CP's last supper: Why railway brass decided it was time to surrender

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The directors of Canadian Pacific Railway Ltd. assembled in a suite at Calgary's Sheraton Eau Claire Hotel Wednesday night for a meal that could be called their last supper.

After four months of a hard-fought proxy battle that pitted CP's board of elite business leaders against tenacious New York fund manager Bill Ackman, the directors were facing a humiliation on a scale rarely seen in Corporate Canada. The vast majority of the railway's shareholders had submitted early votes and the results were devastating.

According to sources familiar with the vote results, more than three-quarters of CP's shareholders had voted in favour of seven dissident directors backed by Mr. Ackman. Nine of the railway's directors had garnered enough votes to be re-elected, but CP chairman John Cleghorn, chief executive officer Fred Green, lead director Michael Phelps and three others had been voted off the train.

The time had come to wave the white flag.

The meal, the directors agreed, would be their last formal gathering. Over the next several hours, CP's lawyers entered negotiations with Mr. Ackman's team to strike a truce. Near midnight, the two sides struck an accord that would save Mr. Cleghorn and the five other veterans from the humiliation of a public rout, while paving the way for a new beginning at a historic railway that had been plagued with operating and performance challenges for years.

At 5:30 a.m. Mountain time, less than three hours before the shareholders' meeting was scheduled to begin Thursday, CP issued its unexpected capitulation, closing a chapter on a bitterly fought corporate power struggle. Following the late talks, Mr. Green had resigned as CEO and Mr. Cleghorn and the four other directors would not stand for re-election.

This has been a "spirited debate about the future of this great railroad," a sombre Mr. Cleghorn said in a brief statement at the meeting.

Instead of the drama of a corporate shootout, the estimated 500 people who crammed into the Wildrose Ballroom of the Sheraton Hotel listened to polite, short statements from Mr. Cleghorn and Mr. Ackman. The meeting was over in 20 minutes and the results of the landslide vote were never publicized.

"We came for the show, I thought it was very anti-climactic" said Brian Krausert, a shareholder for more than a decade. "I thought maybe we'd have a few questions, a little yelling and screaming."

The drama at CP now moves from the war of words on the proxy battlefield to the tough, grinding business of restoring profits at a railway that has disappointed investors for years. The shift means the future of Canada's oldest railway will rest on the shoulders of its biggest critic, Mr. Ackman, who has delivered investment returns by placing big bets on a variety of struggling insurance, real estate and retail companies, but has no experience in the railway sector.

The activist won the support of many of CP's frustrated shareholders with the promise of huge performance improvements under the leadership of Hunter Harrison, a hard-driving railway legend who led a turnaround at Canadian National Railway and before that Illinois Central.

CP's 2011 operating ratio – a gauge of efficiency that measures costs as a percentage of revenue – is 81.3 per cent. A lower number is better and Mr. Ackman's firm, Pershing Square Capital Management, has promised CP shareholders that a new regime can drive the railway's annualized operating ratio down to 65 per cent within four years of replacing Mr. Green.

Mr. Harrison's leadership was vigorously opposed by CP's board of directors, who warned that his record of harsh cost-cutting and high customer service complaints would be "destructive" to a railway staking its future on long-term bulk freight contracts with major mining and resource companies.

CP's new board of directors, which includes Mr. Ackman and six other Pershing nominees, agreed at their first meeting yesterday to launch a search for a new CEO. In the interim, it named Stephen Tobias, a former Norfolk Southern Corp. chief operations officer and one of the alternative directors, as CP's temporary CEO

Madeleine Paquin a CP director since 2001, has been named the railway's acting chair. She is the CEO at Logistec Corp., a cargo-handling firm,.

Signalling a new tone of diplomacy after months of attacking CP's management, Mr. Ackman told the CP annual meeting that he "came in peace, and I am delighted to say that we are at peace once again.

"Proxy contests are never fun for anyone involved, but they are critical to the proper functioning of the capitalist system. We forget how unusual the corporate election system is in a democracy. Ninety-nine per cent of the time shareholders are not given a choice as to who they wish to represent them on the board of directors. This proxy contest gave shareholders a choice, and that, in and of itself, is an inherently good thing."

When he rushed out of the new board's first meeting, he waved off reporters with "no comment."