CSX chairman and CEO, president to retire May 31, clearing path for Harrison

The path for E. Hunter Harrison to become CEO of CSX Corp. was effectively cleared this morning when the eastern railroad giant said that Michael Ward, its chairman and CEO, and Clarence Gooden, its president, would retire on May 31.

Jacksonville-based CSX said Fredrik J. Eliasson, 46, has been named president, a post he assumed last week. Eliasson, who has been with CSX for 22 years, is currently chief sales and marketing officer. He will retain that post, CSX said. Gooden has been named vice chairman, a post he will hold until his May retirement, the company said.

There had been much speculation over the past several weeks about Ward's status, especially after Harrison, 72, abruptly quit last month as CEO of Calgary-based Canadian Pacific Railway and joined forces with Paul Hilal, head of New York-based hedge fund Mantle Ridge LP, in a bid to have Harrison installed as CSX's CEO. In language that was striking in its transparency, CSX said Eliasson's appointment is "not intended to preempt or otherwise affect any discussions" between its board and Mantle Ridge over Harrison's possible ascension to the CEO role.

Ward, 65, has spent nearly 40 years at CSX, the last 13 or so as chairman and CEO. He appeared confident he would remain in the top jobs, telling Trains magazine in an interview last week that the board has asked him to remain for three more years and that he planned to work until he was 68. However, CSX said in today's statement that today's changes were "part of an orderly transition of the company's senior leadership" that the board has been mulling for more than a year.

Mantle Ridge has accumulated a 4.9 percent equity stake in CSX, and has pressed its board to quickly make a change at the top. In a letter last Thursday to Edward J. Kelly III, CSX's presiding director, Hilal said the board and Mantle Ridge "owe it to our shareholders to get a deal done promptly."

Mantle Ridge had originally faced a Feb. 10 deadline to propose its slate of directors, but the deadline was postponed to this Friday to give both sides more time to negotiate an agreement. Hilal said he would be the only Mantle Ridge representative on the new board, attempting to allay CSX concerns that he would propose to install as many as six Mantle Ridge employees on the board. Harrison would be on the new board as well.

Hilal also sought to assure CSX's board that bringing in Harrison was not a precursor to a takeover battle for CSX. "This is not a 'battle for control,'" he wrote. The main sticking point now appears to be the length of Harrison's proposed contract. Mantle Ridge wants a four-year duration, while CSX's board had been leaning towards two years.

As chairman and CEO, Ward has presided over major changes at the railroad, notably a dramatic and secular decline in demand for coal, long the railroad's largest revenue source. Concerns about coal's environmental impact and competition from abundant, clean-burning natural gas have forced CSX to slash costs and reposition its infrastructure to focus more on faster-growing intermodal and merchandise traffic. CSX said it will lay off 1,000 managers, most of them in its Jacksonville corporate office and its subsidiaries. The layoffs are set to be completed by mid- to late March, the company said.

Ward has also been under pressure from analysts and investors to improve CSX's industry-lagging operating ratio, the measure of operating expenses compared to revenues, and a key metric of a railroad's efficiency and profitability. Last year, CSX's ratio stood at 69.4 percent after being in the 70s for several years. It has a long-term target of driving down its ratio to the mid-60s. By contrast, CP's 2016 ratio stood at 59.4 percent, a marked improvement from where it was when Harrison was brought in as CEO in 2012.

Harrison is a master at a practice known as "Precision Scheduled Railroading." Utilized by all railroads to some degree, the model drills down into shipment scheduling patterns so a railroad knows exactly which trains, yards, and connections are involved, as well as the precise time a shipment is to arrive at the customer or interchange location. Executed effectively, precision railroading allows a railroad to budget for the exact assets that are needed to fit the plan.

While at CP, Harrison approached CSX about a possible combination, but was quickly rebuffed. CP then launched a takeover bid of Norfolk, Va.-based Norfolk Southern Corp., the other main eastern railroad, only to be rejected there as well. Harrison has long pushed for consolidation of the North American railroad industry, maintaining it is the only path to reducing network congestion and sustainable service improvements. He has also called for less regulatory interference in the industry's affairs, saying railroads need the ability to maneuver freely if they are to deliver consistently cost-effective service.

Harrison's views are not shared by other U.S. railroads, unions, lawmakers, and many shippers, who argue the industry has already consolidated enough.