The time to switch the tracks and prevent Canadian Pacific Railway from barreling toward a proxy fight is over.
U.S. activist investor William Ackman on Wednesday put forward his slate of five director candidates, signaling the board’s failure in convincing him the railroad was improving fast enough. Ackman, who includes himself on the slate, wants E. Hunter Harrison, former Canadian National Railway CEO, to replace Fred Green as CP chief.
“Our plan is not to lead to a change in control of the company. We don’t believe we need to change the full board,” Ackman, principal of Pershing Square Capital Management, told The Toronto Star. “We are looking for a mandate from shareholders for a change in management.”
The old guard at CP says the current leadership and railroad is on target to reach an operating ratio in the low 70s within the next three years. CP Chairman John Cleghorn said Ackman’s plan to bring the ratio down to 65 is at a “pace never before achieved by any railway management team."
The railroad's fourth-quarter profit rose 19 percent to $221 million, but CP's operating ratio slipped in the same period to 78.5 percent, from 77 percent.
But that’s just the type of challenge Harrison says he's ready for. "With the right board and executive leadership, I believe Canadian Pacific can achieve just as dramatic a turnaround and enjoy its rightful position as a leader in the North American rail industry," he said in statement issued by Pershing Square.
The CP board isn’t alone in opposing Harrison's joining the railroad. CN filed a lawsuit saying Harrison, who helped the railroad become one of the most profitable in North America, breached his non-compete agreements that took effect when he retired in 2009.
So far, the fight has remained relatively civil, with CP demonstrating its drive to increase profitability by ramping up its capital improvement plan to up to $1.2 billion. The board also hired veteran rail executives Tony Ingram and Ed Harris in an attempt to help deflect shareholder concern.
Even Ackman hasn’t unleashed the full fury of his criticism. In a Wednesday interview on CNBC, he said the railroad needs a “serious cultural change” and “to be run by someone who is more like a general than a marketing person.”
Those jabs are far less severe than the “nuclear winter” Ackman promised CP directors if they didn’t replace Green with Harrison. Ackman wrote Cleghorn that the company has “very poor track record” and “shareholders are very disgruntled.”
“We will take the largest public hall available in Toronto, and we will make a presentation to the shareholders and the public … about management and board failures of the last 10 years at CP,” Ackman wrote in an e-mail he leaked to The Globe and Mail.
CP shareholders will have a chance to pick sides at the annual meeting on May 17. And if the proxy fight goes anything like the one an activist hedge fund waged against CSX Transportation in 2008, CP will come out battered but on a faster track to profitability.