05/09/2012 10:02 EDT | Updated 07/09/2012 05:12 EDT

Pershing Square's nominees to Canadian Pacific board gain more support

An attempt by a New York investment firm to have its nominees join the board of directors at Canadian Pacific Railway Ltd. and replace chief executive Fred Green is gaining momentum.

Pershing Square Capital Management said Wednesday that proxy advisory firm Glass, Lewis & Co. and credit rating agency Egan-Jones Ratings Co. are now backing its plan to revamp the board at the railway.

Pershing, headed by Bill Ackman, is seeking to have its seven nominees join CP's 16-member board and replace Green with Hunter Harrison, former chief executive of rival Canadian National Railway Co. (TSX:CNR).

"We are delighted that proxy advisers Glass Lewis and Egan Jones have joined ISS in strongly endorsing change at CP," Ackman said in a statement.

"Bolstered by a shareholder mandate for change, in just eight days the nominees for management change will have the opportunity to reset the board’s culture, deliver fresh views and perspectives and help lead CP through a CEO change and toward a brighter future."

Pershing Square is CP's largest shareholder with a 14.2 per cent stake in the railway.

In a report, Glass Lewis lead analysts Mark Grothe and Reuben Edelson noted the Pershing Square presents "a compelling case for the need to overhaul CP's current leadership."

The firm recommended shareholders vote for Pershing's seven nominees as well as seven of the company's nominees to the board.

"We also agree that simple board representation isn't likely to produce the results that shareholders desire," the analysts wrote in the report.

"Rather, an injection of all seven of the dissident's nominees is warranted, in our view. Further, we support Pershing Square's plan to replace Mr. Green. While Mr. Harrison's track record suggest he's could realize substantial improvements at the company, we will leave the selection of the best CEO candidate for CP to the newly reconstituted board of directors."

The support from Glass Lewis and Egan Jones follows the backing of proxy advisory firm ISS and the Ontario Teachers' Pension Plan.

Shareholders will vote on the nominees at the railway's annual meeting, set for May 17 in Calgary.

The railway noted that Glass Lewis did back seven management nominees, including former Suncor chief executive Rick George, former deputy prime minister John Manley, former Corby Distilleries chief executive Krystyna Hoeg, James Richardson Sons chief executive Hartley Richardson, former Xcel Energy chief executive Richard Kelly, former Cargill vice-chairman David Raisbeck and lawyer Linda Morgan.

"CP continues to aggressively and successfully execute on the multi-year plan, delivering continued record operating performance in April, which marks the start of the fourth consecutive quarter of record operating performance," CP said in a statement.

The railway said it improved its operations for April as measured by a number of metrics including car miles per car day, terminal dwell and train speed.

Desjardins Capital Markets analyst Benoit Poirier said Wednesday that the latest backing by Glass Lewis and Egan Jones further supports Pershing's push for change.

"We continue to believe that Hunter Harrison’s arrival at CP is largely priced into the stock, and based on recent surveys, recommendations from proxy advisory firms and our discussions with institutional investors, we expect overwhelming support in favour of Pershing at CP's annual general meeting," Poirier wrote in a report.

CP, which raised its dividend last month, has said it is building on significant momentum and continuing to improve operations, which is resulting in improved financial results.

However Pershing Square has been critical of the pace of improvement and said Canadian Pacific can improve its operating ratio to 65 per cent by 2015 — a target that CP says can't be achieved in that time frame.

CP, which reported an operating ratio of 80.1 per cent in its first quarter, has set a target of 70 to 72 per cent operating ratio for 2014 and between 68.5 per cent to 70.5 per cent for 2016.

The ratio represents the percentage of revenue required to pay for operations, so investors want railways to push the number lower in order to boost profitability.