BACK in 2002, IRJ's North American sister magazine Railway Age chose Mr E Hunter Harrison, then the chief operating officer of Canadian National Railway (CN), as its Railroader of the Year, lauding him as "quite possibly the best operating man in the railroad industry." A career railwayman, Harrison instigated operating techniques at CN that propelled on-time wagonload performance through the 90% barrier and helped the railway to achieve the highest operating ratio of all the North American Class I carriers.

Through "precision railroading" the railway handled higher volumes with 800 fewer locomotives and 22,000 fewer wagons than it used just five years previously, and the model allowed CN to more than triple its net income. On the back of this success, Harrison was therefore the natural choice to succeed Mr Paul Tellier as CEO in 2003, and he led the company until his retirement in 2009.

Two years on, Harrison's skills are still in demand. When Pershing Square Capital Management, a New York-based hedge fund acquired a 14.2% stake in CN's smaller rival Canadian Pacific Railway (CP) last October, its activist founder and CEO Mr Bill Ackman wasted little time in declaring his profound dissatisfaction with the performance of CP, instigating a campaign to oust president and CEO Mr Fred Green and replace him with Harrison (pictured left). "We think the board has chosen the wrong CEO," Ackman told a CP shareholder meeting hosted by Pershing Square in Toronto last month. "He's been with the company for 33 years, he's been CEO for five-and-a-half years, and the results are the worst railway, by a long shot, in North America."

While CN boasts the lowest operating ratio of the Class Is, CP has the highest, although a particularly harsh winter and severe flooding in spring helped to push the figure up to 81.3% last year. Ackman believes that with Harrison at the helm, CP could reduce its operating ratio to 65% over a four-year period. CP's current multi-year plan sets out a plan and timeline for achieving a 70-72% ratio for 2014, on a par with the levels achieved last year by its US peers, and the railway is confident it can go further in the longer-term as initiatives such as the long train programme take effect. However, Green (pictured right) warns that a change of management will set back any improvement in operating ratio by at least a year.

But regardless of who prevails in this contest, taking CP below 70% will be far from straightforward considering the characteristics of its operations. A significant proportion of CP's business concerns east-west freight across the Canadian Rockies, with all the inherent challenges and costs of intensive year-round heavy-haul operation in the mountains. CN by contrast is more active in north-south flows and derives much of its revenue from operations in eastern Canada and the United States, where it has a much larger network than CP.

Responding to the Toronto meeting, CP said in a statement last month: "Pershing Square continues to offer no plan or clear timetable to improve CP's operations, or even any concrete suggestions. In its presentation, Pershing Square made a number of assertions and characterisations supported by hypothetical mathematical examples of the effects of speculated improvements. It continues to plan a proxy contest based on a call to change management which the CP board believes would cause serious disruption to CP's business and the multi-year plan, which is improving operations."

Yet both Ackman and Harrison are adamant CN's operating orthodoxy is right for CP, and they are diligently lobbying shareholders in an effort to make it happen. Harrison demonstrated his commitment to the proposals by acquiring up to $C 5m ($US 5m) worth of CP shares. "I'm a shareholder," he told the Toronto meeting. "I made a significant investment with my own funds. I'm a believer."

And it seems he's not alone. Several shareholders have already declared their support for a change of management, and the markets too have responded positively to the challenge. The value of CP's stocks has rallied 23% since Ackman first signalled his discontent with Green, while the Toronto stock exchange rose just 1% in the same period and CN shares fell 2.2%.

However, Green is not without support, and several major customers have publicly endorsed both his leadership and CP's multi-year plan. He also has the backing of colleagues on the 15-member CP board, who have met shareholders recently in an effort to secure their support.

The board also refutes Pershing Square's allegation that it does not hold senior management accountable for the financial results of the company. CP says that remuneration of executives is closely linked to performance, and the interests of the board are closely aligned with those of shareholders, with more than 92% of compensation provided to independent directors in the form of deferred shares.

All this leads ultimately to a showdown at the CP annual general meeting in May. Pershing Square will put forward five candidates for election to the board of directors, including Ackman and fund partner Mr Paul Hilal, together with Mr Gary Colter, president of corporate restructuring and consulting company CRS.

Neither side questions the need for CP to reduce its operating ratio, but they are bitterly divided on how to get there. With a 65% ratio, CN found itself more able to compete with other railways and with lower costs, it could even contemplate taking on road transport for short-hauls. It is only natural that CP shareholders look on CN's record with envious eyes, and wonder whether Harrison's talents might achieve the same results in Calgary as they did in Montreal. But they may also question whether it is a credible alternative to the existing multi-year plan, which is yielding tangible results in less-than-perfect economic conditions. CP says wagon utilisation and terminal dwell times both improved 20% year-on-year in the fourth quarter of 2011 and there were further gains in January.

As IRJ closed for press, Pershing Square is still big on rhetoric but, in public at least, thin on detail. Nonetheless there is little doubt that in the coming weeks, two highly-credible voices will make a compelling case for radical change at CP, and more information will emerge to galvanise Ackman's pitch. Meanwhile the current management will seek to convince investors that the railway is already on a stable course for greater efficiency, and that Pershing Square risks stalling progress in this direction. For shareholders, who will decide the way forward in two months, a difficult decision looms.