“CSX wants to know what investors think. Management and the Board of Directors are receptive to Hunter Harrison becoming the next CEO, but the costs and stipulated conditions seem steep as they stand today. We think this is likely a classic move by [activist hedge fund] Mantle Ridge LP and Harrison to ask for more than they think they can get up front, with the expectation that the final agreement will be more equitable.
“CSX revealed that it has made numerous proposals for Harrison to join CSX as CEO, but it seems as if the offers were not enough. The main sticking points appear to be the size and terms of Harrison’s compensation package, medical pre-screening (he has had health issues the past few years), the timing of payment, repayment of fees incurred by Mantle Ridge, designation of numerous board members, selection of compensation committee chairs, and a change to the bylaws to extend the age limit for a board member.
“At the meeting, shareholders will be asked to approve the compensation package proposed by Harrison and, if he is hired, the corporate governance changes proposed by Harrison and Mantle Ridge. Hence, it is entirely possible for shareholders to approve his hiring and pay package but reject the changes to the company’s corporate governance. CSX has taken a stance not to recommend shareholders vote for or against either proposal, but it appears to us from the language in the press release that while CSX thinks Harrison becoming CEO is a long term positive for the business, current management and the Board feel that Harrison’s/[Mantle Ridge CEO Paul] Hilal’s demands are excessive. Top CSX shareholders include Vanguard, Capital Research, State Street, Blackrock, Wellington, Fidelity, Nomura, Lazard, Janus and Dimensional Fund Advisors. Collectively, these top ten investors own just over one-third of the company.
“The proverbial ball is now in the court of CSX shareholders. Discussion of Harrison coming to CSX has provided the company with over $10 billion in market capitalization, so it is hard to fathom that shareholders will squabble with the compensation package even if the current CSX board finds it excessive. However, it is entirely possible for them to vote against the changes in corporate governance. This would place the ball back in Harrison’s hands, which could prove interesting as CSX appears the best fit for him at this stage, given that management is somewhat receptive.”