(The following report by Brent Jang appeared on the Globe and Mail website on April 5.)
TORONTO — A West Coast mutual fund is questioning the bonus awarded to Canadian National Railway Co.’s chief executive officer amid concerns over high-profile derailments.
Ethical Funds Inc. has submitted a shareholder proposal to compel CN to explain why Hunter Harrison’s bonus in 2005 totalled $3.85-million (U.S.), almost three times higher than his base salary of $1.37-million.
The Vancouver-based mutual fund wants CN directors who belong to the compensation committee to examine the link between executive pay and safety performance at Canada’s largest railway.
“CN experienced declining safety performance, as illustrated by several high-profile derailments in 2005, including an environmentally destructive spill at Lake Wabamun” in Alberta, according to the proposal submitted by Ethical.
Other notable CN derailments in 2005 occurred on former BC Rail tracks, including one that spilled corrosive sodium hydroxide into the Cheakamus River in British Columbia, said Inhance Canadian Equity Fund, which is backing Ethical’s push for greater accountability from CN.
Vancouver-based Inhance has also filed its own shareholder proposal to force CN to “conduct a track safety audit on policies, procedures and technical practices on the BC Rail line.”
In 2004, Montreal-based CN acquired BC Rail’s freight operations from the B.C. government.
Jennifer Coulson, Ethical’s manager of sustainability, said that outside of Canada, two CN freight trains collided in Mississippi in 2005, killing four employees.
“2005 was a very poor year for CN’s safety performance — it was disastrous,” she said.
Ethical’s proposal states that it wants CN to “link executive compensation to environmental, social and governance success.”
Ethical owns about 500,000 CN shares while Inhance holds 12,000 CN shares.
CN directors are urging shareholders to vote against the mutual funds’ proposals at the railway’s annual meeting April 24 in Moncton.
CN argues that its compensation committee has already scrutinized Mr. Harrison’s pay for both 2005 and 2006. The committee has deemed that his pay packets properly reflect the company’s strong financial footing — CN posted a profit of almost $1.6-billion (Canadian) in 2005 and a record $2.1-billion profit in 2006.
CN also stresses that in 2006, it spent $1.5-billion, or nearly one-fifth of its annual revenue, on capital programs that helped maintain rail safety. CN’s capital spending budget this year will rise to $1.6-billion.
The railway acted swiftly after the spike in derailments in 2005, well before the mutual funds raised concerns, CN spokesman Mark Hallman said. “The proof is in the pudding in 2006,” he said, noting that the number of CN main-track derailments last year in Canada fell by 26 per cent to 76.
“Without losing sight of the derailments, CN was amongst the safest railways on the continent,” according to CN’s rebuttal in its latest management information circular.
The freight carrier added that it’s closely monitoring track safety in British Columbia. “A detailed plan of action to improve the safety and maintenance of the BC Rail line and to decrease the number of accidents has thus already been put in place,” CN said in its circular. “Safety is a core value at CN.”
Inhance pointed out that two CN employees died after a train derailed off a cliff near Lillooet, B.C., in June, 2006. Dermot Foley, Inhance’s vice-president of strategic analysis, said he’s worried that CN is operating B.C. trains that are too long and running them too fast.
“They have to do a better job of keeping the trains on the tracks,” he said from Vancouver.
In the past, CN has tried to buy Ontario Northland Rail from the Ontario government, but Queen’s Park rejected offers for the provincial Crown corporation. Last Friday, sulphuric acid spilled into the Blanche River in Northern Ontario after an Ontario Northland train derailed.
Mr. Harrison’s compensation totalled $7.3-million (U.S.) in 2006, according to CN’s circular. His remuneration last year included a $1.5-million salary and $4.2-million bonus, but he didn’t cash in any options. In 2005, Mr. Harrison’s pay packet totalled $46.4-million, including a $3.85-million bonus, $22.5-million in option gains and $17.3-million in long-term incentive plan payouts.
The circular said calculations for Mr. Harrison’s bonuses for 2005 and 2006 already took safety into consideration, among a “balanced set” of corporate and personal goals.