Industrials

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

CSX Corp. shareholders paid $84 million for Hunter Harrison. They're now getting James Foote.

Harrison died over the weekend, just days after the company announced he would take a medical leave because of unexpected complications from a recent illness. The 73-year-old railroad-turnaround expert had been CEO for less than a year after campaigning for the job -- and a rich payout -- with activist investor Mantle Ridge. Foote, who worked with Harrison at Canadian National Railway Co., was named acting CEO. He joined CSX less than two months ago after a management upheaval that saw three of the company's top leaders depart, including chief marketing officer Fredrik Eliasson, whom some had seen as a potential successor to former CEO Michael Ward before Mantle Ridge showed up.

What Now
CSX has encountered some bumps in the road as it tries to execute Harrison's turnaround vision. It's not clear how this effort will fare without him.
Source: Bloomberg

My condolences to Harrison's family. I feel significantly less sympathy for the panicking CSX shareholders who sent shares of the company down 7.6 percent on Friday on news of Harrison's medical leave and dipped more than 6 percent in early trading on Monday. You knew what you were getting yourselves into.

Harrison demanded as a condition of his employment the reimbursement of $84 million in compensation and benefits he forfeited by leaving Canadian Pacific Railway Ltd. ahead of schedule and payment of a related tax indemnity that could amount to as much as $23 million. This was in addition to tens of millions of dollars in salary and incentive compensation over a four-year employment agreement. CSX was so uncomfortable with these demands that it called for shareholders to vote on them on an advisory basis. And CSX investors backed the deal in June, with 93 percent approving the extra payout.

Some Payday
CSX and Mantle Ridge quibbled about the ultimate value of Harrison's pay package. But even if you just look at his salary, it was a tall ask.
Source: Bloomberg

They did this despite the fact that Harrison refused CSX's request to let an independent physician do a pre-hire review of his medical records. He told the Wall Street Journal in May that he had been cleared by his doctors to work and that CSX board members were aware of a medical condition that reportedly limited the amount of time he could be at company headquarters and required him to use supplemental oxygen sometimes.

It all seemed a small price to pay for the billions that had been added to CSX's market value since Harrison's potential involvement was first purported. But this recent turn of events is a reminder of the risk of these personality-driven activist campaigns. Because Mantle Ridge wasn't just seeking change; it was seeking a Hunter Harrison kind of change in the vein of the turnarounds he had undertaken at Canadian National and Canadian Pacific. The activist investor sought board seats as well, but that was pitched as a means of creating "conditions for success"  that would enable Harrison to replicate the Canadian Pacific transformation.

High Hopes
Analysts have significantly increased their estimates for CSX's earnings in light of Harrison's involvement
Source: Bloomberg

If Mantle Ridge had simply wanted a change agent, it could have waged a traditional proxy fight, gotten on the board and conducted a CEO search process. Heck, it could have even hired Foote, especially if he really is the younger version of Harrison that CSX is now trying to portray him as. Foote wouldn't have come with an $84 million extra payout bill. Analysts are split on his ability to lead the company going forward. While he's been in the business for decades, he's less of a known-entity to investors. And Harrison was one of a kind as far as his ability to push through radical changes. 

I would think CSX's board might wish the company still had around those top executives it parted ways with this fall. According to the Wall Street Journal, among the concerns they raised with directors was Harrison's health. CSX has only just put behind it (according to the company, at least) service disruption problems that resulted from Harrison's accelerated pace of transformation and sparked an outcry from customers. Mantle Ridge has been dismissive of internal talent from the start, with the activist investor demanding in a February letter that general counsel Ellen Fitzsimmons act like a secretary and send copies to board members. But a little institutional knowledge could go a long way right now toward soothing investors and customers alike.

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

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

To contact the editor responsible for this story:
Daniel Moss at dmoss@bloomberg.net