As Canadian Pacific Railway bulks up, rival Canadian National takes a few attention-grabbing measures of its own

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Canadian Pacific Railway Ltd.’s plan to purchase Kansas City Southern will vie for business story of the year, but its long-time rival, Canadian National Railway Co., also has been doing some things that could help it down the road.

The former Crown corporation has recognized that it’s no longer sufficient for big companies to focus exclusively on maximizing profits. The public, including a growing number of investors, now demands more. So, while CP was bulking up, CN was getting serious about ESG, the emerging force in markets that demands a commitment to the environment, social concerns and enlightened governance in return for access to a pool of capital worth hundreds of billions of dollars.

A couple of days after CP announced the KCS takeover on March 21, CN revealed that it was on track to join its Calgary-based rival as one of only a handful of big Canadian corporations that has significantly diluted the influence of older white men in their board rooms.

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CN said it had nominated Denise Gray, president of South Korean lithium-ion battery maker LG Chem Ltd.’s North American unit, to join a board that will be reduced to 11 directors from the current 14. Gray, who is Black, would ensure that Montreal-based CN will be overseen by a set of directors that more closely mirrors the larger population, one of the objectives of Bay Streeter Wes Hall’s BlackNorth Initiative, an effort inspired by the global backlash that followed the killing of George Floyd by a white police officer in Minneapolis, Minnesota, last year.

A minor reshuffling of directors will strike some as insignificant, and others as slavishly faddish. Another way to think about it: embarrassing. Only about 30 per cent of directors and 18 per cent of executives at S&P/TSX companies were women in 2019, according to Catalyst, an advocacy group. Visible minorities filled about six per cent of board seats, according to a review by Osler, Hoskin & Harcourt, a law firm.

Regardless, leadership diversity is fast becoming a tenant of modern governance. Scholarship shows that companies that are dominated by older white men have too many blindspots. They lose out on young talent that’s adamant about working only for employers that reflect their values. They risk alienating customers, politicians and regulators.

“At the heart of the CEO agenda, is the imperative to build and maintain trust,” Nicolas Marcoux, head of consultancy PricewaterhouseCoopers Inc.’s Canadian unit, said at a virtual event sponsored by the Toronto branch of the Canadian Club on March 23. “ESG is no longer a nice-to-have. It’s a must-have.”

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To be sure, CN chief executive Jean-Jacques Ruest’s senior management team remains entirely white and mostly male. (The roster of vice-presidents is less monochromic).

But Ruest will be the only CN executive on the docket when shareholders vote at the company’s virtual annual meeting on April 27. The independent nominees are an even split of men and women, the same as CP. However, CP’s board is entirely white. That matters to investors who decide where to deploy their money based on ESG assessments. CN is betting that its rivalry with CP and American railroads such as CSX Corp. will be decided by more than shipping costs and arrival times in the future.

“Our longer-term goal is to be at the leading edge of ESG best practices across North America and globally,” Ruest and Robert Pace, the boar chair, said in a letter to shareholders ahead of next month’s annual meeting.

Achieving that objective is going to take some more work. CN tends to say the right things, and often backs up its words with action: the company has cut the greenhouse gas emissions spewed by its locomotives by 40 per cent since 1993, earning high marks from at least one outfit that tracks companies’ commitment to fighting climate change.

Still, it’s unclear that CN has put much distance between itself and its competitors when it comes to ESG. Sustainalytics, a unit of Morningstar Inc. that does ESG research, says CN and CP are both “low risk,” so an ethical investor could buy either stock without violating her or his principles. The firm currently rates CP slightly higher — 30th out of 335 transportation companies (1,611th out of a universe of 13,676 companies), while it ranks CN 34th (1,683rd overall).

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“With respect to ESG, the whole world is moving that way,” Pace, who has led CN’s board since 2014, said in an interview earlier this month. “The trend is wide. It’s deep. We just have to make sure our goals and aspirations are real and we can deliver.”

Too often, companies’ ESG initiatives emphasize what they are doing about the environment. Perhaps the most interesting part of CN’s recent efforts is that its focus is wider than climate change. It said last month that the tenure of independent directors will be limited to 14 years and that they will be allowed to serve on a maximum of three public boards including CN.

More importantly, the company also said that it would create an advisory council of Indigenous people, a recognition that CN tracks cross some 110 First Nations communities. Pace said the decision was partly inspired by the protests that disrupted rail traffic ahead of the pandemic, but that it also reflects an admission that Indigenous voices had been ignored for too long.

“The whole country has taken a long time. We all have to do our part,” Pace said. “We had to step here and make some changes. That’s what we’re going to do.”

Financial Post

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