CANADIAN NATIONAL RAILWAY COMPANY LIMITED (CN) Hunter Harrison Sat in His Office at CN Headquarters in Montreal Reflecting on H

CANADIAN NATIONAL RAILWAY COMPANY LIMITED

(CN)

Hunter Harrison sat in his office at CN headquarters in Montreal reflecting on his experience as CEO of North America’s most successful railway. On the wall beside him was the large screen monitor he had installed that was linked into the railway’s computer system, allowing him to see every train on the railroad, its exact location and its status. He had identical systems in both of his weekend homes in Connecticut and Florida. He was known to wake up at two in the morning and check the screen. “I might pick up the phone and call Edmonton and make a suggestion or two,” Harrison noted.i When he arrived at CN in 1998, Harrison did not anticipate he would end up becoming the CEO. He came in with a job to do and he did it – he turned the company into the best performing company in the industry. In 2003, he transitioned from COO to CEO, leading one of the most highly praised cultural transformations of all time. Now, as he prepared to pass the reigns to the next CEO, he wondered whether there was anything else he needed to do to ensure his legacy was sustained.

History of CN

CN is one of the six major Class I North American railways. Currently, a Class I railroad is defined by the Association of American Railroads (AAR) as one with annual revenue exceeding $319.3 million. CN’s competitors include the other five: Burlington Northern Santa Fe (BNSF), Norfolk Southern (NS), Union Pacific (UP), CSX Corporation, and Canadian Pacific (CP). CN operates the largest rail network in Canada and the only transcontinental network in North America. The CN network covers 12,900 route miles across eight Canadian provinces, including the nation’s five major ports – Vancouver and Prince Rupert, British Columbia, on the Pacific; the key Great Lakes port of Thunder Bay, Ontario; and Montreal and Halifax, Nova Scotia, on the Atlantic. The U.S. network is made up of 6,400 route miles in 16 states and connects the Canadian network to the U.S. Midwest (including Chicago) down the Gulf of Mexico and the ports of Mobile, Alabama, and New Orleans. Through a marketing alliance with the Kansas City Southern Railway Company, the company can also offer its customers access to Mexico and the U.S. Southwest.

CN transports diversified freight over its rails, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, automotive products, and intermodal services (the movement of trailers and containers on railroad freight cars). This has helped balance the company’s performance in the difficult economy over the years. CN was formed in the post-World War 1 era when two of the country’s largest railroads, Canadian Northern and Grand Trunk, were integrated and nationalized after their near collapse. This consolidation prevented a default on $1.3 billion in loans held by the companies and it also gave Canada the second largest railway system in the world, with about 100,000 employees and over 22,000 miles of track, almost double its closest competitor Canadian Pacific Railway (CP).

On November 17, 1995, after 78 years as a Crown corporation, CN was part of the largest privatization in Canadian history through an initial public offering (IPO) that raised CAD 2.26 billion for the Canadian government. This was led by a new management team of ex-federal government bureaucrats, including Paul Tellier and Michael Sabia who began preparing CN for privatization by improving productivity and enhancing profitability. These objectives were achieved by massive cuts to the company’s management structure, massive layoffs (CN went from 32,000 employees to about 23,000) and the sale of its branch lines. In Tellier’s final year as CEO, the publicly traded company earned $800 million.

But, it is under the leadership of Hunter Harrison that CN has become the continent’s best-managed railway. By all measures, CN is much more efficient than every other major North American railroad. For example, one key metric in the industry is an organization’s operating ratio and CN has led the way. Whereas CN’s competitors have remained in the range of 77 to 85 cents on the dollar, CN’s operating ratio has dropped from about 77 cents to 62 cents during Hunter Harrison’s tenure (see Exhibit 1 for a comparison of CN and its competitors). In addition, CN’s sales have increased by nearly one-third, and profits have almost doubled, even during tough economic times (see Exhibit 2 for CN’s financial performance). Today, CN is worth $25 billion in stock market capitalization, more than ten times what it was in 1995.

During his time as CEO, Harrison has received many accolades, including Report on Business Magazine’s CEO of the Year Award in 2007 and Railroader of the Year in 2003 by Railway Age Magazine. In October of 2009, Harrison was again recognized for his success – this time on the front page of the Globe and Mail’s business section where he is described as leaving CN “with a reputation as one of the most successful railroaders on the continent.”ii How did he do it?

Hunter Harrison’s Arrival at CN

Hunter Harrison arrived at CN in March of 1998 but he did not plan it that way. As the CEO of IC (Illinois Central Railroad) in the US, he met Paul Tellier a couple of times before the company was acquired by CN in 1998. It was clear that acquiring the IC was part of Tellier’s strategy to penetrate the US market -- CN’s lines ran from Halifax to Prince Rupert in Canada and only as far as Chicago in the U.S. By acquiring

2 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady the IC, it allowed CN to increase its lines through Mississippi and Alabama, all the way to New Orleans. Whereas Hunter was getting ready to hand in his resignation, Paul Tellier made it clear to him that the deal was conditional upon him staying with the company. Harrison recalled their agreement, “Paul said ‘I’ll run the company; you’ll run the railroad.’” As CEO, Tellier handled government, investment and major corporate decisions, as well as the Board of Directors; as COO, Harrison was responsible for the efficient and effective operation of the railroad. In 2003, after five years serving as Tellier’s right hand man, Harrison was promoted to CEO within hours of Tellier’s announcement that he was leaving -- what may have been one of the most rapid successions of all time.

Hunter Harrison recalls his first experience at CN – a company he knew nothing about:

There had been a number of employee reductions, there was a history at CN of being a Crown corporation, and it showed. If I thought I was going to be CEO at the time, I would have done things differently. I may have made a great political speech, shook everyone’s hand, and so on. But, Paul had explained the sense of urgency to me and I only planned to stay two to three years. And, I had a job to do. I had a blueprint for how to run a railroad that was extremely effective. So, the first day I called in one hundred of the top operating officers of the company to the Bonaventure Hotel and I told them, “This is how we’re going to run a railroad. What you have been doing is out. And, I’m going to tell you why. If there’s feedback, I’ll be glad to listen. But, when we leave this room, we need to all have a clear understanding of where we’re going.”

When Harrison returned to CN around 6:30 pm later that night, Paul Tellier said, “I understand you stood up for 10 hours today without a slip of paper in your hand talking about railroading.” Harrison replied “Paul, I can talk for 1200 hours about railroading without any paper in my hand.” What Tellier was referring to was Harrison’s concept of “Precision Railroading” that he had developed and implemented while working at IC and that had been responsible for turning it around. He was now responsible for rolling it out at CN. This was a totally different operating philosophy that involved running the railroad according to a schedule. Under Precision Railroading, the plan is sacred, discipline is paramount, and people are expected to do what they say they will.

Traditionally, rail carriers were in the habit of holding trains until they were completely full before departing. While this maximized efficiency for the railroad, it meant customers were delayed in receiving their shipments. Traditional railroading moves full trains from point A to point B. Precision Railroading is focused on moving a customer’s shipment from point A to point B, as quickly as possible (versus the whole train). To do this requires disassembling and reassembling trains as required, and 3 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady transferring customers’ railcars from train to train to keep them moving. Precision Railroading is a simple concept but executing it requires a great deal of discipline, planning and leadership.

Precision Railroading transformed CN and is slowly transforming the industry. In 1998 when Harrison arrived, customers would ask how long a shipment would take and their order was always quoted in days. More importantly, CN would often quote customers using a loose approximation of the time such as seven to nine days. Under Precision Railroading, a quote is provided to the customer in hours, making the quote considerably more precise. In fact, the results show that Precision Railroading is 24 times more precise.iii

Harrison began to explain the concept of Precision Railroading to the hundred top operating officers of the company that day and explained what people at CN needed to do differently. He knew that if they ran with fixed schedules and better planning, they could run with fewer locomotives, fewer staff and improve service at the same time. He knew because he already had success using these principles while he was CEO at the IC. Yet, Harrison remembered the poor initial reaction he received, “I’ll tell you there was no red carpet when I walked in there. I could sense that the room was cold. Here was some sermonizer from the South trying to tell them how to run a railroad. And, at the end, there were certainly no Amen’s!” Felismina De Oliveira was an analyst at the time Hunter Harrison arrived at CN. She described the reaction:

The kind of change he was requiring of us was riskier. He had over forty years in the railroad and he knew routing protocols, he knew how the industry worked and he wanted not only CN to be the best but also to improve the entire railroad industry and make it more efficient for the customers and the railroads. And, he was really operations focused. Not cost cutting, per se, but how to do it better in any area of the business. It may be cost cutting; but it may not. And, he really did bring the company to another level. The problem was that not everyone took it as seriously as they should have at first.

Keith Creel, who was District Superintendent, Battle Creek Michigan at the time, had worked with Harrison at the IC. He commented, “I was definitely an ambassador for Hunter Harrison’s scheduled railroading model. But, most people didn’t think it was possible. There was a lot of pain and suffering convincing the nay sayers initially.”

Early Quits

Although the company had been privatized for three years when Harrison arrived, a culture of permissiveness pervaded the company, dating back to its days as a Crown corporation. For example, Harrison discovered the unacceptable practice of “early quits”. This occurred when a supervisor allowed a worker to go home early, often 4 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady half way through a shift. For example, an engineer or a conductor came on duty and worked six hours and got paid for twelve. It was a norm that had developed at CN and had become institutionalized. Harrison reported on a conversation he had at one of the field operations in Battle Creek where he discovered the practice of early quits:

Harrison: Stop this immediately. We’re not going to do this on my watch.

Supervisor: Well, it’s worse in Canada.

Harrison: Where in Canada?

Supervisor: Everywhere, but if you change this in Vancouver, those cowboys will shut this company down

Harrison: Then let’s start in Vancouver!

Tough decisions such as this one were part of the process that Harrison set out to implement as COO to raise expectations and set standards. He challenged individuals about why they were doing the things they were. He explained, “I began asking employees whether it was the policy of this company as a crown corporation to get paid for a full day but only work half?” The reply he received was “no”. He continued, “Well, who allowed this to happen?” People started saying, “I don’t have an answer to that”. It was embedded in the culture.

Harrison reflected on the difficulty he had making this one change, “You’d be amazed what I went through trying to change this one practice. No union leader had the fortitude to come to me on this one; they knew they couldn’t fight it. The employees didn’t like it but they knew it was right. You know who had a problem….the spouses.” Harrison recalled a classic call he received from an angry spouse who said “You’ve cost me my second career….my husband used to be home by 1 p.m. every day and now he’s not home until 4 p.m. and I’ve just lost my second job.” That was just the CN way.

Les Dakens, SVP of People at CN at the time, remembered the reaction CN employees had to Hunter Harrison confronting “early quits”. “He set the tone and became known as the guy who came in and fixed things. He was the bad guy. There was a lot of resistance to him for a number of reasons. First, he was American. And, he was very direct and forceful. And, if you didn’t get on board with his philosophy, you probably didn’t stay very long.” Some of the supervisors who had been allowing people to leave early were part of what Harrison termed “weak leadership” and what he believed needed to be changed or removed quickly. “If people didn’t have leadership skills, they were gone.” Harrison noted. A number of personnel changes were made within a short period of time after his arrival. Les Dakens supported Harrison, “During his time as COO, he also developed a reputation as someone who knew the business.

5 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady People held him in high regard. People knew he knew.” It did not take many to be removed for the message to get out: there was a new expectation at CN.

An Inability to Say “No”

Permissiveness had crept into a number of behaviors and at many levels of the company. Lax standards and an inability to say “no” were prevalent across many parts of CN. On his second day in the office, Harrison was asked to sign a forest products contract that had a one million dollar signing bonus attached to it. He remarked, “I’d never done this in my life.” Harrison made it clear that he was not signing it. Furthermore, he challenged anyone to come into his office and present their case for why CN ought to have contracts with signing bonuses. No one showed up. According to Harrison, a mentality had developed at CN that the customer was always right leading to this type of outcome. He stated, “95% of customers are right and I love them to death. Five percent may not be and this customer was not.” No one was saying anything and the plan was to continue to reinforce this type of agreement. Giving the functional areas the power to say “no” was part of the standard setting Harrison believed was necessary to create a positive culture.

An Early Win

In the first fourteen months, using the concepts of Precision Railroading, CN was able to remove 35% of its fleet, saving the company millions of dollars. Keith Creel, EVP Operations at CN pointed out, “Whereas some people might say that we saved $2 million per locomotive, Hunter looked at it differently.” He saw all the costs associated with each locomotive…the maintenance, the fuel, the parts and the fact that each locomotive requires more people…and that means unnecessary man hours…so there’s a compounding effect for every locomotive we were able to remove. It’s so simple, it’s brilliant.” Harrison commented, “I really needed to establish credibility and the best way to do this was with something I knew would be a winner and this was with locomotives. It was at this point that I saw the first breakthrough. Momentum began to build and people were finally beginning to think “we can do it”. Plus, externally magazines were describing CN as an organization that had gone from “worst to 1st” and we got some recognition for our results.”

Hunter Harrison’s Transition to CEO

By the end of 2002, CN had risen to North America’s top performing railroad (see Exhibit 2 for CN’s Financial Performance). During Harrison’s tenure as COO, CN’s stock rose 1,200%. Only six years after taking CN’s stock public, CN had generated the highest total shareholder return of any Class I railroad. With Bill Gates as CN’s largest shareholder, the excitement around CN’s performance continued to build. The results of Precision Railroading were compelling – CN was definitely “best in class”. 6 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady Hunter Harrison was promoted to CEO of CN, formally taking over from Paul Tellier on January 1, 2003. Tellier moved on to become the CEO of Bombardier. Paul Tellier commented: “I always think of my legacy at CN as not only what I did but what I left”iv, referring to Harrison as the right person to lead CN. Despite CN’s excellent financial success and some early alignment around a new way of doing things, Hunter Harrison knew that the changes that had been made were not deeply ingrained into the culture at CN. He became painfully aware of this one day in an elevator at CN when he overheard a woman say to another, ““Have you been Hunterized?” Harrison couldn’t believe it but came to find out that what he was hoping was an internalized culture of support for doing the right thing had merely become a “Hunter Said” culture. Harrison noted, “People began relying on my position on issues and telling people that I told them it was that way as a cop-out to avoid having to take a position themselves”. Mina De Oliveira, Supply Manager, Fuel and Logistics, suggested that Harrison’s direct style may have led some employees to defer to their leader in this way. “Sometimes he would call people directly on the phone and ask them about their area. This scared people,” she said. Getting a call from the CEO was a significant event and these stories began to travel throughout the company.

Harrison set out to change this. His ultimate objective was to produce a culture where employees were engaged and completely committed to achieving new levels of performance. He began in simple ways by spending time coaching people, asking them questions such as, “What do you want to do?” and requiring them to take the decision themselves. He reinforced it stating, “There are a lot of leaders in this company besides me.” It became obvious that he would need the help of his entire leadership team working as hard as he was to transform the culture. Only then would CN have deep and lasting cultural change.

Harrison’s first task as CEO was getting his senior leadership team on board. Les Dakens, SVP of People at CN commented, “Because he had been COO, and often the COO is all about results, many on the senior leadership team feared he was going to clean house. There was a fear of the unknown. But, Hunter kept the entire team and it sent a great signal to everyone. There was a collective sigh of relief when this happened and the whole team got behind him.” Then the team could focus on achieving Harrison’s vision.

The next most important task that Hunter Harrison had was documenting the five principles that had been guiding his decisions for over 35 years. The five principles (Service, Cost Control, Asset Utilization, Safety and People) are outlined in Exhibit 3. “He communicated to all of his direct reports the importance of becoming aligned with the five principles and how alignment meant that no other competitor could touch us,” Dakens noted. “We had to get our people aligned in each area and it became an expectation of everyone.” CN’s performance management system was changed to 7 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady reflect the five principles and performance appraisals and feedback were provided based on the five areas. Mina De Oliveira, Supply Manager, Fuel and Logistics, commented: “When Hunter Harrison took over as CEO, Precision Railroading was translated into five principles (Service, Cost Control, Asset Utilization, Safety and People) that became part of everything we did. Even our presentations had these five concepts in them. You really had to get your hands around it [Precision Railroading]. But, he had the knack of taking difficult concepts and making them simple.”

CN’s communications department inundated employees and other stakeholder groups with messaging around the five principles. Newsletters, annual reports, quarterly letters to shareholders and other communications vehicles were used to get the message out about the importance of the five principles and their implementation. Ninety-five percent of Hunter Harrison’s time was focused on the five principles. Harrison was known to never be very interested in politics. The reason why: it didn’t fit into one of the five principles. Les Dakens, Senior VP of People commented, “I remember him saying ‘I’ve been living with these five principles my entire life. You will not see the flavor of the month with me.’ And, he was always very consistent, so employees saw this.” The result was that the level of knowledge of managers in the company began to increase and their desire to learn about the business also increased.

The Hunter Camps

Hunter Harrison noticed that CN was a transportation company yet it did not have many people trained in transportation issues. Also, there were few great places to send people for training in the types of issues and challenges that he believed needed to be part of a core program for CN people. Harrison commented, “I just wish I had time to sit down with 22,000 employees and share what I have learned. I’ve always had success in the past with face-to-face, smaller scale meetings so my SVP of People said, “Let’s get 20-25 employees together at a time and provide them with a training program.” Originally, Harrison was focused on running four training sessions per year and targeting Operations Managers at CN. Les Dakens, Senior VP of People and Peter Edwards, VP of HR at the time, challenged him suggesting that the training should be attended by all functional areas and run more frequently so that the objectives could be met more quickly. Edwards coined the training sessions “Hunter Camps”.

The Camps had three main objectives. First, they provided CN with the opportunity to educate its employees on specific examples of Precision Railroading. Who better to provide convincing responses to “why” change and “what” do you need to do differently than the company’s CEO? He had inspirational stories to share from 35 years in the business. Second, the Camps were intended to promote cultural change by removing “organizational mud” – a favourite term of Hunter Harrison’s. Mud is what gets in the way of the flow of communication between the executive suite and frontline 8 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady managers. He would have chance, along with Camp attendees, to discuss issues, to air concerns, and to participate in a Q&A, hopefully overcoming resistance points and creating alignment amongst those who attended. Hunter Harrison commented, “I thought the early training ought to be held at my residence and with a BBQ so I could get to know the employees and they could get to know the real me. When you don’t have a necktie on, people say, ‘he’s not as big a jerk as we think’.” One of the camp attendees commented, “People at the bottom saw him as having a military approach (as COO) – a “this is what you’ll do” style. It was a perception. Once you went to the Camp, you saw him completely differently.”

The third objective of the training was to provide employees with the opportunity to apply what they had learned back on the job. Harrison had an eye for results in everything he did and he knew that this was the best way to convince employees, customers, and shareholders of value. Each employee was expected to come to the training prepared to discuss a key challenge in his/her business unit. Their assignment following the training was to use the principles taught to return to work and produce a positive change in the area of their challenge.

Initially, high potential individuals were chosen for the training based upon supervisor ratings. Each department sent one representative to the Camps. Les Dakens, Senior VP of People noted, “Once we had well over 800 employees come through the Camps, they were no longer our high potentials….then we were into our good managers. By the time we got down to the final Camps, our objective was to put everyone through.” A total of 79 Camps have been held during Harrison’s tenure as CEO.

The early training sessions were a tremendous success. Les Dakens commented on the impact of the Camps, “People came into the Camps very nervous about the process. Most had never met the CEO. Within 90 minutes they were saying it was unbelievable. By the end, they were writing testimonials. When it was over, and the message got out, people were clamoring to get on these.” Stories began to spread throughout the organization about employees’ experiences at the sessions, their follow- up actions and the positive results that were produced for the company. Harrison reinforced these results creating an award for the best change made for CN and listing the pictures and stories of these employees in the company’s annual reports. For example, one employee in the accounting and finance area who was inspired from the Camp saved the company $600,000 upon her return. She checked her airline ticket on the way back home from the training and noticed that the airline had taxed her incorrectly. She applied for a refund and then proceeded to apply the same savings across the company.

9 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady The Camps evolved over time into a three-day session with one day spent on “railroading”; one day on leadership; and one day on strategy (where CN is moving as a company). Hunter Harrison continued to conduct every camp himself believing in the power of one-on-one face time with his people. Les Dakens remarked, “I was at all the Hunter Camps and I can tell you that his level of passion over those three days never changed. He’s a very inspiring speaker.”

Not all employees were equally interested in the Camps. Harrison noted, “Of every set of 25 we put through, three or four never should have been there. They are thinking that it’s BS the whole time. Six to eight become passionately engaged. They become disciples. They get back on the job and do great things for CN. The middle group is not a group of natural born leaders. They are competent individuals who are the backbone of companies. You increase their confidence.” Harrison took the time to learn about every attendee prior to the training, studying their CV’s and pictures so that he could call upon them and engage them in discussion. One camp attendee commented on the positive outcome for her: “I stayed in touch with five or six of the people from my Camp. It developed a real network for me. They are also high potentials so they are real movers and shakers in the company.”

Given the popularity of the Camps for changing CN’s culture, the company has invited Union leaders to the Camps. “We don’t change the script at all”, noted Harrison. “Some can’t come because their constitution won’t allow it because we pay (for meals, etc.) and it presents a conflict of interest.” CN’s competitors have also attended the Camps. Harrison reflected on the time he devotes to the Camps, “Some of my peers (CEOs) think that it’s a horrible waste of my time but I violently disagree. If I can do two things well….I can railroad and I can lead people. I think it’s my responsibility to help people to understand how to handle decisions around leading people. It’s powerful coming from the CEO.” After Harrison retires, CN will no longer run the Camps. However, the company has created its own Railroader Trainee Program and Railroader Certification for any employee in the company who wants to learn about the business. It also has a Railroad MBA program for selected senior executives. Keith Creel, EVP of Operations stated, “I want to develop a Leadership Forum in the next few years. Hunter reached the top half of the pyramid; I’m going to work with and develop to and through the base of the pyramid.” As retirements continue to create more leadership openings at CN, the company continues to develop its own people to fill these positions. Even at the executive level, CN aims to fill at least 85% of these positions internally.

Creating Leaders to Drive Change

Understanding of, and commitment to, Harrison’s five principles was spreading. And, the Hunter Camps were an additional tool to help promote the five principles and overall cultural change at CN. However, neither of these was enough. For one thing, 10 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady even though Camp participants talked to other employees at CN, there were approximately 22,000 employees that the leadership team needed to reach to transform the culture. Second, CN had acquired a number of companies including Illinois Central Railroad (IC) in 1998; Wisconsin Central (WC) in 2001, Great Lakes Transportation (GLT) rail and related holdings in 2003; and BC Rail in 2004.v Acquiring companies meant CN had also acquired several company cultures that it now had the challenge of integrating into one.

Harrison met with his two senior HR leaders, Les Dakens and Peter Edwards, to plan how to achieve greater strides with CN’s cultural change. Edwards commented, “We had a range of employee engagement levels – people who were positively engaged -- to others who viewed the company in a negative way.” CN’s goal was to move all employees to the engaged end of the spectrum. As Harrison, Dakens and Edwards analyzed CN’s culture; it was disappointing for them to admit that while some areas of CN were in good shape, other parts were out of control. CN still had a long way to go to move these areas to fully engage.

Based on Edwards’ experience working with several other large organizations, he was able to analyze CN’s workforce from a leadership perspective. His analysis revealed that although there were many great employees at CN, a very small group (about 5%) of these were “natural or positive leaders”—individuals who would willingly lead and support the company. Some were negative leaders (again, about 5%) – these were individuals regularly working against the company. There were also a set of “positive followers” and “negative followers” (each accounting for about 7-10% of CN’s workforce). These individuals listened to positive or negative leaders respectively. The biggest group at CN was the neutral majority – accounting for 70% -- this group is looking for leadership. With the right direction and recognition, this group can swing an organization’s culture in a positive direction. However, without positive leaders available to lead them, negative leaders can take over and create an opposite reaction.

At this point, Harrison noted, “I realized I had to develop [positive] leaders.” Until then, the leadership team had been thinking that leadership skills were “natural”. Now, they knew that individuals may hold positions of leadership, but not all of them had a natural ability to lead and they needed to be trained if CN hoped to make the kind of cultural change it needed to. Peter Edwards captured the thinking at the time, “Why do we have this misconception that management is a natural act? Why do we think people will know how to lead? When were you taught that? Are you supposed to have learned that innately?vi CN’s next step was to embark upon a leadership development program that would ultimately transform its culture.

Changing culture means changing behaviors. The executive team had to decide how it expected its leaders to behave differently because this would define its culture. 11 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady They decided that both “Delivering Results” and “Engaging Others”, or how you got the results, were important criteria for a Positive Leader. Harrison, Edwards and Dakens believed that the majority of CN’s senior-level supervisors were good at “Delivering Results” but not very good at “Engaging Others” while doing so. On the other hand, CN’s first-line supervisors were quite different. They had experienced the results- oriented leader and didn’t want to be led that way so they had adopted the opposite approach. Without much training to help them behave differently, they frequently gave in to employee requests and had difficulty holding employees accountable.vii

Helping its leadership team understand the types of new behaviors that were necessary was one thing. Without specific tools and training, CN’s executive team knew that the information would never be converted into action. Les Dakens, former VP of People at CN, explained, “I had worked with a consulting company (CLG) when I was at Heinz and we were using them at CN to coach some of our executives. They made a pitch to us about how they could help us drive our cultural change. I made this pitch to Hunter.” Getting this past Hunter Harrison was not easy. CLG promised a two-to-one return for its work, as long as there was agreement on specific results to target. This was the kind of program Hunter Harrison could buy into. He agreed to three pilots.

The ABC’s

The program that CLG introduced at CN is called the ABC’s which is based on simple elements of behavioral science. The ABC’s stand for Antecedents, Behaviors and Consequences. It is based on the idea that “Consequences are the key to changing behavior, which is the key to changing a culture.”viii Consequences have a much greater influence on behavior (80%) than antecedents (20%) do. Antecedents are what trigger a behavior (or what comes before it). For example, when your colleague reminds you of a meeting, you get moving to attend. Behavior is action – or attending the meeting. Consequences follow the behavior or action. They determine whether you will do it again or not. Consequences can be positive or negative. Although the ABC’s sound simple, they are not. Applying the ABC’s takes a great deal of practice and coaching and that’s why CN’s executive team chose to partner with CLG.

Hunter Harrison and CLG’s Ned Morse agreed to three pilots of the ABC’s in three operating regions of CN – the US, Eastern Canada, and Western Canada. All three sites had a tough unionized environment. Harrison knew that if he could build leadership skills to improve relations in these three, he could anywhere at CN. They were all the right size – small enough to engage the employees yet large enough to indicate the ABC’s could work in a larger rail yard. And, they had leaders willing to give the change their best effort. All were unique culturally so it was important to try it in each one to see if it would work. 12 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady Leaders at each of the pilot sites were trained in the ABC’s by pairing one CLG coach with one HR manager from CN to help with the training. Each site took on a different challenge, but in each case they were expected to produce targeted behavioral change and the changes were measured. Ned Morse from CLG had promised a 200 percent return on investment. In two of the three pilots (the US pilot and the Eastern Region) CN achieved a 12-month ROI of 290 percent and 296 percent respectively. In the third site, there was only a modest ROI, but individual behaviors showed marked improvement.

CEO Sponsorship of Enterprise-Wide Change

Hunter Harrison approved the roll-out of the program to develop CN’s leadership using the ABC approach across the company. Les Dakens commented on the effect that Harrison’s sponsorship of this program had on producing widespread cultural change at CN, “Once we put the program in place on how to manage for behavioral change (using the ABC’s etc.), it really snowballed. We could have got compliance but not full engagement without outside help. We developed a leadership cult. Ultimately, the cultural change got filtered down to the average employee when they saw their first line supervisor acting differently.”

It was decided that, for the program to have maximum impact, each of the regional Senior Vice Presidents needed to drive the rollout. This would increase commitment levels and ensure that the regions embraced the changes. The three operating regions were offered six months of CLG’s help with the ABC’s paid by CN’s Corporate Human Resources group. Beyond that, the regions were expected to pay for any further costs themselves. The regions agreed to extend their work with CLG beyond the six months provided that the results supported the investment. Everyone knew that the cultural change would take several years but the reality was that this initiative had to prove itself every quarter and every project to continue. At the end of the six months, all of the regional SVP’s saw behaviors change, results improve, and they decided to move forward with the rollout of the ABC’s, applying their own budget dollars to accelerate the pace of the change.

Learning from a Strike

Within a short period after the senior leadership prepared to take the ABC’s companywide, CN faced a challenge: a strike of 4,500 employees represented by the Canadian Auto workers representing about 20% of CN’s workforce (mechanics and clerks). Interestingly, the CAW had unanimously recommended the deal to its members and its web site stated it was one of the best wage-and-benefit agreements out there.ix Yet only a small percentage of union members voted and, of this small number, the majority took the rest out on strike. CN’s leadership noted that in the past it would have

13 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady done what was necessary to avoid a strike, including offering more cash or benefits etc., consistent with its culture of permissiveness in general. However, this time it was viewed differently. The company’s leadership was changing the culture and this agreement was a “switchpoint”. In railroading, a switchpoint is where railroad tracks diverge, going in different directions.x It is a very clear decision point that decides whether a train will go in direction A or direction B that is set by a mechanical switch. When a railroader does not ever want to return to doing something the old way, they refer to this as “spiking the switch” – it means driving a heavy spike into a wooden railroad tie at a switchpoint to prevent the switch from moving.xi This prevents anyone from moving in the old direction. Stopping “early quits” was a switchpoint. Knowing that the collective agreement was fair was another “switchpoint” – so CN took a strike. As the company proceeded toward changing its culture, it was necessary to “spike the switch”.

There was a month-long walk-out and 2,000 managers temporarily replaced the 4,500 mechanics and clerks. They received the necessary training to do their jobs. They gained an appreciation of the work being done and also developed many ideas for how to do things better. The strike confirmed the importance of the supervisory position. These roles had a huge impact on other employees and, even more so before and after a strike. So, CN learned that it should begin training supervisors in the area where it had had the strike, aiming to produce a positive result quickly and change any negativity as quickly as it could.

Developing Internal Consultants

To ensure the sustainability of the change, CN’s executive team realized that it would need to transition away from CLG consultants to its own. It did not want to do this too fast and put leaders in a position to fail so it believed it required a hand-off time of six to twelve months. The first step involved developing a curriculum to train the internal consultants so thirteen individuals were selected from the Human Resources Department. All of these individuals had strong relationships with operations leaders and had potential to become strong coaches. The internal consultants were certified at various levels by CLG and they began an apprenticeship program alongside their CLG trainers. The original set of thirteen performed extremely well and there was a huge demand for more. The challenge was to find “local” coaches and individuals with enough time to take on this important role. However, over the next two years, CN was able to certify more than 80 internal coaches. Working together with CLG, the other coaches, and the operational leaders, CN was able to accelerate its cultural change and build in sustainability.

14 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady Cultural Transformation – Is it Complete?

When Harrison joined CN in 1998, the company had an operating ratio of 78.4% which meant it was spending about $79 for every $100 in revenue – one of the most important metrics in railroading. With all of his changes, CN’s 2008 operating ratio is now 65%, the lowest in the industry by far. Canadian Pacific Railway, its closest competitor had an operating ratio of 75% last year. This gives CN an incredible competitive advantage over every other North American railroad. According to Les Dakens, former SVP of People at CN, the best test of cultural change goes beyond the financial results. He explains, “I always watch the number of employees who buy stock in the company. In 1995, even when the company offered an incentive for employees to purchase company stock, only 35% did. In 2008, 70% of the employees own stock in CN. Not only are their hearts and minds engaged, but so are their wallets.” He believes that it was when employees felt that their supervisors really cared about them that this shift happened. Their engagement has little to do with how the company is doing financially.

The leadership team is in agreement that cultural change is a continuous effort. Peter Edwards, CN’s former VP of HR assesses that CN is approximately half way toward its goal of converting all 22,000 employees to being “fully engaged” but he points out that CN has achieved an incredible amount so far and “with change, you first realize it never ends. Ever. That’s the challenge.”xii Keith Creel, EVP of Operations agreed with Edwards’ assessment, although he added, “When it comes to our managers, we’re further along. Eighty to eight-five percent of our managers are believers. When it comes to our employees, it’s harder. The more and better we can get at communicating, the better we will be at making the change.”

CN’s leadership team knew that its journey would take several years. And, as Edwards states, “Protecting and preserving culture is a challenge every day. It’s something that if you don’t reinforce positively every day, the negatives will come back again.”xiii Hunter Harrison agrees that it requires constant effort to ensure CN employees are on the right track: “It’s one thing to get the technical aspects right; it’s another to be able to lead…to be able to explain why we need to be doing the things we are and to inspire people toward the right path.” He noted that just recently he found managers at CN who had allowed employees to pressure them into doing the wrong thing once again. This requires continual cleansing, rebuilding and reinforcing of the right behaviors. “When it gets ingrained, it’s continual; not one week; one quarter; or one year. And it takes someone with intestinal fortitude and gumption at the top. And then strong leaders at every level throughout the organization. If you don’t have that, forget everything else. Great leaders can overcome a bad plan. But a great plan will not overcome bad leaders.” Les Dakens agreed, “People watch what the CEO does. Our number one key to successful cultural transformation was that our CEO lived and 15 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady breathed it. The second was finding smart people and getting them on the team around him and letting them do what they did well.” CN took advantage of both.

In terms of sustaining its success, Hunter Harrison has written two books that capture the essence of what CN has done called How We Work and Why (Volumes I and II). These are used internally to help employees better understand the organization and they are also handed out freely to anyone interested in improving their organization. CN’s leadership understands that it’s not the content of the book that is what’s most important – it’s CN’s ability to create exceptional leaders who know how to execute.xiv This has been built into the culture through the 5 guiding principles, the Hunter Camps, the organization’s ABC training program, its internal consultants/coaching program, the reinforcing performance metrics, and the learning programs such as RR-MBA and the Certified Railroader, each designed to reinforce the other.

The Future

On April 21, 2009, it was announced that Claude Mongeau will succeed Hunter Harrison as CN’s next CEO, taking control on January 1, 2010. Mr. Mongeau was CN’s EVP responsible for leading CN’s strategic planning process and its overall financial management as well as the IT function. In 1997, the Financial Post named Mr. Mongeau one of the Top 40 under 40. In 2005, he was selected CFO of the year by an independent committee of his peers. Les Dakens commented, “I’m very confident about the decision. We had a very good succession plan.” Mina De Oliveira, an employee at CN commented on the choice of Mongeau as CN’s next CEO, “We were expecting Claude Mongeau to be chosen as the next CEO. He’s much lower key than Hunter Harrison but everyone knows that he is brilliant. He has been more of a behind the scenes strategist than in the spotlight.” David McLean, Chairman of CN’s Board of Directors, offered the following comment:

Hunter is a seminal figure in the railroad business, with his ground-breaking ‘Precision Railroading’ operating model that's driven significant efficiency gains and shareholder value at CN. He has provided outstanding leadership and service at CN, leading to the creation of a great North American railroad and grooming an excellent successor. Hunter also devoted countless hours to training the next generation of great railroaders at CN. Today's announcement begins an orderly period of leadership transition at CN that will maintain CN's position as an industry leader in creating value for customers and shareholders.xv

As the next CEO at CN, Claude Mongeau will have a special set of challenges. Perhaps the greatest challenge is that CN and its current CEO, Hunter Harrison, have had so much success, making it a tough track record to follow. On the other hand, Mongeau has been a part of the success, supporting Harrison with the cultural transformation. As part of this, Mongeau became certified as a railroad conductor. Also

16 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady using the ABC toolkit, the Finance unit was able to seamlessly integrate the activities from two of its acquisitions. The unit was able to produce cumulative billings that were 48% higher than the year before and increase collections by 52 percent from the year earlier.xvi Harrison commented, “No doubt he will want to make some changes and enhance what I’ve done.” Mina De Oliveira noted, “I think we’ll see changes. It’s time to rebalance and focus on the customer more and Claude Mongeau is very strategic. But we can’t lose that Operations focus because we know how important it is to our business. We have a lot of executives in transportation trained by Hunter Harrison and he has been able to transfer his thinking into our culture.” Les Dakens stated, “I’d be surprised if it changed very much. Hunter Harrison has done a terrific job of training and development. So, Claude will let his Operations guy do Hunter’s old job and focus on building more customers. Then, he can focus on the broader vision of allowing CN to become the best transportation company which means developing other lines of business.” Finally, Keith Creel, EVP of Operations weighed in: “Claude is definitely the right person for the job. He is an insider, he understands how we work and why and while he will put his fingerprints on it I don’t think he will alter our model drastically. And, there’s a kinship among the senior officers of the company. You’re only as good as the people you work with! Second, Hunter taught me that the legacy of a true leader is how well the organization runs when that leader is not there. For the past two and a half years, I’ve had the autonomy to run the operation and Hunter has coached and developed me. I’m not going to allow anything to change in a negative way.”

Hunter Harrison came to CN with a job to do and he did it. He did not plan to come to CN or to be CEO yet he turned the organization into the best performing company in the industry. Harrison does not have any future business plans for now. One thing that we know from watching this Master Railroader is that he has an incredible gift for moving people and things from one place to another.

Discussion Questions:

1. Are the changes that have been made to transform CN’s culture sustainable? If so, why? If not, why not? 2. What should be done now to ensure CN’s continued success? 3. What is the role of a great leader? Do you think that Hunter Harrison has fulfilled it? If so why? If not, why not? 4. Describe Hunter Harrison’s leadership style – what are the strengths of his leadership style? What are the potential weaknesses? How has he changed as a leader during his time at CN? 5. Outline what factors led to CN’s success in changing its culture?

17 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady 6. What can be learned from CN’s success that could be transferred to other organizations interested in making a change? 7. What role should Hunter Harrison play in CN’s future?

18 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady EXHIBIT A CN’S OPERATING RATIO VERSUS ITS MAIN COMPETITORS*

(number in percentages)

2003 2004 2005 2006 2007 2008

CN 70.9 68.0 64.8 61.8 63.6 65.9

CP 80.1 79.8 77.2 75.4 75.3 78.6

UP 81.5 89.4 86.8 81.5 79.3 77.3

NS 83.5 76.7 75.2 72.8 72.6 71.1

BNSF 82.3 84.5 77.5 76.6 77.9 88.1

CSX 93.1 87.6 81.9 77.5 77.5 75.4

*from annual report or 10K for each company

Company Code:

CN Canadian National CP Canadian Pacific UP Union Pacific NS Norfolk Southern BNSF Burlington Northern Santa Fe CSX CSX Corporation (the former Chessie System)

19 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady EXHIBIT 2 CN’S PERFORMANCE IMPACTED BY HUNTER HARRISON

(Canadian dollars in millions)

Operating Ratio Free Flow Net Income Employees Year/Event Revenue (adjusted) Cash (adjusted) (end of period)

1995 89% (118) 3,802 204 23,999 (privatization)

1998 75.3 % 228 4,078 569 19,198 (Harrison arrives)

End of 2002 (Harrison 70.5% 513 6,339 1,059 22,114 promoted to CEO)

End of 2008 65.9% 794 8,482 1,895 22,695

Source: Canadian National Railway Annual Reports and/or Investor Fact Books

20 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady EXHIBIT 3 CN’s FIVE GUIDING PRINCIPLES

Principle 1: Service

• The first rule is “do what you say you are going to do” • Let’s get faster. What are you doing on your job that this a faster railroad? • Let’s get more reliable. How can you make a difference here? • Let’s listen more.

Principle 2: Cost Control

• It’s cost control, not cost cutting • If you truly need more money to make CN better – ask. If you have some left over, give it back - before we ask. • Look at everything. A thousand little things is a lot of money.

Principle 3: Asset Utilization

• The missing ingredient in the recipe for success in the rail industry • Look at every asset and ask, “Do we really need it? Can someone else make better use of it? How can I get 24-hour use out of it every day? • Our estimates say we can probably do 10-15% more business with just what we have today. How can you make your part happen? • If you didn’t use it last year, you probably won’t this year. Scrap it, sell it or recycle it. Just get it out of the way.

Principle 4: Safety

• Make sure no one gets hurt. • Never overlook even the slightest rule infraction. With the nature of our industry, you’re not giving anyone a break. You’re giving them a death sentence.

Principle 5: People

• We can’t do any of the other four without people.

CN’s FIVE GUIDING PRINCIPLES

(continued)

Principle 5: People (continued)

• People drive the service, manage the costs, and ensure our safety standards are met. • Look after each other’s safety. • Take people to their level of excellence.

i Source: http://www:theglobeandmail.com/report-on-business/article799851.ece iiSource: Globe and Mail, Tuesday, October 27, 2009:B4. iii Judy Johnson, Les Dakens, Peter Edwards, and Ned Morse, Switchpoints: Culture Change on the Fast Track to Business Success, NJ: John Wiley & Sons, 2008:12. iv E. Hunter Harrison, How We Work and Why, Volume II, ©2008, Canadian National Railway, p. 46. v Op. cit., p. 16. vi Op. cit., p. 5. vii Johnson et al., p. 46. viii Johnson et al., p. 58. ix Johnson et al, p. 93. x Johnson et al., p. xxxi. xi Johnson et al., p. xxxii. xii Hillary Sirman, “SwitchPoints: Culture Change on the Fast Track to Business Success – An Interview with Peter Edwards, Vice President Human Resources, CN”, Queen’s University IRC, 2009, p.6. xiii Ibid., p. 2. xiv Johnson et al., p. 189. xv Source: http://www:newssire.ca/en/release/archive/April/2009/21/c3546.html xvi Johnson et al., p. 120.