CSX

The hedge fund TCI contends that the railroad company CSX (which I backgrounded for you in the previous entry of this blog) should: separate the roles of chairman of the board and chief executive; refresh the Board with new independent directors; allow shareholders to call special shareholder meetings; align management compensation with shareholder interests; justify its capital spending plan to shareholders; and provide to shareholders a plan to improve operations.

Much of the heat of this still-developing proxy fight was generated in single remark in the context of a teleconference last October (the 17th) called to discussed third-quarter earnings with the stock analysts.

One of the analysts on the line, Christian Wetherbee of Merrill Lynch, noted that CSX was measuring its return-on-investment figures against book value. He asked:
"Where do you think you stand on a replacement cost basis? I'm sure you guys have done the analysis. I'm kind of curious. Is it half that level? Is it, you know, somewhere in between? higher or lower?"

Book value: how much the RR paid for its locomotives and other assets, minus depreciation for their age.

Replacement value: how much it would have to pay for equivalent assets today.

Michael Ward, the chairman and CEO of CSX, replied: "Chris, what industry looks at their ROIC on a replacement cost basis? I don't know of any industry that does that."

TCI considers that remark fatuous: just short of a declaration that Mr. Ward is running a non-profit. They've got a point. It seems intuitively obvious that replacement cost is the more sensible market-driven measure, that book value allows more scope for slushy numbers. And surely somebody at CSX is keeping track of replacement value, even if that somebody isn't Mr. Wald!

Stock price? From the summer of last year until the start of this month, CSX stock was zig-zagging about in a range between $40 and $46. In recent weeks it has broken out of that price on the upside, going above $50. I won't try to give reasons for that move here.

One of the contentions of TCI is the classic corporate goo-goo point that the roles of CEO and chairman of the board ought to be separated, that the coach and the quarerback ought to be different folk. What's behind that contention in this case is chiefly that Mr. Ward is both of those things, and TCI doesn't trust him to do either job, but would rather have him stay on in just one of them than in both.