(The following story by John Shmuel appeared on the Financial Post website on June 8, 2010.)
MONTREAL — Hunter Harrison knew he was dealing with a broken corporate culture when he arrived at Canadian National Railway Co. in 1998. Employees at the Crown corporation were working only four hours a day and being paid for eight. Site managers allowed workers to go home early in the hopes they would move trains faster. Things needed to change.
“Change is difficult. Human beings don’t like change,” says Mr. Harrison, CN’s former CEO who retired from the company last year.
The Tennessee-born “railroader” faced an interesting dilemma in tackling CN’s stagnant corporate culture. CN was a profitable company that was relatively competitive when Mr. Harrison arrived from Illinois Central Railroad as part of an acquisition deal in 1998. At the time, CN had revenue of $4-billion and a bottom line of $569-million. Its operating ratio sat at 75.3%, a far cry from the nearly 100% ratio plaguing the company prior to the company’s 1995 privatization. But there was also a lot of inefficiency and bureaucracy still bogging the company down. Its operations had been divided between Vancouver, Edmonton, Winnipeg, Toronto and Montreal for political reasons. Early quits, the widespread phenomenon of workers being paid more hours than they actually worked, permeated every level of CN.
“If you peel me back, I’m just a rough and tough operating guy,” says Mr. Harrison, talking about how he set about transforming CN’s corporate culture. One of the first things he did when he came to the company was expose early quits and put an end to them. He also introduced precision railroading, a concept that applied railroad scheduling to the time cargo arrived, and not just the time a train got into its station.
Within four years, Mr. Harrison, working as executive vice-president and COO alongside CEO Paul Tellier, doubled CN’s bottom line to $1.05-billion and increased revenue by $2-billion. CN’s operating ratio shrank to 70.5% by the end of 2002.
Claude Balthazard, director of HR excellence at Human Resources Professionals Association, says that type of change is particularly impressive considering it is difficult to transform ingrained corporate culture at companies like CN, which has been around since 1918.
“What you have to overcome is inertia, especially when people grow comfortable with the current culture,” he says.
“This is especially true if you have a culture that was very successful at one point. Then it becomes very difficult to change.”
Mr. Balthazard says that the key to bringing about cultural change at an institution as old as CN is in promoting small victories early on. Whether it is highlighting even minor profits or circulating announcements about new deals, employees need to kept abreast of the gains a company makes directly from the change.
“It makes the sacrifice more palatable. You have to show there is a payoff early on,” he says.
In the case of CN, Mr. Harrison called attention to the company’s stock performance as a gauge of success. CN’s IPO was issued in 1995 after the Canadian government decided to privatize it, hitting the market with a price tag of $27 a share (or a split-adjusted price of $4.50). If an investor had bought $70,000 worth of CN shares in 1995, and reinvested the dividends the stock paid, by 2005, that investor would have made nearly $1-million.
“A lot of our investors were actually company employees. And when they saw how well the company was doing, their chests swelled up with pride,” says Mr. Harrison, who notes that 60% of employees own shares in CN.
Mr. Harrison was eventually promoted to CEO of CN in 2003 after Mr. Tellier stepped down. But rather than stop instituting corporate change at CN, Mr. Harrison continued.
“It was an ongoing effort. I wanted to bring lasting change that would become ingrained into the company,” he says.
When Mr. Harrison grabbed the reins in 2003, he found that early quits were still occurring in some parts of the company. The CEO decided to solve the problem by trying something new. Mr. Harrison started hosting “Hunter Camps” — getaways of 20 to 25 employees where he would barbecue food for workers and engage them at his home. He also started encouraging talent retention — instead of focusing on seniority, employees with high performance levels would be rewarded.
That approach worked to cut down early quits significantly, and consequently, vastly improved the company’s bottom line. By the time Mr. Harrison retired in 2009, CN was worth $25-billion in market capitalization, or more than 10 times what it was when the company went private in 1995.
“We set our goals. We knew what we wanted to do and we stuck by it,” says Mr. Harrison. “There’s a very successful corporate culture at CN now. And that’s not going to change anytime soon.”