CN Leadership Has to Go, Activist Investor Insists

Activist investor TCI Fund Management is courting shareholders of Canadian railway CN with a plan that TCI says would refocus the railway to achieve operational excellence while touting the environmental benefits of using railroads over trucks.

That plan, unveiled Monday, continues to advocate replacing CN CEO JJ Ruest with former CN (NYSE:CNI) and Union Pacific (NYSE:UNP) executive Jim Vena, as well as replacing four board members with industry veterans — Gilbert Lamphere, Allison Landry, Rob Knight, and Paul Miller — who TCI says have operations experience.

"After years of losing market share to Canadian Pacific, TCI believes that, with a new Board and world-class CEO, Canadian National can regain market dominance and, once again, be the fastest growing and most profitable Class 1 railroad," TCI said in a presentation about its plan.

CN shareholders are scheduled to vote on TCI's proposal on March 22.

"The [CN] Board has been responsible for multiple corporate governance failures, including permitting a brain-drain of high-quality operators to leave CN, sanctioning the failed bid for Kansas City Southern, establishing a Board that has no meaningful railroad experience and expertise, and selective, inconsistent and potentially misleading disclosure of material information that shows a deliberate lack of transparency with respect to corporate governance matters," TCI said.

The company laid out four priorities, including growing the business; investing in the network and technology to improve fluidity; developing company morale; and touting the environmental and fuel efficiency of the railroads. TCI's recommendations for CN's CEO and board would help push CN toward these priorities through initiatives such as making intermodal more price-competitive, offering more frequent shipment options and departure times, and achieving higher cash flows, which TCI says would relieve network pinch points and allow for technology investments.

TCI also criticized CN's plan to modify its operations following its failed attempt to acquire KCS (NYSE:KSU).

"The CEO's hastily-conceived strategic plan and the recent resignation of one of CN's directors are clear signs that change is needed. The knee-jerk, reactive, one-year strategic plan is focused on short-term targets for Operating Ratio ("OR"), huge share buybacks, asset sales, capital expenditure, and headcount reductions (1,050 employees)," TCI said. "The operational plan does not acknowledge and address the fundamental issue of a lack of a culture of excellence, and is concerning because the network and operations are unprepared, and the current leadership team lacks the ability and credibility to execute it."

TCI continued, "Poor oversight by the Board and weak leadership by the CEO Jean-Jacques Ruest has resulted in CN underperforming other Class 1 railroads on key metrics of operational and financial performance. CN has the best network in North America and should be the most efficient and fastest-growing railroad in North America."

To bolster its position in freight rail industry matters, TCI said it has been investing in North American railroads since 2006. It owns more than 5% of CN's outstanding shares, worth $4.5 billion, and its shares in Canadian Pacific total $4 billion and in Union Pacific, $1.3 billion.

TCI also noted that it and investment firm 3G Capital "successfully replaced" four directors at CSX (NASDAQ:CSX) over a decade ago, saying that CSX had been underperforming and "failing to realize satisfactory productivity gains."

TCI says its interest in the Canadian railways builds a perception that there is less truck competition in Canada because of the differences in product mix and the longer length of haul. It also thinks the Canadian railways have a lower exposure to coal and are faced with a lower regulatory risk.

CN will release its third-quarter 2021 financial results after the markets close on Tuesday.

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