David George-Cosh

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Canadian National Railway Co. is firing back against claims made by one of its largest shareholders that its operational performance should result in sweeping management and board changes, stating that those critiques are "highly suspect" and "misleading." 

The Montreal-based railroad operator issued a statement Friday detailing how TCI Fund Management Ltd.'s rationale behind its plan to lead an activist campaign against the company is rife with inconsistencies and shows an "obvious conflict of interest" given its ownership stake with its rival Canadian Pacific Railroad Ltd. 

"CN maintains an open and constructive dialogue with its shareholders, including discussions about areas where we can improve our business performance, but we will not indulge unfounded and bad-faith arguments that serve the interests of one shareholder over others – or of one of our competitors over CN," said CN Rail Chief Executive Officer JJ Ruest in a statement. 

In the wake of CN Rail's failed bid to acquire Kansas City Southern (KCS), TCI increased its ownership stake in the railroad to 5.2 per cent and has launched a possible proxy fight replacing Ruest with industry veteran Jim Vena and proposed four new directors with railroad experience. 

In response, CN Rail outlined a strategic plan that highlights how the company plans to add $700 million in additional operating income, slash its operating ratio - the percentage of revenue consumed by operating costs - to 57 per cent from 61 per cent and purchase as much as $5 billion of its stock by 2022. In a conference call announcing the plan last month, CN Rail Chief Financial Officer Ghislain Houle said the company expects to lay off as many as 1,050 staff to meet those targets. 

In Friday's statement, CN Rail said that TCI's portrayal of the company's financial and operating performance is misleading as when calculating those metrics on a trailing 12-month basis, they are "much more meaningful to demonstrate trends in underlying performance." CN Rail also said TCI "mischaracterizes" executive compensation and the company's operating ratio levels. 

Aside from its board and management proposals, TCI hasn't put forth a "credible" plan on how the company should fix its problems, CN Rail said. It also noted how the U.K.-based hedge fund already voted to approve board compensation and climate change-related moves one week after its bid for KCS. 

CN Rail added that TCI only begun to increase its ownership in the railroad only after the company raised its bid for KCS and that submissions tied to the deal sent to a U.S. transportation regulator "have been costly and may yet be problematic for CP." Aside from its stake in CN Rail, TCI owns about 8.3 per cent of CP Rail. 

A TCI representative wasn't immediately available for comment. 

The latest war of words between the two comes days after a letter TCI sent to CN Rail's board criticizing the company for a perceived "egregious breach" of disclosure related to the resignation of a director last month that raised securities and corporate governance issues. 

TCI criticized CN Rail for not immediately disclosing Julie Godin's removal from its board on Sept. 16, but the company said they filed her departure on an online insider recordkeeping site as well as on the company website