Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

Three top executives don't leave a company when everything is going swimmingly.

CSX Corp., the railroad that replaced its CEO with storied cost-cutter Hunter Harrison amid pressure from an activist investor, announced more management upheaval on Wednesday. The $47 billion company's chief operating officer, chief marketing officer and general counsel are all stepping down. I find it hard to believe this reshuffle was planned far in advance because the changes forced CSX to delay an investor conference that had been scheduled for next week. The meeting now won't happen until February, Harrison told Bloomberg News. I hope analysts' and shareholders' flights to Palm Beach, Florida, are refundable.  

Watching and Waiting
CSX shares are up substantially since news of Harrison's potential involvement. But they've tread water since peaking in July as investors wait to see results.
Source: Bloomberg

It's not clear what prompted the executives to leave, but their exit strikes me as a loss for CSX -- not least because two of the three departing executives are women whose jobs will now be filled by men. There's something to be said for keeping a little institutional knowledge around, particularly in light of the cascade of customer complaints sparked by Harrison's aggressive push to implement his strategy for making the railroad run more efficiently. The disruption from delayed shipments and service shortfalls was significant enough that the Surface Transportation Board held a hearing over the degradation in CSX's customer experience earlier this month.

"Overplayed"
While CEO Harrison tried to pass off the issue of service disruption as "overplayed" in July, it was significant enough that CSX had to walk back its forecast for the year
Source: Bloomberg
NOTE: Operating ratio is a measure of profitability in which a lower number is better. CSX shares were trading for $52.01 at 12:12 p.m. in New York on Oct. 26.

New CEOs bring in their own teams all the time, but public commentary would seem to point to these departing executives at least being willing to try things Harrison's way. Outgoing chief operating officer Cindy Sanborn and chief marketing officer Fredrik Eliasson, for example, gave glowing remarks about Harrison's strategy to Bloomberg News in June. Harrison signed only a four-year contract with CSX and the septuagenarian has been dogged by questions about his health. He has a short period to set CSX on a sustainable path to increasing profitability, and someone else will have to take over the controls whenever he retires.

It now appears that person is going to be just-hired chief operating officer James Foote, one of Harrison's lieutenants while he was at Canadian National Railway Co. I'm sure someone with Foote's decades of experience is perfectly qualified, but he hasn't spent a day working at CSX in at least the past decade and Harrison has already essentially crowned him the heir apparent. In an interview with Bloomberg News, he said Foote's appointment is part of a long-term succession plan. Why him and not the "rock stars" Harrison has said he's unearthed at CSX during his tenure?

When a High Score Isn't Good
CSX's operating ratio was the worst among the top North American railroads in 2016. It can obviously improve but how much is a matter of debate.
Source: Bloomberg
Note: A lower number is better

Harrison has laid some of the blame for CSX's service setbacks on employees who were resistant to change and the low morale created by a plan to cut 1,000 management jobs that was announced before his official hiring. That's always been a bit of a rich criticism considering he's targeting 4,500 job cuts this year (including the above slashing) and has done away with some safety-based procedures such as nap breaks. I can’t imagine this latest slap-down of internal talent will do much to improve morale, either.

Shareholders aren't always concerned about employees' feelings, but they do pay attention when flagging morale translates into service issues that erode profits. And this latest bit of upheaval at CSX raises questions about whether or not those setbacks have really faded into the past.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Bloomberg data reflects career information for Foote only through 1995. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net