The fallout from CN’s Surface Transportation Board-forced scuttling of its attempt to merge with Kansas City Southern grew from shrapnel to a ground-zero blast the day after Canadian Pacific and KCS rekindled their relationship and agreed to move forward with their merger.
CN’s board and management are now at the mercy of activist hedge fund TCI Fund Management Limited (TCI), which became a “beneficial owner” of CN with a 5.2% stake in the railroad in late August.
“CN is a great company, and it owns a unique asset—the best rail network in North America,” opined TCI Founder and Managing Partner Sir Chris Hohn. “However, the business has been underperforming for too long, so change is required. We did not seek a proxy fight, but without urgent action, CN’s operational and financial performance will continue to lag its peers under a Board that lacks the right railroad experience and operational expertise. The bid for KCS exposed a basic misunderstanding of the railroad industry and regulatory environment. The Board consistently misjudged the STB and displayed flawed decision-making, committing billions of dollars to an ill-conceived pursuit of an unattainable asset. CN should focus on getting better, rather than bigger.”
The cast of characters is now set in the most recent act of an ongoing soap opera that began on March 21, when CP and KCS announced their initial attempt to merge. On Monday, Sept. 13—which for CN may as well be a Friday—CIFF Capital UK LP and The Children’s Investment Master Fund, acting by their investment manager TCI, announced they intend to hold a “timely Special Meeting” of CN shareholders for the purpose of “refreshing” the current Board of Directors by adding four “independent and highly skilled nominees who will provide the deep railroad operational experience the current Board lacks.”
TCI intends to replace CN Board Chair Robert Pace and Directors Kevin G. Lynch, James E. O’Connor and Laura Stein with Gilbert Lamphere, Allison Landry, Rob Knight and Paul Miller.
Pace has served on CN’s Board since October 1994. “This period of nearly 27 years well exceeds the 14-year director’s tenure limit advised by CN’s Corporate Governance Manual,” TCI said. “While Lynch, O’Connor and Stein, who have all served on the Board for more than seven years, have had distinguished and varied careers, TCI’s independent and highly skilled nominees will bring more balance to the Board and will give it a deeper understanding of strategic alternatives and opportunities, as well as a broader knowledge of the operational challenges and possibilities in running a railroad.”
At the same time, TCI intends to replace CN President and CEO JJ Ruest with Jim Vena, who spent most of his railroading career at CN, retired, and then resurfaced at Union Pacific for about a year as Chief Operating Officer, tasked with implementing UP’s version of PSR (Precision Scheduled Railroading). Vena, TCI said, “has committed to accepting the role of CEO if offered the position in a suitably expedient manner.”
Vena “has a proven track record as an exceptional operator,” TCI said. “His time at CN, where he was a high-performing and well-respected COO, demonstrates he knows how to run a railroad successfully. During his 40 years at CN, Vena ran all three geographic regions of the network, so he knows the network intimately and is uniquely qualified to be CEO.” AT UP, Vena “drove a remarkable improvement in the company’s operations, service, efficiency and profitability, resulting in a 650bps improvement in the operating ratio in two and a half years,” TCI added.
TCI’s Formidable Foursome
TCI’s four board candidates are well-known in the railroad industry, having had “long and distinguished careers operating in and analyzing the industry,” TCI said. “All are fully independent of TCI … [and] they bring vast railroad experience and knowledge, and they also share a common and very achievable goal: to create a much-needed culture of operational excellence at CN, which is essential if CN is to reach its full potential … CN can do better, and will.”
Gil Lamphere, Chairman of MidRail Corp., has 40 years of experience in the rail industry and has been a board member of several public and private railroad companies, including Patriot Rail (2019-2021, Chairman; CSX (2008-2015, Member of the Operations, Finance, Compensation and Public Affairs committees); Florida East Coast Railway (2000-2007); CN (1998-2005, Chairman-elect of the Finance Committee and a member of the Compensation, Investment and Audit Committee); Illinois Central Railroad (1990-1998, Chairman); and MidSouth Rail (1988-1998, Founder).
Allison Landry currently serves as an independent director on the board of XPO Logistics, Inc., a North American LTL carrier and truck brokerage provider, and is also a member of the Audit and Compensation Committees. She previously spent 16 years at Credit Suisse, where she was the lead equity research analyst for the U.S. transportation sector, specializing in the railroad, trucking, airfreight and logistics industries.
Rob Knight is the former Chief Financial Officer of Union Pacific, a position he held for 15 years before retiring in December 2019. During his 40-year tenure at UP, he also held a variety of senior executive positions, including General Manager of the company’s energy and automotive business units. Knight serves as a director at Schneider National and Carrix Corporation, a private transportation services company.
Paul Miller was a CN executive from 1978–2011. During his 33-year career, he held leadership roles in operations, marketing, and planning. He retired as CN’s Vice President of Safety, Sustainability, and Network Transportation in 2011. Miller served on the Safety and Operations Management Committee of the Railway Association of Canada, and the Risk Management Working Committee of the Association of American Railroads. Since leaving CN, Miller has been a consultant, board member, volunteer and educator. As a consultant, he has worked with CN, CP, Enbridge, The Railway Association of Canada and the New Brunswick Southern Railway. He was an Adjunct Professor and Railroader in Residence at the University of Alberta’s Canadian Rail Research Laboratory, and he serves on the board of the Chartered Institute for Logistics and Transport in North America, where he holds the Chartered Member (CMILT) designation. He is a registered professional engineer (P. Eng.) in the province of Alberta.
“Advocating For a Low-Carbon Railroad Industry”
TCI dangled an environmental carrot in front of CN shareholders by stating that, over many years, it has “established an exceptional reputation as a leader on all ESG issues and policy-making,” according to Hohn. “The firm has an active ESG policy with a particular focus on the risk of climate change. TCI has successfully campaigned for many of its portfolio companies to adopt a Climate Action Plan and to give shareholders a ‘Say on Climate’ advisory vote at their AGMs. These companies include CN, who adopted the policy at its 2021 AGM, Moody’s, Aena, VINCI and Canadian Pacific. If our new independent director nominees are elected, TCI will continue to campaign for CN to lead the industry in all ESG issues, to adopt new technologies to improve the efficiency of its network, and to drive the industry to cooperate in developing and introducing new low-greenhouse-gas-emitting locomotives. This will have the additional benefits of attracting new shippers to the railroads, taking freight off the highways, and generating higher volume growth for the industry.”