"Because the dissidents have demonstrated a compelling case that poor board oversight has allowed the company's performance to drift further and further below both its peers and its potential over at least half a decade, it seems clear that change on the board is needed," said Institutional Shareholder Services Inc.
In the report released Thursday, two weeks before shareholders have their say at CP's annual general meeting, ISS recommends shareholders vote for all seven of the nominees the New York hedge fund, which owns 14.2 per cent of CP, wants on the board of directors.
The advice firm is also backing nine of the nominees CP (TSX:CP) has put forward for the 16-member board, including newly-retired Suncor Energy Inc. (TSX:SU) CEO Rick George and former cabinet minister John Manley.
Pershing Square managing partner Bill Ackman is included on both the management and dissident slates.
ISS recommends shareholders vote out CEO Fred Green, whom Pershing Square wants to replace with Hunter Harrison, ex-boss of rival railroad Canadian National (TSX:CNR).
"In the short term, we believe Green has not served shareholders well enough as a director to merit support in this proxy contest," ISS said. "Over the longer term, we would expect to see the company appoint its anointed CEO to the board."
Nor does ISS recommend CP shareholders vote for chairman John Cleghorn, former chief of Royal Bank of Canada (TSX:RY), who has steadfastly backed Green's leadership.
Ed Harris, who has held senior management positions at both CP and CN and has also been a vocal supporter of Green, also did not make the ISS cut, despite his many years of railroad experience.
"Harris' repeated public pronouncements throughout this contest that Green is the right CEO for CP, despite all the evidence to the contrary, raises questions about his commitment to facing hard truths in the service of all shareholders," said ISS.
CP said in a release that ISS has reached the "wrong conclusion" and that is analysis was "flawed."
"The CP board has significant breadth and depth of expertise and experience in both the railroad industry and other complementary fields and is the right board to drive shareholder value by guiding the company through the successful execution of the multi-year plan," it said.
"The entire board of CP is holding Fred Green and the CP management team fully accountable for the success of this plan."
It reiterated that its board is unanimous in its view that replacing Green with Harrison "would delay and damage CP's value-generating plan, and represents unwarranted risk to shareholder value at a critical time."
The crux of CP's plan, as well as Pershing's criticism, revolves around how the railway will improve its operating ratio — the percentage of revenue required to pay for operations — to boost profitability. CP has set a target to bring the ratio down from 80.1 per cent to 70 to 72 per cent for 2014, but Pershing says it can do better and achieve 65 per cent by 2015.
ISS said CP has "significantly underperformed" other North American railroads. In the five-year period ended April 30, CP had a total shareholder return of 19.4 per cent while its peers delivered between 56 and 117 per cent.
The firm doesn't buy CP's arguments that factors beyond its control have affected its performance, like the 2008-2009 downturn and structural factors that put it at a disadvantage to other railroads.
"If commodity cycles can work against you one year they must, one has to believe, work for you in other years, so that the dismal trend relative to peers does not extend unbroken. Strangely, this does not appear to have been the case," ISS said.
ISS also blasted a study Canadian Pacific commissioned earlier this year weighing the feasibility of its plans versus the targets put forward by Pershing Square.
"One helpful signal that a corporate culture may lack accountability might be the impulse, when faced with a potential proxy contest over poor performance, to hire a consultant — five senior partners, shareholders have been soberly informed, working more than 5,000 hours over four months — to measure what is impossible to achieve, then use those results to explain why management and the board cannot be held accountable for underperformance."
And ISS noted a "flurry" of management changes at CP during Green's six-year tenure. The company has changed chief operating officers five times and swapped out chief financial officers three times, it said.
One or two management changes would be understandable, ISS said, but the level of turnover among CP executives is "akin to playing Whack-A-Mole in the C-Suite."
"How, one might ask, is it possible to plan for the long term, much less execute on those plans, which succession planning in the executive suite looks more like crisis management?"
Canadian Pacific shares fell 73 cents to $76.71 in afternoon trading on the Toronto Stock Exchange.