It’s one year before Hunter Harrison will end his tenure as CEO of Canadian Pacific Railway, and the man is beginning to show his age. The creases in his face have deepened with time, and his words come slower than they once did. His body has begun to wither; his navy blue suit fits loosely, the knuckles on his hands have become more pronounced. In 2015, Harrison came down with a case of pneumonia and underwent leg surgery that together kept him out of the office for months.
But Harrison still musters an intense and immediate presence. At 71, his eyes maintain a youthful cunning, and at times he cracks a smile that is full of either mischief or malice – perhaps both. He appears as motivated as ever, still pulling long days at the office. He is sharp as glass as he reflects on his half-century career in the railroad industry, a mixture of boastfulness and sentimentality as he regales in his rumbling Tennessee drawl.
When he steps down next June, Harrison will cap off a career in which he led three moribund railroad companies from industry laggards to top performers, solidifying his reputation as a rare turnaround CEO with a proven track record. His latest venture at CP started in 2011, when a phone call to his home in Connecticut plucked him out of retirement and back into the headlines. “When you work in this business for 52 years, and walk away cold turkey one day with a gold watch and a party, there’s just a void there,” he says. “I didn’t do a very good job of filling it.”
The phone call came from angel investor Bill Ackman, the manager of Pershing Square Capital Management and CP’s largest shareholder. What was meant to be a brief consultation turned into an hours-long discussion and before long Ackman publicly stated his intention to replace much of CP’s senior management, headed by Harrison in the chief executive chair. Ackman’s wrangling kicked off a bitter proxy battle that led to the ousting of then-CEO Fred Green, setting off an extensive restructuring of CP. “We outworked them,” Harrison says. “That was a knockout. I mean goddamn it, the bell was still echoing and they hadn’t even stood up from the stool yet. It was that bad.”
“Mergers are hell at best, and I can attest to that.”
Harrison took the helm of CP on July 4, 2012. The company’s stock value rose from $50 per share in 2012 to over $200 in mid-2014, a result that even Harrison’s staunchest believers probably didn’t expect. By mid-July 2016 that price slumped back to around $180 per share but from an operations and shareholder standpoint, his reversal of the company’s fortunes has been undeniable – “a hell of a run,” as Harrison says. The company’s operating ratio, a measure of operating expenses as a percentage of revenue and an industry benchmark for judging performance, was 80 per cent in the first quarter of 2012; by the first quarter of 2016, that figure was down to 59.8 per cent, a company best. Today, the question is whether the company can maintain this run without Harrison in the cockpit. The industry has undergone major shifts recently as shipping volumes taper off, and the days of the loud, brash outspoken CEO are coming to an end.
Harrison got his start in the industry as a 17-year-old labourer in a Memphis, Tennessee railyard for Burlington Northern Railroad, where he would crawl beneath railcars with an oil canister to lubricate the undercarriage. The job paid $1.50 per hour, which was a major step up from his previous job at his soon-to-be father-in-law’s bakery. “That [job] was quite a learning experience for a kid who they said wasn’t very mechanically inclined, but it showed that for $1.50 per hour you can learn a lot of things,” he says. Whether mechanically inclined or not, some of Harrison’s superiors saw leadership qualities in him early on, and within a few years he was being groomed for management.
He stayed with Burlington for over 25 years, eventually leaving for Illinois Central Railroad in 1988 – a scrappy railroad company with tracks running from Chicago to New Orleans. By then he possessed a reputation as a leader with a keen feel for the operations side of the railroad business, and had worked in nearly every management position that existed (Harrison guesses he has moved homes 22 times in his career). Illinois Central was on the brink of
bankruptcy when he joined the company – then as its chief executive of operations – and it was there that Harrison first showed his ability to wrangle lackluster railways into shape. “We broke all kinds of records that no one ever dreamed of, to the extent that we were relatively small fish in a great big pond,” he says.
In 1998, Illinois Central was acquired by Montreal-based Canadian National Railway, which, as part of the deal, snapped up Harrison and a handful of other top executives to help run its floundering business. Harrison took over the operations and marketing side of the business, while CEO Paul Tellier managed the financials. From the start, Harrison faced immense pushback in an entrenched corporate culture that favoured bureaucracy over Harrison’s top-down, no-nonsense management style. “Mergers are hell at best, and I can attest to that,” he says. “I could show you some scars here if I could peel back my shirt.”
Harrison’s imposing style had an immediate impact on CN employees. “The first time I met him I was scared shitless of the guy,” says Mark Wallace, the vice president of corporate affairs and chief of staff at CP, who was at CN during the merger. Wallace, a longtime ally and right-hand man to Harrison, remembers the first time Harrison addressed CN’s top officials soon after his arrival in Montreal. He was speaking at what the company called its “Top 200,” an annual meeting of its highest-level people hosted in the ballroom of Montreal’s Hotel Bonaventure near CN headquarters. “He ended up talking for eight or nine hours straight, without notes or a slide presentation; he just got up there and spoke to the whole team about his philosophy and how we were going to run the operation,” he says. “I remember thinking, ‘Who is this guy?’ ”
That philosophy included severe cost-cutting measures that, initially, rattled some employees. Administrative costs were cut way back, and underperforming or unnecessary assets were divested. Harrison balked when he heard about a practice known as “early quits,” in which yard employees would sometimes go home early and still get paid for an eight-hour day. When he got resistance from CN’s Vancouver workforce, a particularly self-determining bunch, Wallace says Harrison flew to the city that day to personally reinforce his point. “Hunter’s the kind of guy who faces confrontation head on,” Wallace says. “He doesn’t shy away from it.”
CN soon began to show results, boosting its cash flows and revenues. Its operating ratio fell from 89 per cent in 1998 to 61 per cent by 2006. Harrison stepped down in 2009.
Two years later, his shakeup at CP was even more aggressive. This time the turnaround was condensed to a five-year period. Over the last four years at CP, Harrison axed nearly 7,500 positions from a workforce of 19,500, drawing the ire of unions. He sold the company’s downtown offices and moved the remaining staff into a two-storey building on the industrial grounds of CP’s main railyard in Calgary.
He made operational changes that might seem beneath the duties of a chief executive, like ending the practice in which railyard workers had to wait for trains to come to a stop before jumping on the locomotives (a way for employees to get from A to B in the yard). By allowing people to hop on the trains while they trundle along at slow speeds, the logic goes, less time is wasted getting the trains back up to speed.
Similar to past restructurings, Harrison canned any executives and managers who resisted his alterations. The safety board, for example, vehemently criticized his decision to allow workers to jump on moving trains. “A lot of the operating guys at the top level resisted the change,” Wallace says, adding that those same people “are not with us today.” Wallace says Harrison’s stripped-back approach to the business was welcomed by much of the ground level staff, who had seen how similar changes at CN streamlined operations. Early in his tenure Harrison called for the immediate shutdown of four so-called “hump yards,” basically the equivalent of shipping warehouses where trains are counted, recorded and organized – critical hubs that are central to the railroading business. “Many people thought he had lost his mind,” Wallace says. Instead of infusing the process with new technologies that were prone to malfunctions during Canada’s harsh winter months, Harrison went back to the basics. He scrapped the expensive new metering technology that was used to order and position each of the railcars, replacing it with people who did the work manually – a move that, the company says, cut costs and limited downtime.
But the most sweeping operational change at CP was the move toward “precision railroading,” in which the company operates trains based on regular schedules regardless of whether they have amassed a minimum threshold of cargo (imagine an airline that, instead of departing at specific times, would take off only after it had a certain number of passengers). The change, which he had also implemented at CN, allowed CP to quote its customers by the hour rather than by the day.
Precision railroading gave CP a major boost in productivity, but general cost-cutting measures came with snags. In 2013, record production of grain in Alberta and Saskatchewan put strain on CP’s system, causing a backlog of orders. The outcries from the farming communities became so loud that the Harper government responded with legislation that forced the company to meet minimum shipments of grain, or face a penalty. Harrison lashed out in response to the legislation, saying the policy wouldn’t work toward solving the problem.
In recent months, railroad companies – CP included – have faced low shipping volumes. A boom in oil prices between 2010 and 2014, coupled with a lack of oil pipeline capacity in Canada, was a boon for rail operators. But with oil prices in the tank and economic activity low, the industry saw shipping volumes fall eight per cent in the first quarter of 2016. The drop is mostly due to falling shipments of industrial commodities like coal, iron ore, grain and oil, which together make up 40 per cent of CP’s revenues. In the second quarter, the company’s revenues dropped 12 per cent.
This tension adds a layer of uncertainty to Harrison’s exit. Analysts have speculated about CP’s performance without Harrison, particularly with volumes resting well below the past few years’ average.
It’s a question that has plagued many companies that benefit from great leadership: Apple, for example, has not yet found its footing since the passing of its legendary frontman Steve Jobs. Could the same happen to CP?
Harrison dismisses the speculation. When his heir apparent Keith Creel takes over as boss in 2017, the fundamentals of the business will ultimately be the same, he says. “He’s probably the brightest operating mind of North America,” Harrison says. “I trained him for this, it’s his time to take over, it’s my time to go home and rest. Everybody’s going to make tracks of their own, but at the same time I don’t think the general operating philosophy will see a big change.”
For his part, Harrison was always a rare CEO that embraced change. His approach to the business took a long-term view.
One of the major changes the rail industry in general faces, Harrison has long said, is the need for rail systems to consolidate to improve efficiency. A $30-billion cash and stock bid by CP to acquire Norfolk Southern, which was made public in November 2015, would have marked a gigantic step toward railroad consolidation. Norfolk Southern rejected the offer late in 2015, calling it “grossly inadequate” (CP raised the value of the bid days earlier). Harrison pushed aggressively for the deal, saying it would be highly accretive to shareholders. “It’s a little setback, but it’s not like it’s all over for CP,” Harrison says. “I think there’s going to be more of a consolidation one day.”
Regardless of what’s in store for CP, Harrison will no doubt exit his career as one of the rare executives who was blunt and brash, and backed up his words with results. Harrison himself is aware of the changing corporate mentality of today, where executives rehearse talking points rather than speak their minds. “I’ve just always thought that if you can be frank, honest, candid, and also develop a reputation for that, people listen to you,” he says. “They say, ‘This is no bullshit, this guy tells it like it is.’ I think today too many CEOs – and I’m not painting them all with a broad brush – but too many CEOs are sterile, they’re taught not to say anything, they’ve got to send them to speech class, never say this, never say that, and they walk around like a robot.”
Suitable parting words for an outspoken leader who was never short of them.