Activist Hedge Fund Slams CSX

Offering “constructive” criticism, the fund’s manager says the company is poorly run, performing woefully, and damaging shareholder confidence.
Stephen TaubOctober 16, 2007

The manager of a large, activist hedge fund is putting the heat on railroad company CSX Corp., calling for a broad slate of new corporate governance practices and better business performance.

The Children’s Investment Master Fund, founded and run by the secretive Chris Hohn, made public a letter it sent to the CSX board. Hohn urged the company to separate its chairman and CEO roles, bring in new independent directors with railroad management experience, and allow shareholders to call special meetings.

Hohn, whose fund owns 4.1 percent of CSX’s stock, also criticized the compensation of chairman and CEO Michael Ward, asserting his interests are not aligned with those of CSX shareholders. The letter noted that Ward made $36 million over the past two years

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“Ward has been the highest compensated CEO in the rail industry, despite CSX being operationally outperformed by its peers,” Hohn wrote. He urged the company to tie long-term compensation to returns on capital rather than to the operating ratio, which he said can be easily manipulated.

Hohn challenged CSX, which he claimed is last or nearly last among the five major North American railroads on virtually every important operational and financial metric, to present to shareholders with a detailed operating plan containing specific long-term operational and cost targets to address its under-performance.

He also called on the company to justify its capital spending plan for the years 2007 through 2010. “TCI believes shareholder value is created through sustainable investment in maintenance, infrastructure and training,” wrote Hohn, a successful fund manager who is well known for not speaking to the media or talking about his investments.“TCI is concerned that management’s current illogical and undisciplined capital spending plan puts at risk CSX’s ability to invest long-term because it undermines shareholder confidence and therefore access to capital.”

Hohn also said CSX must improve relations with labor, shippers, and shareholders.

“We hope you receive this as a constructive letter from an informed shareholder with a simple aim: a better and stronger CSX,” the letter stated. “We have no desire to be disrespectful to the board or the management team.” CSX declined to comment on the letter.

UK-based Children’s Investment Fund Management was founded in 2003 and currently manages around $10 billion. A portion of its 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.