Bill Ackman's plan to transform Canadian Pacific

Posted by Fred Frailey
on Tuesday, February 7, 2012

It has been a while since I’ve seen a movie any more entertaining than the show that New York investor Bill Ackman put on yesterday in Toronto. Ackman, founder of Pershing Square Capital Management, is in effect challenging the corporate elite of Canada on their own turf, in his bid to put a new slate of directors on the board of Canadian Pacific and expel chief executive Fred Green in favor of his candidate, retired Canadian National CEO Hunter Harrison. Uppity Yankees, beware: If you’re going to diss the Canadian establishment, you’d better be good.

I am here to say that Ackman is good. He begins by framing the issue this way: “Assume Canadian Pacific didn’t have a CEO and you had to choose one. Would you choose Fred Green, a 30-year CP veteran, or Hunter Harrison, CEO and Railroader of the Year, stepping out of retirement for his third act? Who is best able to lead the company to its highest potential?”

Then follows a 45-minute critique of Green’s six years at the helm of CP, by Ackman and his partner at Pershing, Paul Hilal. It is withering. Brutal. And, frankly, devastating. Five chief operating officers in his first five years and three chief financial officers. Loss of market share.  A stock price that went down the five years before Pershing stepped in, while those of other railroads went way up. Repeated promises of better results that lead to nowhere but more promises. An indulgent board of directors.

A sound bite by Hilal: “The problem is that CP service has been substandard and customers have not been willing to pay them more for what they get. CP has had to give pricing concessions to hold on to customers. CP has also lost market share, especially in intermodal the past five to six years. But it is true of every freight category. This is the biggest issue: CP’s unit cost disadvantage versus Canadian National. It costs CP more per ton-mile to move freight. CP should have a big cost advantage because of its longer length of haul. But CP’s unit costs have increased while CN’s have declined.”

Hilal goes on to focus on poor asset utilization. “CP moves 70 percent as much freight as CN but requires 80 percent the number of cars CN uses and 90 percent of the locomotives. Canadian Pacific doesn’t need more locomotives. It already has the best fleet. Fred Green’s plan is to buy 91 new locomotives in 2012. This doesn’t make sense.”

And more: “CP cars travel 32 percent less than CN’s. CP’s railcars conduct 23 percent fewer trips, its locomotives pull 23 percent less train. Average train speed is 20 percent lower, and it takes CP 80 percent longer to switch a car. Employees are 20 percent less productive.”

This goes on and on until reels the mind. But I’m not suggesting you watch the playback of this at Instead, move about 50 minutes into the show and tune into Hunter Harrison. Love him or hate him, he is a mesmerizing force.

How he would fix CP: “First, let people know what’s expected. Tell them, here’s what we’re going to do, so that once we walk out of that locker room, we’re all going to be on the same page. That message needs to go far beyond the executive offices, because everyone in the organization needs to understand the principles. You need to evaluate your team and make changes if necessary. I would prefer to play with the hand I’m dealt, but I may have to bring in outside help. And you need to put forth a simple agenda. Everyone at Canadian National understood what we were trying to do, which was provide quality service for customers. So we designed a good service. We concluded that good service is doing what you say you are going to do. No. 2, good service means controlling costs — not slash and burn, but control. There is a delicate balance between service and cost control. Next, get no one hurt. Finally, the foundation of all this is people — leadership that can institute those changes.”

Responding to the criticism that he’s not customer-friendly: “We sure were successful at CN not to have customers like us. The worst criticism I would accept at CN is that I asked customers to pay their bills. That was a change.”

On assessing CP’s executive team: “It doesn’t take long. Some people you know at the first meeting that they’re not players. And unless they’re willing to make huge changes in their life, they won’t be on the team. I know the market of railroad talent pretty well. My sense is that there is plenty of talent that would love to be on the team. We can make whatever change is needed, be it 5 percent or 15 percent.”

I expected Canadian Pacific to lash back at Ackman afterward, challenging him fact by fact. I did not expect its response to be so tepid. It disputed nothing that was uttered in Toronto. Basically, the press release from Calgary said, once again, that Ackman has no specific plan for changing CP. But as I see it, Ackman does have a plan, a proven one. That plan is Hunter Harrison. — Fred W. Frailey

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