January 28, 2017

The $100 million man

Someone just hired Hunter Harrison for $100 million - and there's an excellent reason why

Yvan Allaire and François Dauphin | Financial Post

In an unexpected turn of events, the Canadian Pacific Railway announced the early retirement of its CEO Hunter Harrison a few minutes before the conference call planned for the analysts on January 18. Harrison thus forfeited all benefits and perquisites he was entitled to receive from CP, including his pension, and has agreed to surrender for cancellation almost all of his vested and unvested equity awards, this whole package valued at approximately C$118 million.

What makes Hunter Harrison so valuable that a U.S. hedge fund will make him whole on a C$118 million to persuade him to leave CP and come, at age 72, run another railway company (presumably CSX) targeted by the hedge fund? That’s the deal offered to Harrison by Mantle Ridge LP, a newly established hedge fund run by Paul Hilal, who, when at Pershing Square, was instrumental in the CP operation.

But why does Harrison fetch such a market value is a puzzling question? Of course, in the enchanted world of finance, there are no limits to what one will be paid as long as it is a fraction of what the payer will gain. Still, one would think that a hedge fund manager
looking for someone able to turn-around a poorly performing U.S. company would have an abundance of candidates to choose from.

After all, the operating tricks that Harrison has come up with to make railroads more efficient have been described in minute details in books he wrote. Dozens of seasoned railroad executives have worked with him and for him over the years. They must have learned quite a bit about Harrison’s recipe. Yet, again, a hedge fund is prepared to throw a fortune at him to get him on board.

The answer to the question appears to reside in the fact that the successful transformation of these railroads (CN and CP) was the result, yes, of operational improvements but more so of a fundamental cultural change. Harrison then appears as a formidable change agent, a transformational leader in the truest meaning of that tired expression.


Hunter Harrison claims to have invented a principle called “precision railroading”, which he implemented at three major railroads: Illinois Central, CN, and the CP, the latter with spectacular results, bringing the operating ratio (operating costs as a percentage of revenue, the lower the ratio the better) to 58.6% for fiscal year 2016, down from 81.3% in 2011, the last full year before Harrison’s took over.

Precision railroading, if it was easily learned from a book and replicated, would have been applied with success long ago at every North American railroad. Yet, Harrison still seems to bring something that can make a difference over and above the techniques he developed and implemented. That something seems to be his skill at changing the culture of the railroad, a most difficult skill to imitate.


As a lifetime railroader himself, his decisions and actions display a deep understanding of the daily reality of the operators. He spends time meeting with the workers on the field, communicates profusely about the importance of asset optimization and the control of costs. At CP, he took many symbolic actions to instill in the whole organization the need to think and act like a railroader. For example, he relocated the corporate glasstowered headquarters to a railyard, a move that was meant to cut costs but mostly to keep the employees’ focus on freight operations, and remind them daily of what the business is all about.

No cost saving is too small. At the CP, he instilled a healthy competition between the different terminals with a scorecard method designed to stimulate continuous improvement.

Harrison used the employee magazine as his communication tool to impart his vision and strategic orientations and broadcast the results obtained since the leadership change (and always makes sure to give a positive connotation to the word “change”). The magazine is clearly targeting a readership of railroad people, containing lots of interviews with employees working on railroad specialties sharing their passion for what they do. The aim is to create and consolidate a winning culture through the sharing of accomplishments and operational achievements.

Managing a strategic turnaround is not an easy task. The softer, cultural, element of it is often neglected, overlooked, and difficult to implement. That is where Hunter Harrison excels and why a hedge fund manager is prepared to pay big bucks to get that talent
working for him.

But is money really the sole motivation for Harrison to start over at another railroad company at the age of 72. In fact, at this stage of his career, he has more to lose reputation-wise if he fails than anything he can really earn in monetary terms.

The Memphis (Tennessee) native, whose career began over five decades ago as an 18- year-old carman-oiler, may be driven by the determination to prove that the theory he has developed is replicable, no matter where. And determined to push his legacy to a new level, turning him into him some kind of legend in the railroad industry.