With a Clear Conscience: Business Ethics, Decision$-$Making, and Strategic Thinking CHAPTER $9$Shareholder Activism: Canadian Pacific Railway and Pershing Square Capital ManagementIn $2011$ Canadian Pacific Railway Ltd$.($CP$)$ had an operating$-$costtorevenue ratio that was higher than most other railway companies in North America$\mathrm{.}4$ Pershing Square Capital Management, an American hedge fund founded by William Ackman, saw an opportunity to improve CPs return to investors, and acquired $14\mathrm{.}2$ per cent of CPs shares, becoming its largest shareholder$\mathrm{.}5$ In advance of the $2012$ annual general meeting, Pershing Square nominated Hunter Harrison, the former CEO of CPs competitor Canadian National Railways $($CN$),$ to replace Fred Green as CEO, and also nominated several new members to the board,$6$ claiming that Fred Greens and the Boards poor decisions, ineffective leadership and inadequate stewardship have destroyed shareholder value$\mathrm{.}7$ The battle for shareholder proxy votes between the existing board and Pershing Square as the largest investor had begun. $($Shareholders who cannot attend an annual meeting typically designate proxies to vote on their behalf. In the normal course of business, this is the board, but in cases of shareholder activism or a hostile takeover bid, it can be any shareholder standing opposed to the board.$)$Shortly before the annual meeting was to begin, Green resigned and five members of the board, including the chairman, declared that they would not stand for re$-$election. Pershing Squares board nominees were elected, and Harrison was named CEO$\mathrm{.}8$ As Harrisons expertise in running railroads led to operating efficiencies, CPs share price took off, moving from below $$49$ per share in September $2011$ to above $$220$ at the end of $2014\mathrm{.}9$ Pershing Square sold its investment in CP in $2016,$ earning a profit of about $$2\mathrm{.}6$ billion$\mathrm{.}10$ The activism of the largest shareholder transformed CP into a more efficient railway company while producing a handsome return for all investors.There is more to the story, however. Recall that Harrison was an industry insider before coming to CP$.$ He had retired from CN at the end of $2009,$ but because of his intimate knowledge of CNs operations, his retirement package included a no$-$competition clause$\mathrm{.}11$ Further, in Canadian business at the time there was a tacit understanding that moving from being CEO of one company to becoming the CEO of a major competitor is not quite gentlemanly$\mathrm{.}12$ Why are Canadian businesses troubled by a CEO being hired to lead a rival company? Well, CEOs have access to a lot of privileged information, trade secrets$,$ and other confidential matters. This sensitive information belongs to the organization the CEO is leaving, and should not become available to a competitor who hires that person as their new CEO. Because this information is privileged and can cause material harm if it falls in the hands of a competitor, a CEOs fiduciary duties to their past employer often extend for a negotiated period of time following the termination of employment. Further, the leader of a company is expected to do just thatleadand not be available to the highest bidder. Leadership requires the ability to start a project and see itthrough, which in this case calls for long$-$term commitment to a companys overall business strategy. Having CEOs jump from competitor to competitor flies in the face of this commitment.So how did Pershing Square get away with disrupting this tacit understanding? They challenged the agreements that covered Harrisons retirement from CN$,$ and guaranteed that Harrison would get from Pershing Square whatever retirement monies CN would not pay if Harrison was found to have breached his contract$\mathrm{.}13$ Governance researchers Yvan Allaire and Franois Dauphin describe this arrangement in no uncertain terms: Ackman and Harrison are Americans who could not care less about the mores and values of the Canadian business world$\mathrm{.}14$This type of response reflects the complex reality that different cultures often value things differently and often give different priorities to the same values. It is important to understand that the way one culture prioritizes a value is not necessarily more ethical than the way another culture expresses and prioritizes that same value. Both American and Canadian companies value and rightfully expect loyalty from everyone in a company, executives included. It is just that in this particular case, what it means to be loyal meant one thing to Pershing Square and another thing to those critical of Pershing Squares form of shareholder activism.For Discussion$1.$CPs directors were highly regarded in the Canadian business community. But one of the criticisms Ackman levelled against them was that they could not steward a railroad company adequately because they did not understand the industry. Can a board faithfully execute its fiduciary duty to shareholders if it understands how to conduct business in general, but not the workings of the specific industry? Is this a legitimate reason for a shareholder to prompt other shareholders toward corrective action? Explain your reasoning$\mathrm{.}2.$Given a corporations fiduciary duties toward its shareholders, should it consider hiring executives from competing companies, even though it is frowned upon in Canadian corporate culture? What are the moral and prudential values involved here?$3.$Though hiring a CEO from a competitor may be considered unethical, it is still legal if certain stipulations are met. Under what circumstances, if any, is this acceptable in the business world? Think in terms of applying Heaths ten commandments $($see Chapter $1)\mathrm{.}4.$It is not often that a respected executive with knowledge of an industry becomes available for recruitment by an activist shareholder. Harrison did not make the jump from CN to CP immediately, but became involved in Pershing Squares takeover a few years later. Does this time gap make a difference to your answer to the previous question?$5.$Harrison was successful as the CEO of CP$,$ at least in terms of generating shareholder revenue. If Harrison had failed to improve CPs operations and increase its stock price and dividend, would his hiring still have been justified?$6.$To what extent should cultural norms shape corporate governance, particularly in the context of international investment? Could Pershing Squares disruption of Canadian business norms be considered ethical? Why or why not?