This article was originally published on

Screen Shot 2020-04-09 at 10.49.57 am.png


“It may not be ‘cool’ or sophisticated to operate in a low capability field, but ‘contrast’ is optimised by being a super performer, in the weakest of fields.” Peter D Kaufman

The second law of thermodynamics holds: ‘The greatest thermodynamic efficiency is achieved by working with the hottest possible source and the coldest possible sink’. In Munger like fashion, Peter D Kaufman, Chairman and CEO of Glenair, adopted this as a useful mental model in business: ‘we should strive in our performance to be the ‘hottest possible source’, in combination with the ‘coldest possible sinkof competitive field, niche or system.’ A telling example is the Railroad industry; an industry that hadn’t adapted for a generation and then combined with a ‘super performer’ named Hunter Harrison.

The late Hunter Harrison was a tour de force, a railroading genius who worked his way up from the rail yards at eighteen to run four publicly traded railroads, at the same time delivering billions in value to their shareholders. Harrison’s story is told by Howard Green in the recent book ‘Railroader – The Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison’. Warren Buffett, a railroad owner himself, noted ‘It’s an interesting read.’

Harrison’s story highlights the potential for a brilliant operator to significantly improve the operating performance of a lazy capital-intensive asset. Having developed a more efficient operating philosophy, ‘Precision Scheduled Railroading’, Harrison achieved operating margins and profitability which were the envy of competitors.

In contrast to the win-win philosophy evident in many of the recent businesses we’ve studied, at times Harrison’s approaches drew criticism from employees and customers. This is an important differential, as his success suggests different cultures may be appropriate for different business models. WCM Investment Management’s Paul Black, suggested something similar, in that it’s important to ensure a business’ culture aligns with the company’s competitive advantage.

Sam Walton really embraced the notion that you have to bring people along, you have to get people excited, you have to make people happy. You have to pay people well and tie them into the bottom line. He built this culture where people just loved coming to work and they had a lot of fun doing it. As a result they took on these old stale bureaucratic centralised organisations. That works for a retailer. But do you really need happy employees to run a railroad? Probably not. You want people that are highly accountable, that probably think in certain way, more linear, because it’s all about delivering an on-time product in an efficient, cost effective manner. There is a high cost of failure. Different stresses. Very difficult corporate culture is needed for that than for a retailer. We found there are different cultures you find for different businesses that are effective.” Paul Black

The book is an enjoyable read. In particular, the story of how Bill Ackman’s Pershing Square, having recognised Harrison’s innate abilities, made billions buying a stake in Canadian Pacific and recruiting Harrison to run the business.

I’ve included some of my favourite quotes below:

Super Performer

“For decades, Hunter Harrison, an American from working class Memphis, would repeatedly show people how to do it better than anyone else.”

“While Harrison, the unrivaled operator, did not envision a global computing Goliath, in certain respects, he was the Steve Jobs of railroading: uncompromising, unrelenting, fierce, antagonistic, confrontational, and a winner.'”

Shareholder Value

“Railroading wasn’t about being a train aficionado. It was only a route to shareholder value creation. That was everything.”


“You don’t turn around capital-intensive businesses with legacy costs and thousands of employees, making them the most efficient major railroads in North America, without leaving some ‘blood on the tracks’.’”

“‘My mandate in these jobs has never been to be Mr. Popularity’. Indeed, Shareholders of four railroads hired Mr. Un-Popularity to turn around their flagging fortunes. The willingness to not be loved was the price he paid to get things done.”

Capital Intensity, Sweating Assets & Lots of Little Things

“So much of what Harrison taught came down to assets. Few things bothered him more than under-utilised ones. If an asset isn’t used, he wrote, ‘It’s a liability’ because of the costs associated with owning it. ‘Railroads only make money when cars are moving. Track is a railroad’s most expensive physical asset. Track has a 40 year life. So why would we lay down tracks to have cars sit idle?’”


Railroads, he wrote ‘were awash in long-lived assets’ – track, locomotives, and cars. He went deeper. What if dwell times in yards were cut to eight or twelves hours instead of twenty-four? What if customers unloaded faster so their cars were there for half the time? What if average velocity went from twenty-five to thirty miles an hour? ‘Now we’re getting more cycles from the same equipment.’ As he would say, a thousand little things equal a lot of money.’


“It was during his time at Burlington National that Harrison became intrigued by computers.. Harrison was acutely aware of the value of data.”

“The birth of MCSM (Major Corridor Service Measurement), a system that tracked traffic patterns from origins to destinations. From that day on, there became pressure to measure like that. The team would define an acceptable amount of time for a boxcar to get from origin to destination and then monitor it to see if it made it in the set time. If it didn’t, the system showed them where a car lost time and why. [Harrison] was the only one who actually understood what the data meant. He could look at the data and know exactly what that meant from an operating perspective.”

“Soon [Harrison] was scrutinising the return on assets, capital spending, depreciation, cash flow, and revenue. He also wanted all the regions of the railroad to be cognisant of these numbers.’“

Hunter Harrison would drool over such data like a kid over a comic book. More precision was being built into the railroad’s schedule, a step toward heaven for the obsessed, continuous learner and improver. Every possible scenario had to be accounted for so it could be in the algorithm and the algorithm could figure out what was supposed to happen.”

“Previously, CN quoted delivery times in days – plus or minus a day or two for flex. Edmonton to Chicago was seven to nine days. Sometimes is was five or six, other times ten or eleven. That drove Harrison nuts. He wanted to quote in hours not days. If a train was scheduled to leave at 8am, whether there were sixty or one hundred cars. If you measured in hours, everything got more precise. Taking it even further, if you measured car inspections in seconds, they got faster too.”

Trouble was often avoided by a deep understanding of railroading – and a deep understanding also meant measurement, something Harrison was big on.’

Competitive Advantage / Precision Scheduled Railroading

“As Harrison said, his basic view didn’t change during the decades he ran railroads – service customers, control costs, utilise assets, don’t get anybody hurt, and recognise and develop people.”

“Leadership skills and boxcar moving skills would one day coalesce into Precision Scheduled Railroading, the operating philosophy that would become his calling card worldwide.”

“Freight trains ran on volume. Customarily, when the car was full, it would depart. Neither the railroad nor the customer knew when that would be. He said, we’re going to flip this very basic premise and run on schedule. By doing so, the railroad would utilise its assets at maximum efficiency and get rid of ones it didn’t need, saving huge amounts of money.”

What produced results [at Illinois Central] was the approach he would preach for the next two and a half decades – what train velocity does for efficiency, what longer trains mean for efficiency, and on and on. He saw better processes for everything, base hit after base hit.”

“Everywhere I’ve been, we’ve gained market share and been able to increase price. And I think that’s the important thing, and that’s driven on the product you have.”

“Harrison predicted CSX could take about 10 to 15 percent of Norfolk Southern’s business. He said CSX would get its cost lower than NS’s and then price more aggressively.’

Common Sense

“While much of what Harrison did was based on an intellectual approach that had developed over years of observation, thought, and the honing of processes, much of it was also common sense.”

Operating Ratios

“Harrison’s operating ratios were not, however, aberrations. Illinois Central was usually ten points better on Operating Ratio than the next best – and twelve or thirteen points better than the average. For Harrison, a lot of it came back to his time as a train master.”

“By most performance metrics, the CP turnaround had been off the charts. At the end of 2016, the operating ratio was 58.6 percent, the best on record at the railroad – and down from more than 80 in 2012.”

Source: Fortune Magazine

Source: Fortune Magazine


“[Harrison came] to the conclusion that if you said yes to everything the customer wanted, you wouldn’t make any money. That approach would help him make enormous profits in later years, but it would also eventually result in criticism that would later hound him.”


I’ve never seen a guy grab hold of a company,’ Gray said [CN Board Member], ‘and change the culture and the results in such a short period of time.’ Was it all warm and fuzzy? Gray asked rhetorically. ‘Not on your life.’”

“[At Hunter Camps for senior executives,] Harrison wanted the campers to internalise his key principles – provide service, control costs, utilise assets properly, concentrate on people, and not get anybody hurt. He didn’t necessarily want the smartest people in the world, he wanted the hardest working people in the world.”

“[He wanted attendees at Hunter Camps] to be passionate, arguing that people – employees – were dying to do something that mattered, to be inspired. ‘Just care’, he pleaded. He told the room he viewed Hunter Camps as the most important thing he could do at the railroad – changing the culture.”

Among the factors highest on Harrison’s list was culture. CSX, he said, was the sum of putting together more previous railroads than any of the other Class 1’s. ‘We don’t have a culture.’, he said. ‘We have about nineteen.’ As a result, he said staff ‘don’t know where they belong.’ To enact cultural change, Hunter Camps would be revived.’

Industry Structure & Change

“Harrison was a ‘change agent,’ and the status quo, while comfortable for most people, was uncomfortable with him. Railroads, Gray [CN Board Member] said, were ‘slow to adapt’. The industry had not evolved for a generation. Given that the sector was ripe to be whipped into shape, he said it was inevitable that someone like Hunter Harrison would come along eventually. ‘I’d never seen anybody who was more appropriate for the time and the changes required than Hunter.”

“Harrison quoted the former chief of staff of the US Army, General Eric Shinseki: “If you don’t like change, you are going to like irrelevance even less.” He pointed no further than the cassette tape and the compact disc. As for those who say businesses just mature and get commoditised, Harrison wrote in one of his manuals, “this is simply the excuse of losers… Time after time, people and organisations entered stable, mature markets and turned them on their ears. Haagen-Daazs did it with ice-cream, Starbucks did it with coffee, and Canadian National keeps doing it again and again with railroads.’



When asked, however if competitors would up their game and perhaps try to copy what he was doing, he said they could buy the books he’d written at CN. “[They’re each] on eBay for a thousand dollars,” he cracked, adding that he hoped they would try to emulate his operating methods, because he viewed his competitors as partners, since railroads depend on each other’s lines to get their cars where they need to go.”


Harrison had little patience for boards. Put simply, they were a pain, a waste of time and money.”

“Did a board add shareholder value? In the final analysis, Harrison would say no, at least at a railroad.”

Head Office

“[Upon joining CP] Harrison also didn’t like head office, which he called the ‘glass house’ in downtown Calgary. It would not be long for this world… It was also the opposite of what he thought a revamped railroad needed – in-your face contact with rail cars. Harrison would soon announce that he was relocating head office to a rail yard. CP’s headquarters would be where the action was – next to the tracks.”


“Hunter Harrison once said, ‘They ain’t buildin’ any more railroads.’ Critical infrastructure was constructed decades, if not more than a century ago, as cities built up around rail lines. The only way for existing railroads to get bigger and more efficient was to swallow others.”


“‘Success is a lousy teacher,’ Harrison wrote. ‘It seduces smart people into thinking they can’t lose.’ He preferred types like those who came up with the household lubricant WD-40, named numerically because the inventor failed 39 times before coming up with the magic formula.”


“Harrison invoked ‘the team’ and studied great sport coaches of the modern era. While many CEO’s love reading biographies of political leaders, Harrison’s shelves were full of books about winning coaches. While he drew lessons from all of them, he favoured the no-nonsense, tough-guy styles of the past – Vince Lombardi of the Green Bay Packers and Bear Bryant of the University of Alabama. Both were feared and respected.”

“‘Great teams don’t allow people who don’t want to really play to stay,’ he wrote in his first manual.”

“Soon, non-operating people like computer programmers would be trained as conductors. Managers would learn how to drive trains. This would not only give the company flexibility, but office workers would learn what it was like on the front lines of actually operating a railroad. ‘Nothing was sacred’ was the message.”

Reward Employees

More than half of the employee base at CN had joined the stock purchase plan, and the improvement in the operating ratio and the stock price benefitted many.”

Walk The Floors – Tone At The Top

Harrison travelled constantly, so employees everywhere saw him in action.”

“Like at CN, nose-to-nose encounters with the new chief had a way of resonating throughout the organisation.”

Consultants, Monthly Budgets & Rule Books

“Rule number one: no consultants without Harrison’s approval – and he added they wouldn’t get his approval.”

“Then came the assault on the monthly ‘outlook.’ He growled that compiling it was simply busy work, again adding no value, The team drew up the budget for the year in the fall. Unless something changed drastically, he didn’t want high-priced employees fooling with spreadsheet updates. ‘Shit, we ain’t nuthin’ but statisticians .. I want to move boxcars’ and serve customers, he added. ‘I want to know who in the shit you do this for?’ Again, silence.”

“Thumbing through the CSX employee rulebook, which resembled a phonebook from a mid-sized city, he shook his head .. He argued that voluminous rulebooks gave people a false sense of security. He planned to eliminate it and have a new one written that would fit in a pocket and not tell people ‘how to walk’.’”


Hunter Harrison was a maverick in an industry largely unchanged for decades. His intimate understanding, like a sixth sense, allowed him to extract costs and increase efficiencies across the companies he ran. Assets had to keep moving, otherwise they were a liability. Inverting the incumbent operating system, harnessing technology and data, and optimising hundreds of small processes created a superior operating system that maximised profitability.

While some customers may not have welcomed some of the changes Harrison implemented, they benefitted from a faster and more reliable freight service. At times, despite employees and management considering his approach ‘too tough’, Harrison deemed it essential to achieve the cultural changes so required for a successful turnaround.

Ultimately, shareholders were rewarded. Harrison’s record of improvement was so astonishing, a few investors sought him out to run other underperforming railroads.

“Canadian Pacific is shipping 20% more freight than it did before we started, or than it has ever shipped in the past. And it’s shipping that freight 40% faster than ever, with record on-time performance, 40% fewer locomotives, 35% fewer people, and 14% improved fuel efficiency—all while maintaining an industry-leading safety record. In sum, CP is doing much, much better and more safely—and with far less. For our investors, these changes have resulted in an explosion of cash flows. When we made our investment five years ago, the company was worth only $8 billion, reflecting the poor performance of the railroad. Today, with the improvements cemented, it’s worth $30 billion. Bottom line, there are large amounts of latent value in public companies waiting to be unlocked. All it takes is some fresh eyes and hard work.” Paul Hilal, Pershing Square, 2016.

It’s little wonder Buffett has kept a close eye on Hunter Harrison’s railroad success.

“All of those companies [run by Hunter Harrison] dramatically improved their profit margins, and they had varying degrees of difficulty with customer service in the implementing of it. We are not above copying anything that is successful. And I think that there’s been a good deal that’s been learned by watching these four railroads, and if we think we can serve our customers well and get more efficient in the process, we will adopt whatever we observe.. there’s been growing evidence that we can learn something from what they do.” Warren Buffett 2019

Cold sink’ industry investments coupled with ‘super-performers’ can be a recipe for billions.

Further Reading:
Pershing Square Presentation on Canadian Pacific
’Value Creation by Active Investors (and Its Potential for Addressing Social Problems)’ – Columbia Business School, 2015

‘Railroader – The Unfiltered Genius & Controversy Of Four-Time CEO Hunter Harrison.’ Howard Green, 2018. Page Two Books

Follow us on Twitter: @mastersinvest


Read more awesome articles like this one on!