s pen is for sale. I replied that it’s the first duty of any columnist to write with a point of view. Without a point of view, you’re nothing. Sometimes, however, columnists simply get it wrong. I said I happen to like reading this columnist. Maybe, I suggested, he just got it wrong today.

That’s a roundabout way of saying that there is a narrative counter to what I wrote yesterday in Greed versus Goodie Two Shoes, concerning Hunter Harrison and his desire to run CSX. This narrative makes at least as much sense as my Goodie Two Shoes blog, so I’ll share it with you.

At the start of this year, three people vied to replace Michael Ward as chief executive of CSX. They were three of his executive vice presidents: Cindy Sanborn, chief operating officer; Frank Lonegro, chief financial officer, and Fredrik Eliasson, chief sales and marketing officer. The feeling inside CSX was that the two losers would leave the company once the CSX board decided.

Then Hunter Harrison came calling. All three job candidates have change-of-control clauses in their contracts that would grant them generous golden parachutes should Hunter take over. Plus, all but Lonegro, who is new to the company, own piles of stock in CSX whose values rose more than 20 percent due to Harrison’s interest in Ward’s job.

What I’m trying to say is that Sanborn, Lonegro, and Eliasson would obviously be disappointed not to be given the chance to run CSX. But were they nudged aside, Sanborn and Eliasson in particular would leave with much more wealth than if Hunter had never shown up (and with a chance of running another railroad somewhere).  

The only unhappy person in this narrative is Michael Ward. He’s a proud man, and a survivor. The company was a mess when John Snow bailed, and he made it something. What Ward wants to do is simply leave on his own terms. And here comes Hunter asking a base salary twice what Ward gets and three times the bonus. Plus an option to own 1 percent of the whole damn company with no incentive whatever to produce good results by any definition in order to claim those shares. Plus Hunter’s partner, the hedge fund Mantle Ridge, wants CSX to reimburse it for the $84 million plus taxes it paid Harrison to leave the top job early at Canadian Pacific. Plus Hunter has a history of bad health but won’t let CSX discover the present state of his health.

Now put yourself in Michael Ward’s shoes. He knows he can’t stop Hunter Harrison, and maybe he doesn’t even want to. But he hates being pushed around by that old geezer and egomaniac. What he can do is stick out his foot and drag it through the dirt as he is being pulled ungraciously to the front door at 500 Water Street. And enough of his board feels the same way.

So Ward convinces the board to call the special shareholder meeting. He can publicize Harrison’s ravenous appetite for wealth, his unwillingness to bargain, and most of all his desire to be handed more than $300 million of the shareholders’ money the next four years whether or not he produces the operating and financial miracles he claims he can. He can embarrass Harrison, if that is possible.

Maybe, goes this narrative, the corporate governance consultants can convince enough institutional investors that this deal stinks and cause them to vote against the proposals Harrison had made. More likely, between now and the shareholder vote sometime this spring, Harrison can be made to agree to reach certain well defined goals or benchmarks before being handed all that $300 million-plus. If so, Ward can say that he made the monster blink and leave Jacksonville with his head high.

Which do I believe—what I wrote yesterday or today’s counter-narrative? They both are predictions as well as interpretations of events. I say you’d do well to view what happens at CSX the next couple of months through the prisms of both points of view. However, the fact that immediately after I initially posted this blog, Mantle Ridge made public a letter to CSX all but begging it to come and quickly negotiate a compromise deal makes me think the counter-narrative is pretty much on target so far.—Fred W. Frailey

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