CSX Has Weak Defense Against CEO's Strong-Arm Tactics

(Bloomberg Gadfly) -- Hunter Harrison is passing Go and he wants his $84 million.

The lauded railroad turnaround specialist was officially installed as CEO of CSX Corp. late Monday as the company acquiesced to most of the demands of the activist investor backing his candidacy. In an interview with the Wall Street Journal last month, Harrison had lamented an earlier breakdown in negotiations over compensation and board seat disagreements as "chest pounding," calling for the two sides to stop going "through these games which create nothing but further anxiety for the shareholders." Yeah, about that.

Under this recent rapprochement, Mantle Ridge, led by former Bill Ackman lieutenant Paul Hilal, gets to have a say on five board seats, instead of the six it wanted, while CSX is granting Harrison a four-year contract, rather than the two-year term it originally proposed. But the glaring exception to this Kumbaya moment is the $84 million in benefits and awards that Harrison forfeited in order to leave his CEO post at Canadian Pacific Railway Ltd. ahead of schedule and an associated tax indemnity that may amount to as much as $23 million.

Harrison and Mantle Ridge still want CSX to foot this bill, while CSX has said this is "inappropriate" and wants to put the matter to a shareholder vote at an annual meeting likely to be held this spring. While it's not uncommon for companies to make poached executives whole, CSX didn't make Harrison any job promises, nor was it involved in the negotiations to entice him to leave that money on the table. Mantle Ridge was. 

It's hard to blame someone for wanting to claim a big pile of money he's already earned. But apparently, when Harrison told the Journal he was willing to reconsider the terms of his compensation package, keeping part of that obligation with Mantle Ridge or sacrificing some of that payout wasn't what he had in mind. Per CSX's press release on Monday, Harrison will only take the CEO job if investors vote to pay for the forfeited Canadian Pacific windfall. That may not qualify as chest pounding, but it sure sounds like strong-arming.

At the end of the day, shareholders will probably go for it.  More than $10 billion has been added to CSX's market value since Mantle Ridge started its campaign to install Harrison as CEO and that could grow if analysts are right about the kind of improvements he will be able to generate.

All but a few of the analysts tracked by Bloomberg with price targets have raised their outlooks for CSX in the last few months. Citigroup and RBC Capital Markets see the potential for CSX's operating ratio, a measure of profitability where a lower number is better, to drop to 58 percent by 2020, compared with about 69 percent last year.

But the debate over this payout brings back the initial question of why Canadian Pacific let Harrison out of his non-compete in the first place. Sure, it must be nice to not have to pay Harrison $84 million, but I can't think that Canadian Pacific sent him off to fix CSX out of the goodness of its heart. While Mantle Ridge reportedly isn't seeking to orchestrate a merger, Harrison and his Canadian Pacific replacement Keith Creel have long espoused the benefits and inevitability of a large railroad deal. If that's at all in the back of his mind, he's one step closer to both $84 million and a friendly deal. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

1. The employees whose jobs have already been eliminated under CSX's existing margin improvement efforts and those whose positions may be casualties of Harrison's quest for efficiency may feel differently.

To contact the author of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.