Ackman's CP slate wins ISS support

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The activist shareholder pushing for an overhaul of Canadian Pacific Railway Ltd., now armed with a powerful endorsement, is pushing ever closer to victory in a looming board showdown rarely seen in Canada.

"We are going ahead with the vote," Bill Ackman of Pershing Square Capital Management said Thursday after winning the support of an influential proxy advisory firm, Institutional Shareholder Services of Maryland, for his proposed seven new directors at the embattled railway. "In order for this board to function better, it has to listen to what the shareholders are saying."

Mr. Ackman, who has spent $1.4-billion for a 14.2-per-cent stake in the railway, is seeking to elect a minority of directors to CP's 16-member board at a May 17 meeting in Calgary, in an effort to change management. Mr. Ackman wants to replace chief executive officer Fred Green with Hunter Harrison, the former CEO of rival Canadian National Railway Co.

CP is one of Canada's oldest companies and, despite its weak performance in recent years, was widely regarded as untouchable because its board is packed with so many influential business leaders. Mr. Ackman's investment, coupled with the strong backing of ISS, sends a strong message that even Canada's largest companies are becoming increasingly vulnerable to powerful shareholders.

Some of CP's directors had recently proposed starting settlement talks with Mr. Ackman to head off what could be a humiliating defeat. The endorsement of the activist's slate suggests the board would have to agree to all of Mr. Ackman's demands, including the appointment of Mr. Harrison. The railway's board opposes Mr. Harrison, an aggressive cost-cutter, as being "destructive" to its multiyear turnaround strategy.

In a notably harsh report, ISS blamed poor boardroom oversight and a "bewildering lack of accountability" for allowing the railway's performance "to drift further and further below its peers."

Turnover has been so high in the senior ranks that the 25-page report likened the railway's management to "playing Whack-A-Mole in the C-suite."

In an unusual step, ISS also recommended that shareholders withhold their votes for Mr. Green and CP's long-standing chairman, former Royal Bank of Canada chief John Cleghorn. It also recommended shareholders not vote for such establishment directors as former Westcoast Energy chief Michael Phelps, former Shell Canada Ltd. chief Tim Faithfull, former Ipsco chief Roger Phillips and recently appointed industry consultant Ed Harris.

Mr. Ackman said the ISS report is an "affirmation" that his demands for board and management changes at the railway are "profoundly right." The report said CP has underperformed its peers for years, delivering a total shareholder return of 19.4 per cent in the past five years, compared with industry peers that delivered returns ranging from 56 per cent to 117 per cent.

In a statement, Canadian Pacific vigorously disputed the ISS findings, dismissing its 25-page report as "perfunctory" and "wrong."

"The CP board has significant breadth and depth of expertise and experience in both the railroad industry and other complementary fields and is the right board to drive shareholder value by guiding the company through the successful execution of the multiyear plan. The entire board of CP is holding Fred Green and the CP management team fully accountable for the success of this plan."

CP's stock price has risen more than 60 per cent since Pershing Square first began accumulating its stake in September. The sharp rise suggests investors are betting the hedge fund will prevail with its slate of alternative directors, a sentiment that is endorsed by some of the railway's largest investors, who declined to be identified.