Opinion: Hunter Harrison a hard act to following, but successor well qualified
(The following column by David Olive appeared on the Toronto Star website on April 26, 2009.)
TORONTO Hunter Harrison's retirement on Jan. 1, 2010 as CEO of North America's most successful railway became official at last week's annual meeting in Calgary of Canadian National Railway Co.
It should have been a moment fraught with concern. Harrison had just capped off a remarkable five-year CEO stint by reporting first-quarter profits unchanged from a more buoyant 2008 making CN alone among the six top-tier North American railways not to report a sharp drop in profits.
Yet Harrison, 64, was effusive in praising his successor, Claude Mongeau, 47.
"I'm a little bit more of a gunslinger (than Mongeau), rock `em, sock `em, risk-oriented," said Harrison, a railroader for more than four decades who started out as a carman/oiler in a Frisco Railroad yard while still in high school.
But Mongeau, he said, "is a qualified conductor, soon to be a qualified engineer."
"There's no CFO in North America who can make that claim."
During his 15-year tenure at CN, the last decade spent as chief financial officer, Mongeau did find time to earn his conductor's credentials. And the CFO who was key negotiator in a CN acquisition strategy that has made CN the only truly North American railway with a route network traversing the breadth of Canada and stretching south from Chicago to the Gulf of Mexico is planning to spend a summer riding the system in railway gear labelled "Railroader in Training" to get a more intimate feel for CN's more than 30,000 kilometres of track.
Harrison will be a tough act to follow. With his strategy of "Precision Railroading" matching equipment and personnel with customer demand so acutely that CN assets are rarely idle, failing to generate cash flow Harrison was able to make CN the industry's most efficient operator. The key measure is the operating ratio (the portion of revenues consumed by costs), which was a dreadful 89 per cent when CN was privatized in 1995 and 65.9 per cent last year.
The team of Harrison and Mongeau also snapped up four railways, including B.C. Rail, which raised CN's lumber-haulage volume; and last year, a tiny gem, Elgin, Joliet and Eastern, in suburban Chicago, that eases a bottleneck in America's busiest rail hub.
But Harrison himself had somehow to improve on his own predecessor's astonishing record. The modern history of the 82-year-old CN begins with Paul Tellier, a career federal civil servant whom Ottawa put in charge of the chronically money-losing CN in 1992. Tellier cut CN's bloated workforce by almost one-third. He shed distracting non-rail operations, including hotels, telecommunications, real estate development and the CN Tower. And in the spirit of NAFTA, Tellier bought Illinois Central Corp., a rail corridor running the length of America from the Great Lakes to the Gulf Coast; and another large U.S. regional road, Wisconsin Central Transportation Corp.
Tellier's smartest move was making Illinois Central's CEO, Hunter Harrison, and Harrison's management team, a condition of the IC purchase. Unafraid of being overshadowed by one of the industry's most highly regarded railroaders, Tellier put Harrison in charge of day-to-day management of the much larger combined firm, as chief operating officer, and was content to oversee the financial side.
Harrison's success resulted in part from what he didn't do. Soon after becoming CEO in 2003, Harrison squelched his own dream to return to the vertical integration of rail, trucks and ships by which earlier, conglomerate versions of CN, Canadian Pacific Railway Ltd. and Harrison's own firm (once a motley collection of firms known as IC Industries) had lost focus and routinely disappointed investors.
Harrison also abandoned dreams of reviving a mega-merger akin to Tellier's failed 1999 bid to merge with Burlington Northern Santa Fe Corp., BNSF, a deal that would have created the industry's largest firm but was scuppered by U.S. regulators. Which might have been just as well. The $20-billion (U.S.) worth of industry consolidation in the 1990s resulted in years of operational turmoil, irate customers and squandered shareholder value.
Having slipped just 17 per cent since its peak, stock in CN has widely outperformed that of its five top-tier North American competitors, to the satisfaction of CN investors like Bill Gates and Warren Buffett. Coming out of the recession after generating such impressive returns during the epic slump, CN is poised to lead the industry out of the downturn and post still stronger earnings simply by exploiting its newly streamlined Chicago hub and ready access to a Mexican economy set for a significant rebound.
Yet career dealmaker Mongeau will be hard-pressed to resist the mega-merger urge while stock in the likes of BNSF and Union Pacific Corp. is trading at a 43-per-cent and 45-per-cent discount, respectively, to their peaks.
If the industry's anaemic condition persists for another year or so, there might of necessity be another round of consolidation, Harrison predicted this week.
"Mergers and consolidations come out of weakness and not strength," he noted.
