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New CP Rail boss Harrison shifted culture at CN

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ANALYSIS: Hunter Harrison, appointed on Friday to take the helm at Canadian Pacific Railway Ltd (CP-T), engineered a turnaround at rival Canadian National Railway (CNR-T) earlier in his career by pushing his employees to make the trains run on time.

Activist CP shareholder William Ackman wants Harrison to conjure up the same magic at the country's second-biggest railroad, and help the storied company improve its worst-in-class operating performance.

Ackman, whose Pershing Square Capital Management is CP's biggest shareholder with a 14.1 percent stake, won a bruising proxy battle in May when former CP Chief Executive Fred Green resigned mere hours ahead of almost certain defeat in a proxy fight at the company's annual meeting.

Chairman John Cleghorn along with Green and four other directors also decided not to stand for re-election to the board, opening the door to all seven Pershing nominees to join the board. Ackman promised that the new board would conduct a full search for a new CEO, but Harrison was his preferred candidate.

Harrison, 67, is credited with transforming the culture at CN, Canada's biggest railroad, which reinvented itself as a public company after its 1995 privatization, boosting efficiency and cutting costs.

Harrison, who grew up in Memphis, Tennessee, and still speaks with a southern drawl, started as a carman-oiler at the St. Louis-San Francisco Railway in 1963.

He rose through the Frisco, and then moved to Burlington Northern and Illinois Central. President of the Illinois Central when CN acquired it in 1998, Harrison became chief operating officer at CN.

"I was always looking for that future talent. I found a pool of it in a regional U.S. railroad known as Illinois Central," Paul Tellier, a prominent civil servant and businessman, was quoted as saying in a book co-authored by Les Dakens, who ran human resources at CN under Harrison.

Tellier, who led CN's privatization, said picking Harrison and his team in the merger was one of his best decisions at CN.

PRECISION RAILROADING

At CN, Harrison made changes he had honed at Illinois Central. CN calls Harrison's system "precision railroading," and can be a tad ambiguous about what it means. But the most important point is simple: make sure the trains run on time.

Traditionally, railways had played fast and loose with schedules, holding trains until they were hauling as much cargo as possible. From the perspective of single trains, flexibility can seem efficient, but that misses the big picture in the "precision railroading" system. Locomotives don't get where they are needed; crews are idle; cargo is late.

"CN has led the industry with being more disciplined, more scheduled. That might result in smaller trains on occasion, but you get much better asset utilization," University of Dayton professor and railway consultant Michael Gorman said earlier this year.

Under Harrison, CN Rail started moving assets more quickly, shipping more cargo using less equipment. It cracked down on shifts that traditionally started late and ended early, a tough regime that at one point brought two strikes in four years.

When Harrison arrived in 1998, CN's operating ratio, a key measure of railroad performance, was 75.1. When he became CEO in 2003, the ratio had fallen to 69.8 percent, for several years before the financial crisis it came in below 65.

The lower the ratio, which measures operating costs as a percentage of revenue, the more efficient the railway.

CP's operating ratio has lagged CN's since the mid-1990s. In the first quarter, CP's operating ratio was 80.1 percent, while CN's was 66.2 percent.

DON'T BE LATE

But the CN shift in tactics went deeper than that. Cargo that arrived late would be left behind, and if clients held on to CN's cars longer than agreed, they were liable for fines that Harrison was not shy about collecting.

Harrison was as tough on his workers as on his customers. He ran about 18 three-day "Hunter camps" across North America every year for managers and union stewards, but also pushed his employees hard.

A wide screen in his office let him monitor the position of every train in CN's network. Famously, he would call employees at any level of the company to complain that trains were running late or ask why a train was not moving.

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