Harrison spent a lifetime teaching railroaders to think like shareholders
Railroader: the Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison. Howard Green. Page Two Books, 2018. $27.99.
Howard Green, one of the founders of the Business News Network in Canada where he anchored Headline with Howard Green from 1999 to 2014, has written a new biography of railroad executive Hunter Harrison, who died in December 2017. Green plays to his strengths in Railroader: the book is strongest when Green is explaining the conflicts between the clubby, relatively small Canadian business elite and the brash, unpolished Tennessean during Harrison’s tenure at Canadian National (2003-9) (NYSE: CNI) and Canadian Pacific (2012-7) (NYSE: CP).
Green also excels at narrating the deals that shaped Harrison’s career, such as Canadian National’s acquisition of the Illinois Central, which Harrison ran at the time, the proxy war led by an activist investor that thrust Harrison to the top of Canadian Pacific, and CP’s failed bid to acquire CSX (NASDAQ: CSX). In those chapters, Green’s immersion in the world of high finance and familiarity with the view from the C-suite really shines through. And more than three hundred hours of interviews with Harrison, his family, and close associates paint a detailed, intimate portrait of the man himself—his passions, obsessions, flaws, and contradictions.
Less thorough were the sections of the book laying out Harrison’s Precision Scheduled Railroading philosophy and the actual operational changes wrought by the turnaround artist. Sure, we hear about how many people were laid off, how many locomotives were taken out of service, and what happened to the operating ratios of the railroads Harrison ran (they went down), but more color on the physics of hauling freight profitably in the Canadian Rockies and details about the congestion in CSX’s network on the urban East Coast would have been appreciated. Those topics were mentioned, but not elaborated upon, either because the biography is intended for a general audience or because Green himself is not a railroader.
Green’s characterization of Harrison’s personality is intimate and nuanced. Harrison’s frequent screaming, disdain for customer service, zeal for work, and disregard of corporate-political niceties are well known. But Green usefully highlights Harrison’s passion for coaching and mentorship, his loyalty to trusted subordinates, and the restlessness that drove him out of retirement twice, even as he was aware that his health was failing and his family craved his attention.
Two quotations from Hunter Harrison will stick with this reader. The first is borrowed from Steve Jobs, whom Harrison admired, and was often repeated by the railroader: “The person who said ‘the customer is always right’ was probably a customer.” As we saw—and FreightWaves covered—last year, Precision Scheduled Railroading was inevitably associated with massive disruptions to service, causing plant shutdowns and customers to lose business. Harrison understood the leverage that Class 1 railroads had over their customers, and he used it to run his businesses in the leanest way possible. That meant having his customers accommodate the railroad’s schedule, rather than the other way around.
The second telling quotation Green gives us is from CSX’s Q1 2017 earnings call, when Harrison had been at the helm for less than a month. He used the opportunity to re-introduce his philosophy to investors and analysts and make the case for why PSR could work at an eastern rail. Harrison said something that simultaneously underlined his Wall Street mentality and his savant-like operational intuition: “Don’t spend one dollar in precious capital until you’ve explored every operating alternative.”
Harrison was thus first and foremost a capitalist, not a railroad nostalgic. He cared about owners and the value of their equity, not the history of train technology, the traditions of railroad companies, or getting along with unions. But Harrison’s operational expertise—even staying up all night dispatching trains to clear a snarl while he was CEO—is what allowed him to deliver unprecedented value to his shareholders. Harrison’s focus on the owners of the corporations he ran made sense, of course, because he asked for most of his compensation in the form of stock, which became immensely more valuable as he drove operating ratios down, delivered dividends, and executed stock buybacks.
Harrison’s huge payouts became controversial—he reckoned that between IC, CN, CP, and CSX, he was paid about $500M in the form of salary, stock, and pensions—but they dwarfed the value he created for shareholders. Green points out that in a regulatory filing, CN said it paid Harrison $55.8M for more than $15B in value creation; Paul Hilal of Mantle Ridge LP, the activist investor who foisted Harrison onto CSX, calculated that Harrison created $54.4B in value over his career. That makes Harrison’s compensation while CEO equivalent to less than one percent of the total value he created.
Although Green quoted liberally from investors and analysts who trumpeted Harrison as a kind of railroad magician, Green puts both Harrison’s investor-first mindset and his operational know-how in a larger context. The reform of corporate governance in the 1980s and 1990s fundamentally changed the relationship between corporate boards and the CEOs they hired, as adversarial boards became more common and operating executives were held accountable by shareholders. Bill Thompson at the St. Louis-San Francisco Railway (‘the Frisco’) taught Harrison most of what he knew about running a railroad and should be credited as one of the progenitors of Precision Scheduled Railroading.
Harrison’s legacy lives on today. His longtime protégé Keith Creel is now the CEO of Canadian Pacific. And just last month, Union Pacific’s (NYSE: UNP) CEO Lance Fritz announced that the railroad would implement PSR, beginning with its eastern North-South corridor, from Wisconsin to Texas. Whether Fritz has the operational wizardry, tenacity, shareholder and board support, and corporate culture to force through a long series of difficult choices remains to be seen, but Wall Street is watching.