Canadian Pacific board censures largest shareholder for media leaks

It took just one business day of 2012 for relations between Canadian Pacific Railway (CP) and its largest shareholder to hit the rocks.

In a sharply worded letter sent today to hedge fund titan William A. Ackman, the board of Calgary-based CP criticized Ackman for making "inaccurate comments" to the media about a possible change in CP's upper management structure "in an effort to advance its own objectives."

The board took issue with an article that appeared in the Dec. 30 edition of the Toronto Globe and Mail that cited Ackman—who holds a 14.2-percent stake in CP—as saying he approached E. Hunter Harrison, who ran rival Canadian National Ltd. (CN) until he retired in December 2009, to inquire into his interest in running CP.

Ackman's company, New York-based Pershing Square Capital Management LLC, raised Harrison's name during a recent presentation it made to CP's board. According to the Globe and Mail article, CP's board was enthusiastic about the choice of Harrison and had sought a meeting with him.

However, the CP board letter said "no invitation has been extended by us to Mr. Harrison." The letter added that the board had expressed reservations about contacting Harrison because of a non-compete clause written into Harrison's exit contract with CN. The board also warned Ackman that media leaks "are counterproductive, and we hope that they are not attributable to you personally."

A source close to the industry said Harrison's non-compete provision expired on Dec. 30. CP is currently run by Fred Green, who has been at the helm since 2006.

Harrison, 67, worked in the railroad industry for 45 years until his retirement. He served as president of the Illinois Central Railroad for five years until CN bought the Illinois Central in 1998. He was named president of CN in December 2002 and assumed the CEO's role a month later.

The source, who knows Harrison, called the executive "a driven man" and still young enough to run a railroad as long as he is in good health. "It wouldn't surprise me if he takes the job" if it is offered to him, the source said.

Neither Harrison nor Ackman was available for comment. CP declined comment beyond release of the board's letter.

Pershing disclosed last October that it had accumulated 20.6 million shares of Calgary, Alberta-based CP, calling the shares "undervalued" and the railroad "an attractive investment." Pershing then acquired another 3 million shares in December, bringing its position in CP to 14.2 percent of the company.

Ackman's modus operandi is to initially work in a collegial manner with a company's board and its management. If not satisfied with the results, he will generally take a more activist approach toward fixing what he believes is wrong.

CP's share price has lagged behind those of U.S. railroads and the CN as investors remain concerned about the railroad's stubbornly high operating ratio, which is expected to be around 81 at the end of 2011. Operating ratio is defined as operating expenses divided by revenues. A company with relatively low operating ratios is growing revenues at a faster pace than expenses and is considered to be an efficiently run enterprise.

Last summer, CP management outlined plans to achieve an operating ratio of 70 within the next three to four years.

At mid-day on Jan. 3, CP's shares stood at $68.46, up 80 cents on the trading day.