Activist "Stakeholders".

For years now, activist "stakeholders" have shaking down the the the pusillanimous suits that tend to reside on the boards of corporate America-
for pet causes-even when their "stake" doesn't include ownership.

It is actually unusual that an activist group owns some stock and railrods really haven't had a lot of profit to abscond until relatively recent years. This story is also unusual in that the activists want more profit not just some cash.

Secifically, for those who don't know it, CSX is under some some attack by The Children’s Investment Fund Management (UK) LLP (“TCI”), which describes itself as "a London-based asset manager founded in 2003 which manages The Children’s Investment Master Fund. TCI makes long-term investments in companies globally. The management company is authorized and regulated in the United Kingdom by the Financial Services Authority. A portion of TCI’s profits go to The Children’s Investment Fund Foundation, a non-profit organization focused on improving the lives of children living in poverty in developing countries."

Specifically, TCI alleges (from their October 16 letter to the CSX Board):"It is our view that CSX management does not fully understand the economics of the business, is cavalier about potential risks, is undisciplined about spending, is unrealistic about future prospects, is complacent about operational under-performance and is unnecessarily adversarial towards labor, shippers and shareholders. We hold the Board accountable for these failings."

While TCI's is putatively a the food line for a charitable organization, the partner signatories brandish Harvard and Stanford MBAs and the organization owns 17.8 million shares, or 4.1% of CSX. They are big bucks.

While some of their criticisms may be valid, its pretty clear its not because TCI is staffed with railroad experienced managers, which is what they claim to be a key deficit in CSX' board. Moreover, one has to wonder why anybody would buy such a stake in a company so described. Its a significant block of money, but not one that can effect change in the board. None of their letters are going to raise the stock price. I'm also not sure how they have such insight into, for example, CSX's capital expenditure (aka capex) budget, because of all the things on company balance sheet, the propriety of the level capital expenditures might be the hardest thing for any outsider to evaluate.

However another sentence in their missive may be more telling. "Failure to take these actions would, in our opinion, be negligent of your duty to shareholders." Sounds like they are threatening a lawsuit (perhaps Trainlawyer could opine on what actions a minority shareholder could take against CSX directors, and whether D&O insurance would protect their personal assets)

While this corporate soap opera wouldn't seem to have much to do with running mainline excursions, you can bet that CSX isn't going to risk buttressing claims like "cavalier about potential risks" by allowing steam excursions. The benefits are indefinite and immeasurable, but the cost of a lawsuit wouldn't very conspicuous and calculable.

Now you know why the operating agreements start the specification for liability at $25,000,000.

wouldn't very conspicuous and calculable.

should be would be, oops. Dang typos.

Could it be the other way around? Is CSX giving the charity a hard and adversarial time about running a benefit passenger charter with say, the Polar Express?

Could be wrong, but it sounds like the charity is much more concerned about short term return rather than long term value growth, which can include such things as reinvestment in the business rather than higher immediate dividends. I'd hate to think that a British charity believes it knows more about American railroading than CSX. But then, allegations don't have to be factual, and any shareholder can ask for a business action.

Consider what has happened to Hershey........

dave

"It is our view that CSX management does not fully understand the economics of the business, is cavalier about potential risks, is undisciplined about spending, is unrealistic about future prospects, is complacent about operational under-performance and is unnecessarily adversarial towards labor, shippers and shareholders."

Since I've decided I don't give a damn anymore, I've got to say I don't have any serious disagreements with this group's characterizations of my employer.

Gosh, they didn't even mention CSX sending their lady lawyer out to intimidate sellers on eBay who list items that have a CSX logo.

MX

"It is our view that CSX management does not fully understand the economics of the business, is cavalier about potential risks, is undisciplined about spending, is unrealistic about future prospects, is complacent about operational under-performance and is unnecessarily adversarial towards labor, shippers and shareholders."

I don't think there are many class 1 railroad employees today who would disagree with this statement, whether they like trains or not. If the railroads were in any other business, they would have folded years ago.

“I don't think there are many class 1 railroad employees today who would disagree with this statement, whether they like trains or not. If the railroads were in any other business, they would have folded years ago.”

I didn’t intend this post to be a discussion about the merit of TCI’s assessment of the competency of CSX management, but I suppose questioning management is something of an American pastime, and in collectively bargained environments, it’s obligatory. With railroad employees, it’s also particularly intense. I remain surprised however that people persist in employment dependent on the judgment of people who they consider foolish enough to make the employer’s failure a realistic peril. I find this especially true because there has been no shortage of fallen flags in the last few decades, so the being a railroad isn’t a guarantee of corporate survival.

However, its not railroad employees questioning CSX, it’s a couple of MBA’s across the pond. The great irony is that when Dartmouth minted the first MBA’s in the 1890’s, they were being prepared to work on railroads, not Wall Street. Being an MBA, I’m aware of its use and of its limits. In some applications, quantification and abstraction are great tools, but in many others, the MBA quiver is full of arrows that assume perfect aim or are meant for targets that don’t exist.

More and more, the real world and the academy are questioning the B-school gospel and its promise that in a year or two, their boot camp can create four star generals. In railroad terms, the MBA is great at qualifying you on (some of) the rules, but territory is still a matter of experience.

So it is that thousands of organizations think they are geniuses for directing customers through serpentine mazes on their “800” numbers. Its easy to see how much a breathing service representative costs-especially if they are stateside, but nobody can identify and measure the cost of a customer on the other end having fantasies of driving to the company and turning into Jack Nicholson in “The Shining”. After all, the MBA’s in finance sent you a spreadsheet embedded in a PowerPoint which shows the savings from installing a voice response unit and cutting back on the service staff 20%, right.

Then there’s the obvious question. Why would you take a stake in company you believe to be run by the ignorant, inexperienced and imprudent? Why not just buy some CN stock, they are hands down the best road based on the performance indicators TCI has chosen. If they just want a challenge, they ought to take on Uncle Pete.

Nonetheless, as this situation applies to preservation, specifically operating interpretations, the problem is that TCI or any other activist minority shareholder can do little but issue ineffectual bromides UNLESS something happens that would allow them to say “see we told you so” and lead a coalition. As long as its business as usual, just freight trains, TCI will be a minor pain. Having an excursion “problem” would qualify as an unusual event. Public goodwill is too transient, indefinite and immeasurable to justify when the risk is a very measureable, definite, permanent, and conspicuous order to pay. Don’t expect the next New River Gorge trip to be easy or soon, but perhaps seeing the suits get jerked in public is more fun.

The quick and dirty Black Letter Law is this:

Directors have a duty to manage the company, as such, they are shielded from most liability by the Business Judgment rule. To get around the business judgment rule, you'd have to show that the directors breached their duty to manage the compnay. That's harder than it sounds. Even bad business decisions are shielded by the Business Judgment Rule. From how I understand it, you have to have something bad like self, dealing, failing to appear at board meetings, etc.

My guess is that they are setting themselves up for a shareholder derrivitive suit. They are making a demand on the corporation to make a change. If the board ignores this, they bring a suit, but in a sort of legal-fiction, they are bringing the suit on behalf of the corporation, because their alleged injuries are no different from any other shareholder. From what I remember from my business associations classes, most shareholder derrivative suits get settled long before they get very far, usually with the filing attorneys making some quick cash for reimbursement from their attorney's fees.

I would think that D&O insurance would cover this, or any supposed problem that the "stakeholders" have with CSX. Your actions as a director would have to be pretty far off the reservation, depending on the policy. If you are a director of a non-profit, and have D&O insurance, I recomend you read your policy.

Superheater makes some good points. My gut is that sooner than later these guys are going to begin the learning curve that railroading is by golly a unique animal in some critically important areas and not responsive to some of the tactics that work on many widget makers.
Seems to me that it will probably prove to be a wise investment for a long term player like Warren Buffet and a bad investment for the likes of these guys??? My bet is that they'll tire after 2/3 years of not getting their way and move on to easier targets???
Time will tell.
Ross Rowland