Canadian Pacific Railway (CP) said this morning that CEO Fred Green has resigned and has left the company, paving the way for rail legend E. Hunter Harrison to take the reins of Canada's second-largest railroad and handing activist investor William A. Ackman a resounding victory in his effort to revamp CP's board and upper management.
At the same time, six current directors, including Chairman John Cleghorn, have decided not to stand for re-election, CP said in a terse statement.
The announcement comes as CP shareholders were convening in Calgary, Alberta, for the company's annual meeting. At that time, they were expected to either vote for the current 16-member slate of directors or to incorporate seven new members led by Ackman, whose hedge fund, Pershing Square Capital Management L.P., is CP's largest shareholder with an approximately 14.1-percent stake.
Cleghorn was one of six current board members who chose not to stand for re-election. Among the members expected to remain on the new board is Linda J. Morgan, former chairwoman of the Surface Transportation Board, the U.S. agency that regulates the nation's rail industry.
The actions today effectively scuttle CP's five-year plan to drive down its operating ratio—defined as the percentage of operating revenue consumed by operating expenses—to between 68 and 70 by 2016. A lower operating ratio means greater profitability as it takes less of every operating dollar to run the company.
CP's first-quarter operating ratio stood at 80.1, compared with over 90 percent in the first quarter 2011. The improvement was due to increased demand, a superior commodity mix, and an unusually mild Canadian winter that produced relatively few service disruptions and helped hold down costs.
By contrast, the 2011 quarter was marked by heavy winter snows followed by severe springtime flooding, both of which drove up CP's operating costs.
For the past month, CP's board and management warned that a change in its organizational structure would cause a major rupture in its long-term plan. The board and Green have been under intense shareholder pressure to improve results that have lagged behind its brethren.
Harrison, 67, retired at the end of 2009 following a stellar performance as the head of CP rival Canadian National Inc. (CN). Today, CN is considered by many to be the best-run railroad in North America. Its operating ratio stood at 66.2 in the first quarter, after coming in at 63 for all of 2011.
In recent weeks, it had become apparent that Pershing Square held the upper hand in the proxy war. In an extraordinary move, three large proxy advisory firms—Institutional Shareholder Services Inc.; Glass, Lewis & Co.; and Egan-Jones Proxy Services —recommended shareholders vote for Pershing Square's entire slate of nominees, withhold their votes for several incumbent directors, and not re-elect Cleghorn or Green.
Two large Canadian pension plans, the Canada Pension Plan Investment Board and the Ontario Teachers' Pension Plan, also threw their support behind Ackman.
Ackman said the action by the proxy companies was unprecedented. "We are unaware of so powerful and uniform an endorsement for change in the history of large cap activism," he said in a statement several weeks ago.
