Believes ISS Report Contains a Number of Statements and
Comparisons that are Inaccurate or Misleading
CALGARY, May 7, 2012 /PRNewswire/ - Canadian Pacific
Railway Limited (TSX: CP) (NYSE: CP) posted a response to
Institutional Shareholder Services' ("ISS") recent M&A Edge
report related to the CP proxy contest on its web site.
Highlights from the response include:
- ISS operates from a false premise and maintains a double
standard with respect to CP's Multi-Year Plan and Pershing Square's
failure to provide any strategic or operational plan,
- ISS fails to take into account the development and aggressive
and successful execution of the Company's Multi-Year Plan,
- ISS has failed to recognize the risk to shareholder value and
the delay to the continued execution of the Multi-Year Plan related
to Pershing Square's proposal to replace CP's current CEO,
Fred Green, with Hunter Harrison,
- ISS attacks the Board's decision to commission the Oliver Wyman
report in response to Pershing Square's CEO ultimatum and
unrealistic OR target of 65 by 2015, while overlooking the flaws in
Pershing Square's thesis,
- ISS's flawed justifications for recommending the Pershing
Square nominees are based on incorrect and incomplete information
and reflect a lack of objectivity,
- The ISS report contains a number of errors,
- Having failed to present to CP shareholders a balanced analysis
of the opportunities and risks before the Company, ISS puts forward
spurious reasons to vote against CP's directors, and
- The dissemination of the ISS report to the media prior to
receipt by the company and certain ISS subscribers reflects poorly
on ISS's professionalism and, by extension, on the recommendation
put forward by ISS.
The full text of the Company's response is below:
Response to Recent ISS Report on Canadian
Pacific
Canadian Pacific believes that the ISS report on
the CP proxy contest contains a number of statements and
comparisons that are inaccurate or misleading. The rationale
put forward by ISS to justify its support for all seven Pershing
Square nominees does not take into account the progress CP has made
in its successful execution of the Company's Multi-Year Plan.
Additionally, CP is concerned that ISS's recommendation does
not recognize the inherent risk to shareholder value related to
Pershing Square's proposal to replace CP's current CEO,
Fred Green, with Hunter Harrison. Mr. Harrison, as the 67
year old former CEO of Canadian National Railway Company ("CN"), is
well known to the CP Board and the Board has serious questions
about his track record in customer and regulatory relations while
at CN. This response highlights some of the flaws that CP
sees in the ISS report.
CP notes that this is not the first time that
ISS has been the subject of criticism for its lack of thorough
analysis and objectivity. CP also notes that, in previous years,
ISS has consistently recommended in favour of all CP directors,
including those that it recommends against in its latest report. As
such, all CP shareholders that subscribe to ISS should do their own
due diligence regarding Pershing Square's claims and the facts
before deciding how to cast their votes.
1. ISS operates from a false
premise and maintains a double standard with respect to CP's
Multi-Year Plan and Pershing Square's failure to provide any
strategic or operational plan.
In its M&A Edge report, ISS states, "This proxy contest is
ultimately less about running a railroad than it is about
credibility and expectations." Even to the most casual
observer, it must be objectively clear that this proxy contest is
very much about running a railroad. As such, it is of serious
concern to the Company that ISS openly accepts the fact that
Pershing Square's nominees have failed to provide any strategic or
operational plan that would lead to an improved operating ratio
("OR"), stating "ISS does not require a plan of action, nor that
the dissidents prove their plan is preferable to the incumbent
plan." ISS does, however, devote considerable time to
criticizing CP's plan, for example the essential replacement of
locomotives by CP, despite the fact that ISS has no railroad
expertise or evidence with which to support this
criticism.
Putting to one side that ISS is not qualified to make judgments
on running a railroad, it is clear that ISS is maintaining a double
standard in its discussion of credibility and expectations.
In addition to giving Pershing Square a free pass on having no
plan, ISS overlooks the fact that Pershing Square has backed-off
its unsupported projections of a mid-sixties OR by 2015 that served
as a basis for its demand that CP replace its CEO. In fact,
ISS tests neither Pershing Square's credibility in making this
claim nor what expectations CP shareholders should have of the
Pershing Square projections materializing should ISS's
recommendation in favour of all seven Pershing Square nominees be
followed.
2. ISS fails to take into
account the development and aggressive and successful execution of
the Company's Multi-Year Plan.
The CP Board has overseen the development of the Multi-Year
Plan, which is specifically designed to drive maximum shareholder
value from CP's unique franchise. The CP management team is
aggressively and successfully executing on this plan, which has
enabled CP to narrow the Company's target OR range from the low
70's to 70 - 72 per cent for 2014. Recently, further success
and a clear line of sight to new growth opportunities allowed CP to
extend the Multi-Year Plan out by two additional years with a
target OR range of 68.5 - 70.5 per cent for 2016.
CP posted strong financial results for the first quarter of
2012, providing evidence that the operational successes and record
operating metrics resulting from the execution of the plan are
beginning to translate into financial results and creating
significant shareholder value. Notably, versus the first
quarter of 2011, in the first quarter of 2012: total revenues were
$1.4 billion, an increase of
$213 million; operating income was
$274 million, an increase of
$165 million; operating ratio was
80.1 per cent, an improvement of 1,050 basis points; net income was
$142 million, an increase of
$108 million; and diluted earnings
per share were $0.82 per share, an
increase of $0.62 per
share.
CP believes that the ISS report fails to recognize the improved
results driven by the successful execution of the Multi-Year
Plan.
Key operating metrics such as train speed, terminal dwell, car
velocity and active cars online began to show significant
improvement back in the second quarter of 2011, and CP has now
delivered four consecutive quarters of sustained operational
improvement and achieved records in a number of operating metrics
in the fourth quarter of 2011 and the first quarter of 2012.
Clearly, CP's record operating metrics are evidence that the
Multi-Year Plan is working and is beginning to deliver improved
financial results.
The continued successful execution of the Multi-Year Plan by the
CP management team will drive further financial improvement,
further OR improvement and further shareholder value
creation. ISS has failed to take into full account these
improvements and the shareholder value inherent in the continued
execution of the Multi-Year Plan by the Company's management team,
led by CEO Mr. Green.
3. ISS fails to recognize the
risk to shareholder value and the delay to the continued execution
of the Multi-Year Plan related to Pershing Square's proposal to
replace CP's current CEO, Fred
Green, with Hunter
Harrison.
Pershing Square's campaign to replace CP CEO, Mr. Green, with
Mr. Harrison has been based on Pershing Square and Mr. Harrison's
unsupported assertions that Mr. Harrison can improve CP's OR to 65
per cent by 2015. Despite Pershing Square's OR projections,
which represent a rate of OR improvement that has never been
accomplished by any railroad management team, neither Pershing
Square nor Mr. Harrison has presented a credible, detailed plan to
achieve the targets they have set forth.
Given the results driven by the successful execution of CP's
Multi Year Plan, the CP Board unanimously believes that ISS has
ignored the reality that Pershing Square's demand that CP replace
the Company's CEO with Mr. Harrison would delay and damage CP's
value-generating plan, and put the progress and momentum the
Company has built at significant risk. By his own admission,
Mr. Harrison has noted that if he were installed as CEO, it would
take him some 18 months to get his team in place, develop a plan
and begin to "move the needle." Regardless of whether the
four-year timeframe for OR improvement cited by Mr. Ackman begins
at the beginning, sometime in the middle, or after that 18 month
period has elapsed, the fact is that CP's management team's
successful execution of the Multi-Year Plan is already "moving the
needle," and any disruption of that execution caused by the
installation of Mr. Harrison as CEO would be detrimental to the
enhanced creation of shareholder value.
Additionally, Pershing Square's statements that the bulk of its
OR improvement projections are based on cost-cutting display a
fundamental misunderstanding of CP's business and of the fact that
CP has maintained operating expense unit costs comparable to CN
since 2006, excluding legacy pension expense. This
misunderstanding is not taken into consideration by ISS, and
represents additional risk to all CP shareholders. The bottom
line is that CP cannot cut its way to growth. It must invest
to grow, which ISS and Pershing Square have utterly failed to
grasp. This is why a vote for Pershing Square and Mr.
Harrison is a vote for risk and disruption.
ISS has ignored Pershing Square's lack of a concrete plan to
drive enhanced shareholder value, and its recommendation fails to
take into account the significant risk involved with Pershing
Square's proposal to replace Mr. Green with Mr. Harrison.
4. ISS attacks the Board's
decision to commission the Oliver Wyman report in response to
Pershing Square's CEO ultimatum and unrealistic OR target of 65 by
2015, while overlooking the flaws in Pershing Square's
thesis.
Pershing Square has admitted that its plan amounts to nothing
more than replacing one CEO with another. Without the benefit
of any other details, Pershing Square promised CP shareholders a
doubling of CP's share price in three years. The explicit
assumption underpinning this promise is an OR of 65 by 2015 - a
level of performance achieved by only one Class I railroad despite
the concerted efforts of the many talented management teams who
have managed Class I railroads. Clearly then, there is
something unique about CN's franchise, as the only Class I railroad
where an OR of 65 has been achieved, that warrants examination.
The ISS report fails to consider this issue, despite its
obvious relevance. In fact, ISS attacks the CP Board's
efforts to understand whether the thesis behind Pershing Square's
CEO ultimatum had a basis in reality.
The facts about the Board's commissioning of the Oliver Wyman
report are as follows: In order to provide shareholders with
an independent assessment of the differences between rail
franchises, CP's Board of Directors engaged the services of Oliver
Wyman, a highly qualified Industry consultant, and shared its
findings at its March Investor Day. This work, coupled with
the extensive details of CP's Multi-Year Plan, provided
shareholders with the data needed to make a proper and informed
decision about the two distinctly different views of CP's near term
potential.
Consistent with its superficial analysis, ISS casually dismisses
both the Multi-Year Plan and the conclusions of a highly respected,
independent consultant as evidence of the "CP team reaching detente
with its Operating Ratio," despite CP's publicly stated targets and
clear evidence of progress towards those targets.
5. ISS's flawed justifications
for recommending the Pershing Square nominees are based on
incorrect and incomplete information and reflect a lack of
objectivity.
ISS represents itself as a provider of objective research and
analysis. However, CP believes that, in recommending that
shareholders support all seven of Pershing Square's nominees, ISS
overlooks important facts and fails to consider the lack of
experience of several of the Pershing Square nominees. In one
case, ISS contradicts statements made in its own report in order to
justify its conclusions. CP highlights the following
examples:
ISS recommends shareholders vote for Pershing Square nominees
Rebecca MacDonald and Paul Haggis to "restore board leadership and
imbue a sense of accountability to shareholders."
CP notes that, by her own admission, Rebecca MacDonald has no relevant industry
experience. At Pershing Square's "town hall" meeting on
February 6, 2012, Ms. MacDonald
admitted "…I have to be honest with you. I know nothing about
railroad business."
ISS notes that Mr. Haggis, as CEO of OMERS, "drove a
re-evaluation of its real estate, infrastructure and private equity
assets, resulting in a $600 million
write down." As reported in an April
3, 2008 article in The Globe and Mail titled "Who
considered the public interest on a $4-million payout?", "Sid
Ryan, president of the Ontario division of the Canadian Union of
Public Employees (whose members represent 45 per cent of the plan's
380,000 members), said 'in essence, he was fired by the
board.'" Shareholders should consider whether a CEO who was
reportedly fired by his Board of Directors after just 3 ½ years is
the right choice to "restore board leadership and imbue a sense of
accountability to shareholders."
ISS recommends shareholders vote for Pershing Square nominees
Gary Colter and Dr. Anthony Melman for "their strategic experience,
particularly as it applies to corporate turnarounds."
Neither Mr. Colter nor Mr. Melman has the deep operational
expertise possessed by many of the CP directors. To reference
only those directors specifically recommended against by ISS,
John Cleghorn ran the Royal Bank of
Canada, Tim Faithfull ran Shell Canada Limited,
Fred Green is running CP,
Ed Harris was COO of both CP and CN,
Roger Phillips ran IPSCO Inc. and
Michael Phelps ran Westcoast Energy
Inc.
ISS recommends shareholders vote for Pershing Square nominee
Stephen Tobias for his "railway
operating experience."
There is no shortage of railway operating experience on CP's
Board. Three of CP's director nominees - Fred Green, Tony
Ingram and Ed Harris -
possess decades of railroad operating experience, including at
CN. In addition to serving as CEO, Mr. Green has filled a
number of executive roles at CP, including that of COO.
Messrs. Ingram and Harris, who were added to CP's Board in
December 2011, have senior operating
experience at four of the seven Class I railroads in North America. Given the clear evidence
that CP's Board already possesses an enviable level of railroad
operating experience, the addition of Mr. Tobias to the Board is
simply unnecessary.
ISS recommends shareholders vote for Pershing Square nominee
Paul Hilal for his "knowledge of the industry and its
opportunities."
Shareholders should note that in its report, ISS itself concedes
that Mr. Hilal has "no railroad experience." Though Mr.
Hilal's own biographical information in Pershing Squares proxy
circular claims that he "has extensive railroad expertise", the
only evidence the biography contains to support this is a reference
to his brief stint accompanying Mr. Harrison to shareholder
meetings.
CP believes that ISS's justifications for recommending that
shareholders elect the Pershing Square nominees are flawed, and do
not fully reflect the facts.
Importantly, given the nature of ISS's own justifications, it
seems clear that the CP director nominees are superior to those of
Pershing Square.
6. Having failed to present to
CP shareholders a balanced analysis of the opportunities and risks
before the Company, ISS puts forward spurious reasons to vote
against CP's directors.
As noted earlier in this response, ISS's recommendations are -
in the end - rationalized by the most stunning of statements.
Confronted with a large number of "inconvenient truths" such
as Pershing Square's unsupported promise to shareholders without a
plan, a large amount of information on the public record disproving
Pershing Square's criticisms of CP's management and nullifying the
critical elements of its own "investment thesis," and the clear
evidence of the success of the Multi-Year Plan, under the close
monitoring of highly knowledgeable incumbent Board members, ISS
claims "this proxy contest is ultimately less about running a
railroad than it is about credibility and expectations." On
the basis of this statement, ISS would have you believe the
interests of shareholders are best served by voting against
directors with deep, relevant Company and Industry knowledge and
for others who have - on the public record - admitted they know
nothing of this business, its challenges or its opportunities.
Consider the following:
ISS Claim: Shareholders should not vote for
Fred Green, John Cleghorn and Tim
Faithfull due to their alleged failure 'to provide effective
leadership and accountability to shareholders in their respective
roles…'
Fact: ISS ignores that, under Mr.
Green's leadership, CP has expanded its presence in emerging
markets, such as energy, and now reliably moves large volumes of
crude by rail into the Gulf, the Midwest, the US Northeast, eastern
Canada and the west coast.
CP's market development in energy will provide up to $400 million in new annual revenues over the next
three to four years. Under Mr. Green's leadership, CP's
management team has developed long-standing relationships with
customers, government and regulatory officials, and members of the
communities in which the Company operates, which are of great value
to CP and its shareholders.
Importantly, Mr. Green is leading the aggressive and successful
execution of the Multi-Year Plan. Mr. Green is the architect
of the Plan, which has been specifically designed to generate the
best possible operational and financial results from Canadian
Pacific's unique assets and circumstances. The Plan has been
driving sustained and record operating results over the past
several quarters, and, as noted above, the first quarter of 2012
indicates that those operational successes are translating into
improved financial results - financial results that the Company
expects will be sustained and will drive shareholder value going
forward.
ISS also fails to consider that the CP Board has overseen the
development and implementation of CP's Multi-Year Plan. The
entire CP Board of Directors is diligently monitoring the execution
of the Plan, and is holding the management team accountable for the
results. ISS targets certain individual directors, but the
entire Board takes responsibility for CP's Multi-Year Plan
development and oversight of its successful implementation
including through difficult times such as the recession of
2008/2009, the winter of 2010 and the spring of 2011.
ISS unfairly calls for shareholders to withhold their votes from
Messrs. Faithfull and Harris because, in ISS's view, these
directors failed to exercise oversight and accountability on
operating performance of management. This is completely
unfounded as the individual responsibility of Messrs. Faithfull and
Harris for oversight of operations, distinct from the rest of the
CP Board, only began in December
2011, when operations oversight was given by the Board to
the newly constituted Safety, Operations and Environment Committee
("SOE"). Prior to that time, the entire Board was responsible
for operations oversight. This was made clear to ISS during
the Company's presentation to ISS and is readily available public
information. Since December
2011, operating metrics have been excellent, in some cases
at record levels and superior to CN.
ISS Claim: Shareholders should not vote for
Mr. Harris, allegedly "for the strange and ultimately unnecessary
governance issue raised by taking a Board seat to 'oversee' the
performance of the CEO he had just recently reported to."
Fact: ISS overlooks the value that Mr.
Harris, as a seasoned railroad executive, brings to the CP
Board. Mr. Harris has over 44 years of railroad experience,
and has led operations at both CP and CN. Given his
experience at each of these railroads, he is an important member of
the CP Board and the SOE Committee, and has been a valuable asset
in providing insight to the rest of the Board and the CP management
team regarding the railroad industry as well as helping oversee the
successful execution of the Multi-Year Plan.
Furthermore, in a letter from Pershing Square to CP dated
January 3, 2012, Pershing Square said
that it agreed "wholeheartedly" with CP's decision to add Mr.
Ingram and Mr. Harris to the Board, stating that "they both bring
valuable railroad industry expertise."
ISS Claim: Shareholders should not vote for
Roger Phillips for reaching the
Board's mandatory retirement age, ISS recommends, and shareholders
should not vote for Michael Phelps,
ISS alleges, 'whose long tenure has not helped shareholders avoid
the long decline relative to peers and the company's
potential.'
Fact: ISS's recommendation that shareholders
withhold their vote from Messrs. Phillips and Phelps on the basis
of long board tenure does not withstand close scrutiny. Each
of these directors, as former public company CEOs of, respectively,
IPSCO, a major North American steel manufacturing company, and
Westcoast Energy, at the time of Mr. Phelps's tenure one of the
largest natural gas infrastructure companies in Canada, have substantial relevant
experience. Each has contributed significant leadership to
the Board. Mr. Phelps, as Chairman of the Board's Management
Resources and Compensation Committee, has publicly expressed the
Board's resolve to hold CP's management team accountable for the
continued success of the Multi-Year Plan, saying at CP's 2012
Investor Day, "The expectation is of a significant, measurable,
evident, continuous improvement, or else... We understand the
expectations from the marketplace and we expect to see
improvement."
7. The ISS report contains a
number of errors.
The ISS report contains numerous inaccuracies throughout.
Among others, ISS misrepresents CP's management recommendations for
director nominees, creates a peer group for CP that is not
comprised of CP's listed Class I peers and gets the location of the
Company's annual meeting of shareholders wrong. To set the
record straight, the Company does NOT recommend CP
shareholders vote for Pershing Square nominee Gary Colter, and does recommend that
shareholders vote FOR all 16 director nominees nominated by
the CP Board. CP also calls into question why ISS would
classify Bombardier, Canadian Tire Corporation or Methanex as peers
to CP. Lastly, CP clarifies that its annual meeting of
shareholders will be held at the Sheraton Suites Eau Claire, 255
Barclay Parade S.W., Calgary,
Alberta, and not at the Fairmont Palliser Hotel, as
suggested by ISS in their report.
8. The dissemination of the ISS
report to the media prior to receipt by the Company and certain ISS
subscribers reflects poorly on ISS's professionalism and, by
extension, on the recommendation put forward by ISS.
On May 3, 2012, The
Globe and Mail posted an article publishing ISS's
conclusions and recommendations before the report was released to
all ISS subscribers. CP became aware of ISS's analysis
through this media outlet, which is clearly inappropriate for a
leading proxy advisory firm. The Company believes this
reflects poorly on ISS and that CP shareholders should take this
into account when considering whether to rely on the ISS
recommendation.
CP recommends that shareholders use the WHITE universal
proxy to select the 16 best directors to comprise the new
Board. The 16 individuals with the most votes, out of the
total of 22 individuals put forward by CP and Pershing Square, will
comprise the Board elected at the annual meeting.
Shareholders who wish to vote for some, but not all seven, of the
Pershing Square nominees are encouraged to use the WHITE
universal proxy.
Shareholders are encouraged to visit www.CPonTrack.com to access
the Company's Management Proxy Circular and for more information
about CP, the CP management team and its value-generating
Multi-Year Plan.
If you have any questions about the information contained in
this document or require assistance in completing your WHITE
universal proxy, please contact our proxy solicitation agents:
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Note on Forward-Looking Information
This news release contains certain forward-looking information
within the meaning of applicable securities laws relating, but not
limited, to our operations, priorities and plans, anticipated
financial performance, business prospects, planned capital
expenditures, programs and strategies. This forward-looking
information also includes, but is not limited to, statements
concerning expectations, beliefs, plans, goals, objectives,
assumptions and statements about possible future events,
conditions, and results of operations or performance.
Forward-looking information may contain statements with words such
as "anticipate", "believe", "expect", "plan" or similar words
suggesting future outcomes.
Undue reliance should not be placed on forward-looking
information as actual results may differ materially from the
forward-looking information. Forward-looking information is
not a guarantee of future performance. By its nature, CP's
forward-looking information involves numerous assumptions, inherent
risks and uncertainties that could cause actual results to differ
materially from the forward-looking information, including but not
limited to the following factors: changes in business strategies;
general North American and global economic, credit and business
conditions; risks in agricultural production such as weather
conditions and insect populations; the availability and price of
energy commodities; the effects of competition and pricing
pressures; industry capacity; shifts in market demand; inflation;
changes in laws and regulations, including regulation of rates;
changes in taxes and tax rates; potential increases in maintenance
and operating costs; uncertainties of investigations, proceedings
or other types of claims and litigation; labour disputes; risks and
liabilities arising from derailments; transportation of dangerous
goods; timing of completion of capital and maintenance projects;
currency and interest rate fluctuations; effects of changes in
market conditions and discount rates on the financial position of
pension plans and investments, including long-term floating rate
notes; and various events that could disrupt operations, including
severe weather, droughts, floods, avalanches and earthquakes as
well as security threats and governmental response to them, and
technological changes. The foregoing list of factors is not
exhaustive.
These and other factors are detailed from time to time in
reports filed by CP with securities regulators in Canada and the
United States. Reference should be made to
"Management's Discussion and Analysis" in CP's annual and interim
reports, Annual Information Form and Form 40-F. Readers are
cautioned not to place undue reliance on forward-looking
information. Forward-looking information is based on current
expectations, estimates and projections and it is possible that
predictions, forecasts, projections, and other forms of
forward-looking information will not be achieved by CP.
Except as required by law, CP undertakes no obligation to update
publicly or otherwise revise any forward-looking information,
whether as a result of new information, future events or
otherwise.
About Canadian Pacific
Canadian Pacific (TSX:CP)(NYSE: CP) operates a North American
transcontinental railway providing freight transportation services,
logistics solutions and supply chain expertise. Incorporating
best-in-class technology and environmental practices, CP is
re-defining itself as a modern 21st century transportation company
built on safety, service reliability and operational efficiency.
Visit www.CPonTrack.com for a copy of CP's Management Proxy
Circular and to see how Canadian Pacific is further driving
shareholder value.
SOURCE Canadian Pacific