Electing as few as four directors from Ackman’s slate of seven may be enough to achieve his goal by changing the boardroom dynamic, paving the way for a new CEO, said John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc., which owns Canadian Pacific shares.
Ackman’s quest comes to a head at the railroad’s May 17 annual meeting, about a week after his presentation today at Bloomberg’s Canada Economic Summit. Any of his nominees elected would have a platform to air Ackman’s views, eroding CEO Fred Green’s support and pressuring colleagues to make a change. A vocal minority can have an outsize impact because boards tend to work collegially, investors and analysts said.
If “there are even three directors on the board who don’t think that they can do the job properly, then it typically ends with the CEO being terminated in one way or another,” said Paul Hodgson, a researcher at GovernanceMetrics International.
Ackman, whose Pershing Square Capital Management LP disclosed a stake that made it Canadian Pacific’s largest shareholder in October, has been demanding a leadership shift to boost profit at North America’s least-efficient major railroad. While Ackman champions former Canadian National Railway Co. (CNR) CEO Hunter Harrison to replace Green, Canadian Pacific’s board has resisted.
Even if directors seeking a new CEO can’t persuade a majority to ask for Green’s departure, Stephenson said they could make the working atmosphere difficult.
Board members including Chairman John Cleghorn and Green probably “wouldn’t be made to feel welcome for a variety of reasons,” he said. “In the case of Cleghorn, you’re the face of the resistance, essentially. And Fred, you’re the guy that everyone thinks is the reason why this is happening.”
Walt Disney Co.’s leadership change in the mid-2000s illustrates the leverage a small minority can exercise, said Hodgson, whose New York-based firm tracks corporate governance and transparency.
CEO Michael Eisner retired in September 2005 after a prolonged campaign by dissident shareholders Roy Disney and Stanley Gold, who stepped down from the company’s board in 2003 and publicly sought Eisner’s removal.
While institutional investors at Canadian Pacific “overwhelmingly” prefer the 67-year-old Harrison to Green, Pershing isn’t likely to see its full slate elected, Stephenson said.
Shareholders will “give them some of their directors and leave some of management’s slate there,” he said. That would “send sort of a muddling message that they’d like to see change, but maybe not overwhelmingly stack things in the favor of Pershing Square.”
A recommendation from Institutional Shareholder Services Inc. in favor of electing Ackman’s entire slate may sway shareholders comparing the railroad’s performance with a 21 percent share-price surge since Pershing said it was the biggest investor.
“If you vote for some of them, but not all of them, that would be self-defeating,” said Jim Huang, president of Toronto-based T.I.P. Wealth Manager Inc., which holds Canadian Pacific shares. “We have voted, and we voted for all seven.”
The Ontario Teachers’ Pension Plan, the railroad’s 14th-largest investor with about 1.3 percent of shares, said yesterday that it, too, voted for all seven of Ackman’s nominees.
Ackman, 45, ruled out a deal on May 2 with Canadian Pacific that would give Pershing four to five board seats and eliminate Harrison as a CEO candidate. News of the railway’s proposal, which was relayed to Ackman by other shareholders, followed a Brendan Wood International investor survey that showed growing support for Ackman’s campaign.
“It’s clear from all the polls that the wind of change is very strong,” Huang said. “One hundred percent of the people I talk to in the community want a change, and they will vote for Ackman’s proposal.”
Ackman has said he heard that at least one current member of the railroad’s board doesn’t support the CEO, and directors often feel obligated to vote unanimously even if they don’t really support current management.
That made Pershing comfortable nominating a minority slate of directors rather than seeking to replace the entire board, he said.
The slate has won almost all of the 36 percent of shareholder votes logged so far, Ackman said today at Bloomberg’s Canada conference.
“There’s a direct correlation between how many directors we get and how quickly and efficiently we can work to maximize shareholder value,” Ackman said by telephone last week.
Another investor, Michael Sprung, president of Sprung & Co. Investment Counsel Inc., questioned whether board incumbents could be persuaded to replace Green, 55.
“As long as the current directors can keep control of the company, they will defend their choice,” he said. “They’ve made such an effort to defend the record of Mr. Green up to this point, that I think that they would be loath to then, all of a sudden, change direction.”
Whether Green or others lose their jobs isn’t investors’ main concern, said Lee Clair, a Chicago-based partner with transportation consultant Norbridge Inc.
“What really is important is, can there be value created in the company?” he said. “It’s going to become fairly apparent in a reasonable amount of time” whether the company can boost profit.
Canadian Pacific’s operating costs rose to 80.1 percent of sales in the first quarter from 79.4 percent in the same period in 2006, a month before Green took the top job. That operating ratio was the highest of the seven largest North American railroads in the the period.
Canadian Pacific fell 23 percent from the time Green took the top job through the day before Pershing began buying its stake. That lagged behind a 27 percent gain by Canadian National and a 47 percent increase by the three-member Standard & Poor’s 500 Railroads Index.
The hedge fund manager has pointed out previously that before his stake purchase, investors saw a negative return in Green’s tenure as CEO. That was a criticism ISS emphasized in its report.
“The issue for shareholders -- who are ultimately invested for return -- is exactly this issue that only the dissidents have spoken to: the performance of their investment over time,” ISS wrote. “An investment which, unlike every one of its peers, had been losing value until an activist shareholder stepped in is unlikely to be explained away with a welter of metrics.”
The Calgary-based railroad, which disagreed with the ISS report’s conclusions, has argued that its own performance-improvement plan has already begun delivering results, even though it was temporarily slowed by inclement weather in 2011.
First-quarter profit this year more than quadrupled and the company’s ratio of expenses to sales improved by 1,050 basis points to the lowest for the period since 2007. The measure was still higher than it was in the quarter before Green took over.
“You can make the argument that maybe they’re on the right path, but again, we’ve seen this kind of stuff before,” said Chris Wetherbee, a New York-based analyst with Citigroup Inc. Ackman will likely see some of his nominees on the board, which will make it difficult for directors “to defend the current management team,” he said.
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