Why I’m Writing This
The journalist I.F. Stone (1907–89) is little remembered by my students’ generation, and rarely emulated by journalists today. A left-wing political radical and philosophy major drop-out who cut his teeth in the newsrooms of the Philadelphia Inquirer, the New York Post, and The Nation, Stone adopted a slow-but-sure method of investigative journalism based on close readings of publicly available documents. That’s very unsexy stuff — no “Deep Throat” (a reference that one high-school journalist of my recent acquaintance did not get), no Woodward and Bernstein heroics (the high-schooler didn’t get that reference either). No book or movie (All the President‘s’ Men? Nope, no glimmer of recognition). An independent journalist with his own little newsletter, “Izzy” Stone just read documents hidden in plain sight in the public domain, and not infrequently scooped the big guys. (Late in life he turned back to philosophy and wrote an entire book about the trial of Socrates. Interesting guy!)
I come from a family of journalists, and I’m interviewed regularly in my day job as an atmospheric scientist and faculty member at the University of Georgia. And I know that today’s journalists literally have no time to do what Izzy Stone did. Heck, even back in Stone’s day he was just about the only one doing it. Today? A journalist is required to write more stories, post more tweets, and generate more clicks than is humanly possible. I once did a phone interview with a young Los Angeles Times reporter who was hyperventilating over the phone, apparently because she was so busy and stressed out. In this context, Stone’s plodding old-school approach is simply unthinkable for professional journalists.
Until the corporations that run journalism (into the ground) change their ways, the only solution seems to be for “unprofessional,” citizen journalists to fill the void. This is an attempt by me to do just that, to aid and honor the memories of the four generations of journalists of my mom’s side of the family who go and went before me: my grandfather, grandmother, aunt, uncle, mother, brother, first cousin, and first cousin once removed.
Why I’m Writing About CSX
Our son Evan, when he was little, was a complete and total train fanatic. Thomas the Tank Engine. Brio trains. Model trains. Real trains. My wife Pam and I had to scurry to keep up with Evan’s passion.
On a whim, we invested a little of our savings into CSX — the corporate descendant of the glorious “Chessie” system that we saw in videos Evan watched. Oddly enough, this turned out to be a better investment than any stock that Merrill Lynch recommended to us! Evan is nearly finished with college and isn’t much into trains anymore, but we still have 225 shares of CSX stock.
Investing in CSX meant that each year we’d get some literature from the company that we could show to Evan — one more avenue for train-related entertainment. And we still do. In fact, at the end of this week the CSX Annual Report 2017 and 2018 Proxy Statement arrived in the mail. Being old-fashioned, we still get hard copies.
The nice thing about hard copies is that the temptation to scroll quickly through a document online is lessened when you have something in your hands. You can get engrossed in it. And yesterday I did. To my astonishment, what I thought would be a 5-minute glance at the train pictures became a two-day examination of the data in the Annual Report and Proxy Statement.
I should state here that I am the former or current chairman of the board of multiple small non-profits, and I am currently a school board member for a district with an annual budget of $150 million. And as a physical scientist, I’m a data nerd. I naturally pick up and read annual reports!
And so what follows is the assessment of a reasonably informed citizen and shareholder who happens to know his way around annual reports and is interested in trains because his son was a train fanatic.
I looked at the CSX documents the way an I.F. Stone would: with a BS detector and with a focus not on profits, but on people. Which is what you rarely, if ever, get from the “business” (not “labor”) section of a newspaper or cable channel.
What I found is probably common knowledge among some, and you probably would be able to find some of it by Googling. But maybe this story a little more believable if you hear it from a scientist and a dad reading the company’s own documents than from a think tank or a political activist.
And for the tl;dr crowd, here’s a one-sentence preview of what follows:
I like trains — but what I learned about CSX from its own reports turns my stomach.
Earnings Up, Employees Down
In 2017 CSX’s earnings per share number exploded to $5.99/share. That was up a whopping 237% from the previous year. Holy cow, what happened?
The Trump tax cut happened. Over $3.5 billion in taxes was saved when the tax rate for CSX was slashed from 35% to 21%. For a company whose annual expenses are circa $8 billion, that’s big money. Nothing else explains more than a small fraction of CSX’s banner year.
For example, revenue due to operations was actually down 1% in 2017. Coal exports were the only bright spot, up 42%. But the Izzy Stone in me says, “Is exporting coal to other nations in the year 2018 really how we should be making our money in a globally warming world?” Even if it is, all this was a blip compared to the Trump tax cut in terms of CSX’s bottom line.
Also a minor factor financially, but a major factor for people, was CSX’s “involuntary separation with enhanced benefits” program for its workers. Translation: CSX got rid of employees. How many? In 2017, a total of 950 employees were “involuntarily separated.” Kicked to the street with some extra bennys, which did cost the company $194 million (p. 69 of the annual report), while promising to save hundreds of millions in the near future.
You won’t find this detail in the CEO’s report at the front of the CSX Annual Report 2017. The 950 booted employees stat is buried on page 68.
By my estimate, CSX got rid of about 4% of its workforce just in 2017 alone.
But don’t let CSX tell you that the downsizing of workers helped their bottom line very much. The savings was perhaps a quarter-billion dollars. But the Trump tax cut, again, gave back over $3.5 billion. Down the road there will be additional savings due to fewer employees, but let’s give credit where it’s due: to The Donald.
More money from Trump, fewer employees. But wasn’t the whole premise of the tax cut that it would stimulate employment? That’s what the White House said on April 16, 2018. There’s no indication that it’s happened at CSX; quite the opposite. And, as we’ll see, more employment at CSX is not in the plans, not at all, in the future.
Safety Is Optional?
When you slough off 4% of your workforce, probably some of the more senior workers to boot, how does your organization react? Don’t parrot some Harvard MBA claptrap; think, men, think. What happens in real life? Your organization does a lousier job, right?
Buried in the CSX annual report is evidence of this. On page 41 there are several statistics. The CEO pulls out the ones he wants you to hear and puts them in his report on pages 1 and 2. But back on page 41, the careful reader learns that:
> CSX’s on-time originations went down 5% from 2016 to 2017
> The CSX train accident rate went up 12% from 2016 to 2017
> The CSX personal injury frequency index went up from 2016 to 2017
Meanwhile, an environmentalist Izzy Stone might be troubled by the statement on page 47 and again on page 79 that CSX could be on the hook as a potentially responsible party for no fewer than 214 “environmentally impaired sites.”
Personal and environmental safety should be a concern of this company. But, is it? What does CSX really care about?
It’s Not About The Employees
Railroads used to be known for the generosity of their pension plans. CSX’s pension plan is limited to those hired prior to 2003; a different “cash balance formula” was put in place for more recent hires. The average duration of those on pension plans is 12 years, which to my uninformed ears sounds a little low. Perhaps the retired workforce is mostly men who lived somewhat hard lives.
You might think that with a wave of Baby Boom retirements etc. that CSX would be on the hook for major costs in its pension system in the years ahead. Nope. Pension costs are projected to go down by 8% from 2018 through 2022 (p. 91 of the annual report). Post-retirement medical benefits are projected to plummet 42% over the same time period.
Do you know of any other organization that’s expecting that kind of massive reduction in medical benefits over the next four years? What gives?
My read of the situation is that CSX has dumped so many employees in recent years (the CSX workforce is, by my calculation, down 25% from FY 2012 to December 31, 2017; see p. 74 of the 2018 Proxy Statement for the latest estimate of 24,215 employees) that even the rising costs of pensions and medical benefits cannot compete with the downsizing. CSX’s explanation of the pension cost reductions in 2017 relates to “spot rate approach.” I’ll leave it to the actuaries to parse that, but I am going with the assumption that slashing one’s employee ranks can reduce one’s pension obligations.
So, if a corporation’s heart is where the money is, CSX isn’t about its rank-and-file employees. In the words of George Thorogood and the Destroyers, who do you love, CSX?
Shareholders
2017 was a very good year for CSX shareholders like us Knoxes. As the CEO reports on page 1, “We returned almost $2.7 billion to our shareholders through dividends and share repurchases, a year-over-year increase of more than $900 million.” Doggone, up nearly a billion in one year? That’s a 50% increase. In one year. The dividends per share went up from $0.70 in 2015 to $0.72 in 2016 to $0.78 in 2017. CSX loves shareholders, and the shareholders love CSX, presumably.
The Really Big Chunks…
There’s love, and then there’s lust. As in American society at large, the rich get richer at each level in CSX.
Let’s start with the board of directors of CSX. The median compensation for the directors (average age 64; 23% female) in 2017 was $304,692 (p. 33 of the 2018 Proxy Statement) — a combination of fees, stock awards, and “all other compensation.” In toto, that’s $4.9 million for the people entrusted with overseeing the corporation.
CSX lavished $39 million in equity award modifications on 75 employees at the top (p. 77 of the annual report)— an average of over a half-million dollars apiece! These awards were tied to company performance; and, as we’ve seen, it was a very Trumpian year at CSX.
Then there are the NEOs, an acronym tossed around in the Proxy Statement that refers to the non-management CEOs and Senior Vice Presidents yadda yadda. There were just nine of these NEOs in 2017. But eight of them, not counting the new CEO who came onboard in March, raked in $54.5 million in total executive compensation — an average of $6.8 million apiece!
All this was just a part of a larger payday of $133 million in total share-based compensation and income tax benefits for employees near the top and the directors. This figure was just $16 million in 2015 and $51 million in 2016 (p. 73 of the annual report). So, that’s more than an eight-fold increase in bigshot compensation over just two years.
But the biggest money, like hot air, rises to the very top.
The Money Shot
The executive overcompensation outlined above pales in comparison to the mother lode hauled in by CSX’s brand-new CEO, E. Hunter Harrison, who earned from one publication the coveted title of “the world’s greediest CEO.”
At age 72, Harrison jumped the rails from Canadian Pacific to CSX in a complicated series of events between January and March 2017 that intimately involved CSX Board Vice Chair Paul Hilal and the company Hilal founded, Mantle Ridge. (I can’t read about this without asking questions, and apparently other shareholders did, as well, judging from the lengthy apologia in the 2018 Proxy Statement on pp. 26-27 and pp. 40–41.) It wasn’t the first time that Harrison had moved from one railroad to another while trailing clouds of controversy.
What awaited Harrison at CSX was an enormous payday. Ginormous, at least by the standards of the dad of a train fanatic who winced at the cost of Brio track.
Not only did Harrison cut a deal so that he got $84 million paid to Mantle Ridge and to him, to cover Hilal’s company’s funds paid to Harrison during the scant time he worked for it and to replace forfeited compensation from Canadian Pacific. No, not just that. CSX also assumed Mantle Ridge’s tax indemnification obligations. (All this is found on p. 68 of the CSX Annual Report, right under where it finally mentions the 950 laid-off employees. Nice touch, anonymous editor at CSX — way to twist the knife!)
But, no, not just that. Harrison demanded and got options for 9 million shares of CSX stock as another condition of his employment as CSX CEO. Total executive compensation for CSX CEO E. Hunter Harrison in 2017 (p. 11 of the 2018 Proxy Statement), including stock options: $115.9 million. These options were to vest in equal annual installments over Harrison’s four-year term as CEO, beginning after his first full year of service (p. 40 of 2018 Proxy Statement), i.e. March 2018.
What a killing. All Harrison had to do was keep breathing until March. The ratio of CEO total annual compensation to the total annual compensation of the median employee would be 1,531:1. Holy plutocracy, Batman; even in our Second Gilded Age the typical ratio is more like 140:1, 10 times smaller! But who cares? Nobody! Just remember to breathe.
A Breathtaking Turn of Events
That turned out to be impossible for E. Hunter Harrison.
According to the Chicago Tribune, Harrison had had bypass heart surgery in 1998. He’d had stents put in his legs in 2015, as well as a bout of pneumonia in that same year, which interfered with his work. In May 2017, shortly after he’d cut his deal with CSX, the Wall Street Journal reported that Harrison was using supplemental oxygen and often worked from home. Harrison’s riposte: “Don’t judge me by my medical record; judge me by my performance.”
But Harrison refused CSX’s request to have a doctor independently review his medical records. CSX went ahead and hired him anyway, at the 9-figure total compensation package figure cited above. What could go wrong? Stock prices soared, because the stock market loved Harrison.
But Harrison was carrying a tightly held secret — no surprise, given what you just read. He was suffering from emphysema — hence the supplemental oxygen. My father-in-law died more or less from emphysema, and I’ve seen it up close; over many years one’s lungs just stop working, and you die. That’s what happened to E. Hunter Harrison on December 16, 2017.
CSX bullshat the public with a press release that Harrison died from “unexpectedly severe complications” from a recent illness that forced a surprise medical leave just two days previously. But Railway Age, which honored Harrison twice as Railroader of the Year and couldn’t be fooled, reported that “[Harrison] had indeed been ill for quite some time, requiring supplemental oxygen, as he was suffering from emphysema. But few probably knew the extent of just how ill he was.”
Those “few” seemed to include the CSX Board of Directors.
Again, put on your I.F. Stone hat and read the above paragraphs. E. Hunter Harrison was a seventysomething man with terminal emphysema. He actively hid the severity of his condition while negotiating an amazing executive compensation package with the help of the CSX Board’s Vice Chair who also just happened to own the company Harrison landed with in January 2017. Sweetheart deals all the way around, it would seem.
Perhaps Harrison, a covertly dying man, was trying to get the best possible deal that would set his family for life — for generations. If so, the big payoff — the stock options to the tune of 9 million shares— didn’t materialize. They were forfeited upon Harrison’s death.
But can you believe that the CSX Board fell for this?
The Bottom Line
To be fair, the CSX Board cares about making money. And, incredibly, the clown show of the hiring and burying of E. Hunter Harrison within 9 months did not hurt CSX’s financial situation. On the contrary, the boost CSX got from Harrison’s hiring has been maintained. The 1Q 2018 report was good, too. For now.
But, again thinking like Izzy Stone, let’s look at where the money went and who got it:
A total of 950 CSX workers were let go “involuntarily” in 2017. CSX paid out $194 million to do this (p. 69 of the annual report).
Meanwhile, the big payday for Harrison and other “restructuring” costs led to CSX paying out $141 million. The biggest single chunk of this was the Harrison $84 million cha-ching (not counting the near-miss on his stock option payoutpalooza).
This is where American industry is today: willing to lavish hundreds of millions on a few people while paying out an equal amount on nearly 1,000 employees to kick them to the street, with benefits. The Thousand (ok, 950) worked for CSX for decades. Harrison covered up his health situation and lasted just nine months. But he got almost as much in those nine months as The Thousand did, combined, in severance.
This shareholder says that’s fubar.
The Future of CSX: PSR, or Call BS?
The reason E. Hunter Harrison could command nearly nine figures for nine months at CSX was because of his ballyhooed concept of “precision scheduled railroading” or PSR. His replacement as CSX CEO and fellow disciple of PSR, the shellshocked-looking James M. Foote, explains PSR in the following pithy ways in his CEO’s report in the 2017 Annual Report (p. 2):
At its core, [PSR] is about relentlessly identifying and eliminating every unnecessary step, every unproductive asset, every extra mile, and every extra car handling that does not contribute to the quality and consistency of our transportation product. We eliminate bureaucracy. We run fewer, longer trains with fewer stops… Running a railroad this way changes the game. We need… less capital… [PSR] allows us to carry significantly more traffic with fewer assets.
Put on your Izzy Stone hat again. What is brand-new CEO Foote really saying?
“Bureaucracy”: hold on, CSX has already shed a fourth of its total workforce since 2012. I really doubt that there are large tribes of middle managers left. You’re not talking about eliminating “bureaucracy.” You’re talking about massive layoffs of, um, real people who need jobs. Lots of people.
What happened to Trump’s promise that the tax cuts would stimulate hiring? At CSX, there can be zero doubt that the employment numbers are going to dive.
“Fewer, longer trains”: Let’s think about real people here, not the CEO. If you live near freight tracks, is this the news you want to hear? Maybe, maybe not. Are we talking about half-hour backups of car traffic at rail crossings?
“Changes the game”: Always be suspicious when the people at the top talk about games. E. Hunter Harrison played games, and CSX lost that “board” game in many ways. The stock will stay high as long as PSR is seen as the cure-all, with Foote as Harrison’s surrogate.
But PSR didn’t get off to that great a start in 2017. In late September, American Shipper reported in a damning story that it had been a “bumpy ride” for CSX. For example, “an Aug. 1 report from financial services firm Cowen & Co. said more than 80 percent of shippers surveyed had experienced problems with CSX and nearly 40 percent had already switched some shipments to rival Norfolk Southern, while 67 percent have transferred freight to a trucking company.” American Shipper also stated that “ in late August, an opinion piece in logistics publication DC Velocity openly speculated as to whether taking on the CSX role would be Harrison’s ‘Waterloo,’ a reference to the battle that proved to be Napoleon Bonaparte’s final defeat.” He went out more like Frank Gorshin than Napoleon, but Harrison surely did go down.
- Where do things stand now with the transformation of CSX to a people-lite, compensation-heavy corporation, after Harrison’s inconvenient death? Maybe some shareholders should ask, at the 10 am EDT Friday May 18 meeting in Jacksonville, FL at the Prime F. Osborn III Convention Center, 1000 Water Street.
- Maybe some shareholders should ask what the CSX Board was thinking when it hired a terminal emphysema patient as CEO and offered him 9 figures, at the 10 am EDT Friday May 18 meeting in Jacksonville, FL at the Prime F. Osborn III Convention Center, 1000 Water Street.
- Maybe some shareholders should query the CSX Board about how it views the Trump tax cuts and its intended stimulus to increased employment, in light of PSR. Was it really just a multibillion-dollar giveaway to a company that’s trying to get rid of all “bureaucracy” and “capital”? How do the employees feel about that? Ask at the 10 am EDT Friday May 18 meeting in Jacksonville, FL at the Prime F. Osborn III Convention Center, 1000 Water Street.
- Maybe some shareholders should ask about the increases in accidents and personal injuries caused by CSX — including the fatal CSX-Amtrak collision in Cayce, SC in February 2018. Is there a connection between the involuntary separations and the increases in poor performance? Is there a connection between PSR and poor and unsafe performance, as suggested in industry articles cited above? Ask at the 10 am EDT Friday May 18 meeting in Jacksonville, FL at the Prime F. Osborn III Convention Center, 1000 Water Street.
- Maybe some shareholders should raise hell about a company that lavishes as much or more to the 75 people at the top than the 950 people out on the street. Because shareholders are kind-hearted? No. Because the Second Gilded Age is flirting with revolution as it overreaches, especially when it makes a mockery of due process by hiring leaders who won’t even submit to a truly independent medical exam. Harrison, Trump — they’re all the same!? Don’t expect the Marjory Stoneman Douglas High School generation to make fine distinctions because of the glories of PSR. Hell, even the freight shippers had had it with CSX by August 2017 — see the stats above. Raise hell, at the 10 am EDT Friday May 18 meeting in Jacksonville, FL at the Prime F. Osborn III Convention Center, 1000 Water Street.
- Maybe some shareholders should vote for change. There are 878.5 million shares of CSX stock outstanding. Pam and I own 225 shares, or 0.0000256% of the total. We’re not going to change the CSX world by ourselves. But I have a friend near the top of Blackrock, and he’s going to see this essay. Blackrock, Inc. owns 5.7% of all CSX stock. That’s more shares than all the executives and all the directors of CSX own, combined. Question authority, at the 10 am EDT Friday May 18 meeting in Jacksonville, FL at the Prime F. Osborn III Convention Center, 1000 Water Street.
I began reading the CSX Annual Report 2017 and the 2018 Proxy Statement just yesterday. I don’t know a lot about big business. But I can read. I probably got a detail or two wrong in here. CSX will undoubtedly harp on any small discrepancy in an attempt to discredit the whole essay. That’s how American institutional damage control works. But there’s so much smoke here, the fire’s not far away. And it’s a big fire. Those who know more, go and investigate.
And this is how citizen journalism can work… one train dad at a time.
“The only kinds of fights worth fighting are those you’re going to lose, because somebody has to fight them and lose and lose and lose until someday, somebody who believes as you do wins.” ― I.F. Stone
“Facts are subversive.”― I.F. Stone
