04/18/2012 04:43 EDT | Updated 06/18/2012 05:12 EDT

Ex-minister Strahl warns against reverting to past in Canadian Pacific fight

CALGARY - An activist investor's push to improve efficiency at Canadian Pacific Railway Ltd. may come at the expense of customer relationships, former federal cabinet minister Chuck Strahl says.

Strahl, who once held the Agriculture and Transport portfolios, said in an interview Wednesday it's something CP (TSX:CP) shareholders ought to think about ahead of the company's May 17 annual meeting, when a months-long proxy fight will come to a head.

CP's biggest shareholder, New York hedge fund Pershing Square Capital Management, says a change in CP's top management is needed to improve the railway's operating ratio — expenses as a percentage of revenues, and a key performance measurement in the industry.

"I just urge people, don't let that be the be-all and end-all," Strahl, who left government last year, said from Chilliwack, B.C.

During his time in cabinet, Strahl said he fielded complaints from customers of both CP and its rival Montreal-based Canadian National Railway Co. (TSX:CNR).

As Ottawa became less involved in the sector during the 1990s, railways began to adopt a "single-minded" focus on improving operating ratios, which was the right thing to do at the time, Strahl said.

But what resulted from that efficiency drive was that other concerns, like the satisfaction of customers, played "second-fiddle."

"Those shippers felt that increasingly like nobody cared. Their concerns — they were also in a worldwide competitive squeeze — got short shrift," said Strahl.

"They were just told, this is the way it's going to be, take it or leave it."

The industry has since swung back to a greater focus on customer service, and it's in everybody's best interests that it stay that way, said Strahl, who has no investment holdings or any other involvement in CP or CN.

Pershing Square wants to replace CP CEO Fred Green with Hunter Harrison, CN's ex-CEO. Harrison is highly regarded by many for his initiatives to improve efficiency at CN, but a number of major CP customers have said they want CP's current management team to stay in place.

Some people argue that if Harrison, who left CN in 2009, could make a comeback "that will be just like the good old days," Strahl said.

"But my point is, those good old days were from a different era. All that focus on operating ratios was necessary for a period."

But companies are realizing that if they just keep pushing, they'll lose customers and — in what Strahl would be a "bigger disaster" — the government might have to step in with more regulations if the tone gets acrimonious enough between railroads and customers.

"It just gets into a hopelessly inefficient way to run a business, and especially when you're trying to run an efficient railroad."

"I think Hunter Harrison did a good job in his era. But what's clear is that what he did back then, you cannot do that now."