Railroader: The Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison

How a larger-than-life figure transformed the railroad industry

Introduction

The larger-than-life figure of Hunter Harrison is impossible to avoid for anyone who follows the railroad industry. Nearly five years after his death, Harrison’s influence is as great as ever given the nearly universal adoption of precision scheduled railroading, an operating model and mindset that has generated tremendous value for railroad owners over the past two decades.

It is no exaggeration to compare Hunter Harrison to Steve Jobs in terms of the impact these men had in their respective industries. Both men were iconoclastic rebels who rejected conventional wisdom and were not afraid of ruffling feathers. They could both be insufferably rude and insensitive, yet they somehow attracted intensely loyal followers who believed in their mission. Both men lived for their work, resisted fully disclosing the extent of their illnesses, and died while still in leadership roles. Perhaps most significantly, both men have continued to exert a major influence on their industries many years after their deaths.

The dust jacket of Harrison’s biography, Railroader, fits my mental image of the man after reading the book. Howard Green, a Canadian journalist, knew Hunter Harrison very well and interviewed him extensively over many years, including just a few days prior to Harrison’s death. Green makes the comparison between Harrison and Jobs but adds that Harrison’s Southern manner and charm were differentiating characteristics. Harrison insisted that he was not a “mean man”, but it is clear that he didn’t suffer fools gladly. Part of Harrison’s charm, and a source of credibility with the rank-and-file, is that he was one of them for many years. Harrison’s life reads like a classic “up from the bootstraps” story. His working class family could provide him with few advantages, yet he took the initiative when he started working at the Frisco Railway as a carman oiler in 1963 at $2 per hour. He rose up through the ranks without the benefit of a college education. He was a self-made man.

From Trainmaster to Executive

A railroad trainmaster is the equivalent of an air-traffic controller at a busy airport. The trainmaster is responsible for directing the movement of railcars as they arrive at a yard. Typically, trains that are arriving at a yard must be broken down into individual cars, the cars must be sorted and connected appropriately, and new trains are formed to move the cars on toward their final destinations. It is a logistical challenge that requires a great deal of intelligence, initiative, and adaptability. This role fit Hunter Harrison’s personality and skill set perfectly, and he was promoted to the position of trainmaster in 1972 at the age of 28.

Trainmasters had to be tough and well-respected to be effective in their rough and tumble world. Harrison decided that he would demand a great deal from his workers. He had started as one of the guys and knew what was involved in the job, but he wasn’t about to allow bad behavior or tolerate safety violations like drinking on the job. One gets the sense that he might not have been well liked, but he was universally respected and sometimes feared. He was noticed by Frisco executive William F. Thompson, a colorful character known as “Pisser Bill” due to his habit of urinating wherever he happened to be in the rail yard.

With Thompson as a mentor, Harrison’s ascent up the ranks at Frisco proceeded rapidly throughout the 1970s. When Burlington Northern acquired Frisco in 1980, Harrison moved to Seattle, took job as Assistant Vice President, and continued his steady career progression throughout the 1980s. But while Harrison had built a reputation as Burlington Northern’s strongest operating executive by the late 1980s, he was not well liked by top executives. Harrison was not politically adept, and the writing was on the wall. He had topped out within the Burlington Northern organization and had to look elsewhere if he wanted to be the top man at a railroad someday.

The Boss of Illinois Central

Opportunity came knocking when the private equity group that purchased the Illinois Central Railroad needed a strong operating executive to make their investment pay off. In May 1989, Harrison joined Illinois Central as Vice President and Chief Transportation Officer. The railroad was in terrible shape with the operating ratio in the high 90s. A railroad’s operating ratio is defined as operating expenses divided by operating revenue. Illinois Central’s efficiency was so poor that operating expenses nearly consumed all of its revenue. The private equity group that controlled Illinois Central wanted to reduce the operating ratio to 84, but Harrison thought he could get it to 74 within two years.

In 1992, the operating ratio at Illinois Central fell to 70.9, several points lower than even Harrison had thought possible three years earlier. As the man in charge of transportation logistics, much of the credit belonged to Harrison. How did he accomplish such a major turnaround in a short period of time? Harrison’s early moves at Illinois Central involved cutting waste that was obvious to him but few others. He converted dual tracks to single track, pushed for longer and more efficient trains, reformed crew scheduling, and declared a “war on paper” and bureaucracy.

Shortly before Harrison took over as CEO of Illinois Central in early 1993, the prior CEO announced four year targets which included a drop of a point every year in the operating ratio, with an eventual goal of a 66.9 operating ratio by 1997. Harrison recalled that he had no heads up about that goal and was “about to faint” when he heard the plans announced during a conference call. When asked, the departing CEO told Harrison “You’re a smart boy. You’ll figure it out.”

Harrison more than rose to the challenge. In addition to increasing revenue significantly, Harrison drove the operating ratio down to 64.4 in 1996. He would subsequently drive the operating ratio down to 62. In just seven years, Illinois Central had gone from a barely profitable mess to a railroad with an industry leading profit margin. During a golf tournament, Harrison met his Frisco mentor Bill Thompson (aka “Pisser Bill”) who asked, “How in the shit did you get the operating ratio down to 62?” Harrison responded by saying that he applied some of the lessons Thompson had taught him.

Perhaps Harrison was being kind to an aging mentor. While Harrison no doubt learned a great deal from Thompson, he developed the concepts much more thoroughly and was able to communicate the lessons to others in a way that became institutionally entrenched. These operational policies formed the underlying architecture of precision scheduled railroading, a concept that Harrison would use again and again in the coming years to deliver operational improvements as his career progressed.

Canada, Eh?

I’m no expert on Canadian culture, but I have spent time there on personal trips and, on a couple of occasions, for business meetings. So, I couldn’t help but grin when I started reading about Hunter Harrison’s integration into Canadian business society. It seemed like Harrison’s brash and blunt persona and stereotypical Canadian politeness and quiet understatement would combine as well as oil and water.

Harrison had worked wonders at Illinois Central, but the railroad was a small regional player in a consolidating industry. By the late 1990s, Illinois Central had industry leading financial metrics and operated a solid north-south railroad ranging from Chicago to New Orleans. Canadian National operated an east-west railroad and, spurred by the implementation of the North American Free Trade Agreement, needed a route into the U.S. market. The combination of Canadian National and Illinois Central would transform Canadian National’s network into a “Y” shape. Canadian National acquired Illinois Central in 1998 and Harrison became Executive Vice President and Chief Operating Officer of the combined company.

Canadian National’s CEO was Paul Tellier, a highly respected and politically adroit executive who was instrumental in privatizing Canadian National in the early 1990s. Under Tellier’s leadership, Canadian National had made great strides, but wanted Harrison to work his magic and apply the Illinois Central model to a much larger operation. At the time of the acquisition, Illinois Central had an operating ratio of 62.3. Tellier had brought Canadian National’s operating ratio down from the mid 90s in 1995 to 78.6 by 1998, but clearly there was much more that could be accomplished.

Harrison began to apply precision scheduled railroading at a company with more than twenty thousand employees, far more than the three thousand he oversaw at Illinois Central. One of Harrison’s mantras was to avoid spending money on capital expenditures when a process improvement could accomplish a similar objective. Harrison understood what many operational executives do not understand: capital is not free. Underutilized capital ends up being a liability rather than an asset. Harrison was a genius at getting much more out of a railroad’s existing property base.

By 2002, Canadian National’s operating ratio was down to 69.4, far lower than other North American Class 1 railroads. In 2003, Harrison took over as CEO. By 2006, the operating ratio had fallen even further to 61.8. Under the leadership of Tellier and Harrison, $75,000 invested in Canadian National at the time of its public listing in 1995 appreciated to $1 million by 2008. One gets the sense that Harrison’s years at Canadian National were the pinnacle of his long career in terms of his enjoyment of the job and the success and accolades that followed. Harrison retired from Canadian National at the end of 2009 at the age of 65.

A Failed Retirement

Hunter Harrison was not thrilled to leave Canadian National, and his departure was not without some acrimony. Although he had developed an interest in horses, Harrison had few other interests beyond railroading. One gets the sense that he was bored and miserable when he stopped working. Harrison had succumbed to a common ailment among hard driving type A personalities: He failed retirement.

Canadian National had continued to perform well after Harrison’s departure and posted an operating ratio of 63.5 in 2011. In contrast, Canadian Pacific’s operating ratio was 81.3. This caught the attention of Pershing Square, a hedge fund run by Bill Ackman. Harrison was contacted by Paul Hilal, Ackman’s colleague at Pershing Square. Hilal had conducted over a thousand hours of research on Canadian Pacific and saw a clear opportunity. Harrison agreed to consult for Pershing Square at a rate of $10,000 per day.

Pershing Square soon acquired a significant stake in Canadian Pacific and initiated an activist campaign to gain control of the railroad and install Harrison as CEO. Those who enjoy reading about the boardroom dramas surrounding proxy battles will be fascinated by Green’s lengthy description. Ultimately, Pershing Square prevailed and Harrison took over as CEO of Canadian Pacific in June 2012.

The pattern Harrison established at Illinois Central and Canadian National was repeated again at Canadian Pacific. By the end of 2014, Canadian Pacific’s operating ratio dropped to 59.8, beating Canadian National’s operating ratio of 60.7. To bring the operating ratio of a massive railroad system down by over twenty points in two and a half years was nothing short of remarkable. Pershing Square was richly rewarded with Canadian Pacific’s stock rising from $47.72 in the fall of 2011 when the hedge fund started buying shares to $241 in the fall of 2014. While the bulk of the financial results were due to Harrison’s operational brilliance, Ackman contributed as well by overseeing a turnaround in the company’s pension fund, bringing it from a deficit to a surplus of over $1.1 billion. Harrison had created tens of billions of dollars of value and again established himself as an industry legend.

The Final Act

Hunter Harrison’s health had started to deteriorate significantly during his years at Canadian Pacific. In addition to the impact of age, by his early seventies Harrison had developed multiple health problems that eventually required him to use supplemental oxygen constantly. He had earned hundreds of millions of dollars over a long career and clearly did not have many years ahead of him. So why in the world did Harrison agree to turn around yet another railroad?

When Harrison was approached to participate in the turnaround of CSX, a large railroad system operating in the eastern United States, he had nothing left to prove to anyone but himself. Turning around a fourth railroad would prove nothing more to the world than turning around the first three, but Harrison was internally driven to do it again. Harrison served as CEO of CSX from March 2017 up to two days before his death in December 2017.

During Harrison’s final act, he was forced to work almost entirely from home while hooked up to an oxygen machine. Although he did show up at the company’s headquarters and participated in board meetings and other events, he also suffered greatly and endured multiple hospitalizations. Remarkably, just a couple of weeks before his death, Harrison gathered the strength to hold a final “Hunter Camp”, a gathering of CSX employees who were regaled with stories, anecdotes, and operational wisdom gained through a lifetime of work on railroads.

Critics would allege that Harrison was overly abrasive and harsh during his brief tenure at CSX, and perhaps this had to do with the fact that Harrison knew that he had little time left to implement his plans. CSX’s operating ratio was 69.4 in 2016 and Harrison vowed to bring it down to 65 or 66 by the end of 2017. According to SEC filings, the operating ratio fell to 67.9 for 2017, but Harrison’s methodology had taken firm root and would endure after his death. CSX posted an operating ratio of 55.3 in 2021, a level that no one would have dared to suggest five years ago.

Conclusion

Hunter Harrison died at the age of 73 on December 16, 2017, fully engaged in his work almost to the very end. I started this article by comparing Hunter Harrison to Steve Jobs. The comparison extends to corporate governance issues as well. Jobs was less than forthcoming with disclosures of his health condition to Apple’s board and shareholders. Harrison was even less transparent. He refused to release his medical records and the board never seemed to have understood the full gravity of Harrison’s problems. Even Harrison’s biographer does not seem to really know exactly what Harrison died of. The details are murky even today.

When does an executive’s right to privacy take a back seat to providing full disclosure to shareholders? This is not a straightforward question, but it seems apparent that disclosures at both Apple and CSX were woefully inadequate given the seriousness of the CEO’s health conditions. Fortunately, both companies did not pay a long-term penalty for dubious oversight. Apple has done extraordinarily well under the leadership of Tim Cook and CSX has continued to improve its performance led by James Foote.

The story of Hunter Harrison’s life is indispensable for anyone who is interested in learning about the railroad industry. Although the book contained far more insight into proxy battles and boardroom drama than the nuts and bolts of precision scheduled railroading, it is nonetheless a fascinating story about a very interesting man.

---

The Rational Walk is a reader-supported publication

To support my work and to receive all articles that I publish, including premium content, please consider a paid subscription. Thanks for reading!

---

If you enjoyed this article, please click on the ❤️️ button and consider sharing this issue with your friends and colleagues.

Thanks for reading!

---

Copyright, Disclosures, and Privacy Information

Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC.  

Your privacy is taken very seriously. No email addresses or any other subscriber information is ever sold or provided to third parties. If you choose to unsubscribe at any time, you will no longer receive any further communications of any kind.

The Rational Walk is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.