Could CN be run out of Chicago?
One of Paul Tellier's likely successors hangs his hat south of the border

Peter Diekmeyer
Special to The Gazette

When a CEO is as identified with his company's success as Canadian National's Paul Tellier, succession is a big concern. But speculation becomes even more rampant the closer the top dog gets to traditional retirement age.

An intriguing twist to speculation about CN's next CEO, is the fact that one of the key contenders is American, raising the possibility that increased decision making authority could be transferred couth-of-the-border.

CN officials take pains to stress that 62-year-old Tellier - the man widely credited as the architect of the company's string of sales and profit increases and its impressive record of wealth creation for shareholders ­ is in wonderful health and will be around another three to five years.

However, although there is no designated heir, Chicago-based Hunter Harrison, 57, the company's executive vice-president and chief operating officer looks increasingly well-positioned to succeed Tellier when he decides to leave.

While our initial reason for interviewing Harrison was to ask about the implementation of scheduled railroad service - for which he was named Railway Age magazine's Railroader of the Year - talk quickly turned to whether Harrison has what it takes to run the railroad.

"It's not an issue right now," said Harrison, in a booming baritone voice that gives the impression of someone used to barking out orders. "If Paul (Tellier) decides to retire, the board of directors is going to have to carefully evaluate who the best person is."

Succession might not be an issue officially, but unofficially, there are plenty of signs that Harrison is first in line. For one, Harrison was chief executive officer of Illinois Central when CN bought the company in 1998, and he thus has experience running a major railroad.

"I was getting ready to take a few months off. But Paul (Tellier) asked me stay on," said Harrison, who started as a carman oiler 38 years ago with Frisco St. Louis in Memphis, a company that later became part of Illinois Central. Roughly 25 or 26 job changes and 16 or 17 moves later, Harrison was running the show.

As Illinois Central's CEO, he quickly developed a reputation as a tough manager. When CN took over, the company's operating ratio was one of the best in the industry. But CN is bigger than Illinois Central ever was, and Harrison's most recent experience is as second in command.

When Bernard Landry became Quebec's premier after years of being second in command, he remarked that while the promotion was only one step on the organizational chart, it was more like 10 when you consider the increased stress and responsibilities that come with being top dog in a large organization.

But according to Harrison who has held both CEO and COO jobs, the difference
between No. 1 and No. 2 is not always that big.

"I would take issue with (Landry's comments)," Harrison said. "We work as a team. We like to say that Paul runs the company and I run the railroad."

Another clue to Harrison's status within the company can be found in CN's 2000 annual report. In the official photo, company executives are lined up across a two-page spread, reminiscent of pictures of the old Soviet politburo on the May Day parade-reviewing stand.

Harrison is standing beside Tellier. To Harrison's left, are a dozen CN execs figuratively cut off from Tellier. An amateur Kremlinologist would interpret the photo as meaning that Harrison is in good standing.

Another sign of Harrison's status is his compensation package. According to a CN information circular, Harrison drew more than $12 million in salary and incentives during 2000, compared with $2.28 million for Tellier. Though most of the difference is from Harrison's incentive bonuses, which were accumulated over several years, the shear dollar amount speaks volumes.

Operationally, the big feather in Harrison's cap was the credit he gets for the implementation of scheduled railroad service.

Although it seems obvious that railroads should be able to guarantee customer's delivery dates, until recently, this was not so. North American railroad companies simply waited
for cargo wagons to accumulate until their lines were full before sending off a train.

Customers needing guaranteed delivery had to ship by truck. Implementing scheduled service was a risk, because it meant sending a train off even if it wasn't filled to capacity. But the move became a big hit with customers and CN is today moving the same freight with 800 fewer locomotives and 22,000 fewer cars in its fleet than in 1998.

Harrison's biggest liability, and possibly the reason that he has not been designated as successor, is that he is from the U.S. This would not be a problem in most companies, but CN is a national icon in Canada. When the company was privatized in the mid-1990s, one of the conditions was that its head office would remain in Montreal.

But CN's focus is increasingly turning south. Last year, the company quietly announced that revenues from the U.S. and from cross-border traffic for the first time made up more than half of its sales.

CN's Y-shaped railroad grid, which stretches from Prince Rupert to Halifax and into the U.S. through Chicago to New Orleans, has been carefully structured to take advantage of recent increases in north-south freight traffic.

So, while it is a political liability, the fact that Harrison is from the U.S. puts him in an ideal position to carry on the company's southern growth strategy, which could eventually bring CN into Mexico.

According to one analyst who follows CN, Harrison's nomination as CEO would not present as much of a political problem today as it would have five years ago. "It's becoming more of a U.S. company," said the analyst. "So it's only natural that there are more Americans among top management."

In today's wired world, in which CEO's spend a good part of their lives in a plane, one can argue that the phrase "head office" has lost much of its former meaning. When Claude Lessard was CEO of Cossette Communication Group before moving upstairs to chairman, he used to say that the company's head office was located "wherever I plug in my laptop."

However if Harrison were to be named CEO, there are several ways the nomination could be finessed to make it more palatable politically. For one, CN could announce that he was renting an apartment in Montreal. It is doubtful that anyone would actually check, to see how many days he spent there.

Montreal has a long tradition of hosting the head offices of companies, whose real decision making authority has long since effectively moved elsewhere. Seagrams, Royal Bank and Bank of Montreal come to mind.

In fact, since Harrison is currently supervising railroad and marketing operations from his Chicago office, and his Montreal office is mostly empty, it seems that CN is already in large part being run from the U.S.


Photo caption: Hunter Harrison, CN's executive vice-president and COO, is a good candidate to succeed Paul Tellier, when he retires.


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