Wednesday, October 17, 2007

Children's Investemt Fund Calls Out CSX Management

As a happy shareholder of CSX (CSX), I am both upset and encouraged by the recent letter sent by the Children's Investment Fund to management.

In the letter, the Fund call for:

* Separate Chairman and CEO roles. TCI believes, and it is widely recognized, that this is best practice in corporate governance. TCI is concerned that Chairman and CEO Michael Ward’s interests are not aligned with those of CSX shareholders.
* Refresh Board with new independent directors. The CSX Board has many longstanding directors and virtually no railroad management experience, which leaves the Board effectively unable to challenge management and provide appropriate oversight. CSX’s Board should be refreshed with new independent directors with the experience and courage to do so.
* Allow shareholders to call special meetings. The Board should amend CSX’s bylaws to allow shareholders to call special meetings, a shareholder proposal that was approved overwhelmingly by shareholders at CSX’s last annual meeting.
* Align management compensation with shareholder interests. Michael Ward has been the highest compensated CEO in the rail industry over the past two years, despite CSX being operationally outperformed by its peers. TCI urges the Board to align management compensation with shareholder interests. This includes tying long-term compensation to returns on capital rather than to the operating ratio, which can be easily manipulated.
* Present plan to improve operations. CSX is last or near last among the five major North American railroads on virtually every important operational and financial metric. CSX must present to shareholders a detailed operating plan with specific long-term operational and cost targets to address this under-performance. The existing operating ratio targets can be achieved with no operational improvements.
* Justify 2007-2010 capital spending plan. TCI believes shareholder value is created through sustainable investment in maintenance, infrastructure and training. TCI is concerned that management’s current illogical and undisciplined capital spending plan puts at risk CSX’s ability to invest long-term because it undermines shareholder confidence and therefore access to capital.
* Improve relations with labor, shippers and shareholders. TCI believes the Board and management have taken an unnecessarily adversarial approach to these key constituencies, resulting in strained relations instead of collaborative solutions. TCI believes the interests of the major stakeholders are largely aligned, and success is best achieved through open and constructive relations with them.

In August I wrote about my purchase (my son's actually) of CSX shares and the tremendous results we have enjoyed. After reading the TCI letter, it would appear those results are more a function of dramatically improving business conditions rather than management acumen.

That does make the letter a good news bad new scenario. It is bad news because the company could be run much better. It is good news because it means that even after an almost 100% gain in the stock, when management gets its act together (or there is a change) there is still plenty of improvement still to be had. That, is very good news indeed.

CSX management has spent the better part of the past year patting itself on the back for what can only be described as a railroad renaissance chiefly being enabled by the biofuel boom in the US. Looking at the illustrations and getting further into the details if TCI's plans, it is obvious that CSX holders should be doing much better.

I back the TCI proposal 100% and call on management to adopt the letters initiatives. Their ignoring of TCI to date is unacceptable and they seem to have forgotten who owns the company. TCI is a larger shareholder than any single member of management and that single fact determines that what they have to say requires at least the common courtesy of being heard and not dismissed.

Management seems to have forgotten who they work for.

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