01/20/2012 11:37 EST | Updated 03/21/2012 05:12 EDT

CP, under fire from activist investor, says it has customer, shareholder support

CALGARY - Canadian Pacific's enbattled CEO fired back at his detractors Friday, saying some of the railway's biggest customers believe the company is on the right track despite a major shareholder's highly public demand for his removal.

In an internal memo to staff made public by the railway on Friday, Fred Green said coal miner Teck Resources Ltd. (TSX:TCK.B) and fertilizer maker Mosaic Co. (NYSE:MOS) are happy with the railway's service.

"Our performance improvements have been well received and we continue to focus on strengthening our valuable partnerships with customers," Green told employees.

A New York fund manager with a 14.2 per cent stake in CP (TSX:CP) has said repeatedly he wants Green out and is looking to shake up the company's board of directors to achieve that goal.

Pershing Square's Bill Ackman, who has a reputation as an activist shareholder, wants to replace Green with Hunter Harrison, the former boss of the railway's main rival, Canadian National Railway Co. (TSX:CNR).

Teck — Canada's largest publicly traded mining company — is CP's biggest customer and recently increased the volume of business it gives to the company, which ships coal mined in southeastern B.C. to the Port of Vancouver for export.

Teck CEO Don Lindsay is quoted in Green's memo as being "pleased" with the level of service Teck has received.

"Fred Green understands that to grow the economy, especially in Western Canada, we need to work together to get the most out of the rail network," Lindsay said.

Marcia Smith, Teck's senior vice president of sustainability and external affairs, said in an interview that the relationship with CP is "very positive," and that the spat between Pershing Square and management has not appeared to be a distraction from Teck's standpoint.

Pershing Square has not approached Teck to get its take on how the railway is performing, she said.

In the note, Mosaic CEO Jim Prokopanko said his company has had a "long and fruitful history" with CP.

"CP Rail, under the leadership of Fred Green and his team, has proven to be a key business partner by helping us strengthen our distribution network and our competitive position in conjunction with our multibillion-dollar potash expansion projects," Prokopanko said.

Green also said chairman John Cleghorn, a retired chief executive of Royal Bank of Canada (TSX:RY), has been meeting with shareholders, who appreciate efforts the railway has made to make its operations run more smoothly.

"Specifically, shareholders have commended our improved customer confidence and our improved efficiency," Green wrote.

He said it's possible to achieve an operating ratio — operating expenses as a percentage of revenue — in the low 70 per cent range, from its current level of 78, over the next three years. The lower the operating ratio, the better a railroad is seen to be performing.

But he said a decrease in operating ratio to 65 isn't achievable in such a short span, something Ackman contends would be possible if Harrison were at the helm.

"This pace of improvement, from this starting point, has never been achieved by any railway's management team," Green wrote.

"In fact, it took Hunter Harrison seven years to lower CN's OR from 75 to 65 during a strong economic period and one in which CN significantly grew revenues through acquisitions."

Cleghorn has made similar remarks in previous statements released to the press.

While Green said he's encouraged by progress the railway has made to boost efficiency, he stressed the need for even greater improvements.

"We are determined to further accelerate the pace of change at CP and to safely deliver significantly improved operational and financial results," Green said.

"Even though we did not choose to be the target of Pershing Square's public demand, there is a silver lining. The situation shines a spotlight on CP as we continue with our efforts to achieve superior performance for the benefit of both our customers and shareholders."

CP shares fell 1.4 per cent to $71.56 on the Toronto Stock Exchange.