Canada's CFO of the year talks privatization: Claude Mongeau, CFO of Canada's largest railway company, reflects on its privatization process and broader issues affecting the finance function in a more rigorous regulatory environment.

Over the past decade, Canadian National Railway (CN) has been undergoing a radical transformation, turning itself from a highly bureaucratic, government-run enterprise into a private-sector success story. FEI Canada's CFO of the Year for 2005, Claude Mongeau, executive vice president and CFO of CN, talks about how his company became what he calls the most competitive railway in North America, and how CFOs can best lead their organizations through the many challenges facing them in today's competitive environment.

FE CN is one of the world's most successful examples of how to transform a government-run enterprise into a leading, market-driven company that has the ability to compete with the best private-sector railroads in North America. Can you explain how CN went through this transformation?

CM If you look back about 10 years ago, CN was just about the worst railroad in North America, basically [by] every metric. Most importantly, in terms of financial return, this was a highly indebted and money-losing company in the early 1990s. Through the turnaround and the privatization, we were successful in evolving into today what is a leadership position.

CN is now the best in the industry on every one of those same measures, from financial returns, to actual railroad operations, to safety metrics, etc. So it's been a dramatic transformation. As to how this happened ... it starts with vision. We had a leader in the early '90s, Paul Tellier, who came in with a vision to fix CN and make it one of the best North American railroads. That vision has driven our strategy. We had a very detailed strategy on how we would get there, from fixing the cost structure to focusing on expanding our network in a market that mattered, namely the United States, to driving towards better service so that we could have growth.

So that strategy has been implemented, and I would say the third ingredient is people. As our current CEO, Hunter Harrison, would say, "You can have vision, but if you don't have strong people from top to bottom to actually execute on that vision and strategy, you don't succeed." So if you asked me to summarize how it was done, I would say vision, strategy and people.

FE In many countries around the world, state-run enterprises have been privatized in recent years. What sort of advice can you give to financial executives in those organizations, who desperately need to modernize old strategies and structures and basically overhaul their entire view of financial management?

CM Of course, it's more than the financial function. In the case of CN, when you're a crown corporation, or when you're an organization that's not adhering to market principles, you find politics is driving so many decisions that your business processes are not anchored on the right metrics. You really do need to have a clean-slate start and focus your entire organization on delivering value to the customers and shareholders.

The opening of markets around the world is definitely a positive, but these traditional government-run organizations will not be able to seize the opportunities created unless they fundamentally change the way they manage their business processes to get to a point where everything is driven off of efficiency and market-driven principles. The CN story, if it says anything, tells us that organizations that have no business being in government hands should be the first to be privatized. Governments should only do things that are not well done by the private sector.

Governments should do a core review of everything they own and ask themselves the tough question: "Is it better done by the government or by the private sector?" In many instances, the private sector can deliver a higher level of efficiency, higher levels of responsiveness and actually drive the economic development agenda far better than the government can.

FE So, in terms of shaking up management thinking in those organizations, would this typically require a whole new set of leaders in the executive suite?

CM That's certainly the way it was done in CN. It's very difficult to engineer radical transformation if you don't change the people who are driving the business. That doesn't mean you necessarily have to go outside. You can also get the best people from inside the organization to move up to the top--those that have a passion for excellence, those embracing the agenda of change. Typically, these are also the ones that are hungry below. I would be surprised if you could succeed in transforming an organization without a healthy dose of change in the management ranks.

FE What will be the most challenging aspect of making this transition?

CM In the case of CN, you could not go fast enough. The best advice I could give is set your sights on a direction and execute as fast as humanly possible. There are always a million reasons people will give you for why you're trying to change the organization too fast or for not breaking institutional ties. I believe that if I had to do it all over, faster would be better, because there is no better way to rewire an organization than to drive change as urgently as you can.

FE What were some the greatest efficiencies gained in privatizing CN?

CM Labor efficiencies, capital efficiencies, service [efficiencies].... When you're a government-owned entity, you tend to focus on employment levels. It's very difficult to reduce employment, particularly if you're a geographically based business like a railroad. Every corner of the country doesn't want to be impacted by job cuts. So you're kind of stuck. There's no question that a government-owned entity would not have been bold enough to make acquisitions, to expand the franchise of CN outside Canada into the U.S. Since 1995, we've made four acquisitions for a total of C$7 billion. Most of them were in the U.S., pretty much in all aspects.

CN first started on a turnaround to improve as a government entity. But that led to the next question, "Can we do better as a private entity?" The answer was yes. This became the rallying cry, the accelerator or catalyst, if you will, in the paradigm shift that brought CN to where it is today.

FE What do you feel has been your major accomplishment in privatizing CN, and more generally, how important was strong financial leadership in this process?

CM I can tell you that finance was one of the core catalysts for change, just because so much of what was needed at CN was a focus on the bottom line. So, from changing the culture, to changing the tools to drive financial management inside CN, we did both.

We reorganized the entire finance function. We invested heavily in changing our information systems and went to an enterprise-wide platform, an SAP system. This was close to a C$300 million system change, which gives us the ability [to equip] a much stronger finance team with the best possible tool. At the end of the day, we view ourselves as catalysts for change. We're not just focused on reporting the numbers, but focused, in partnership with the business, on driving the numbers to improve.

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So, finance has been at the center of that transformation. Successful organizations are those where finance is a partner in change. In today's environment, if finance perceives its role as one that's too anchored on control, you can actually be an impediment to value creation.

You still have to focus on control and financial reporting, [and] the integrity of the framework has to be absolutely sound, but you have to do so in a manner that drives people to focus on what makes the business tick.

FE For the past three years, financial executives in North America have been under intense scrutiny from investors, the regulatory community and virtually all interested parties concerned about corporate ethics. In your view, has the management culture changed in the U.S. as a result of its regulatory environment? Have companies like CN and their top managers become more risk-averse?

CM There's no question there has been a huge change. Financial reporting and the framework for financial disclosure are under the microscope. This is putting the onus on management and the finance function to make things right in every aspect. I think that if this is well managed, it's for the better.

However, you have to be careful not to swing the pendulum too far and grind the organization to a position where it is slower and more risk-averse. I don't think the regulatory environment calls for it. [The regulators are] just calling for what should have been there in the first place: absolute integrity in financial reporting and solid internal controls.

FE Do you think that CN would have taken such bold steps towards privatization in the early '90s if the same regulatory framework existed here in Canada at that time?

CM No question. The new environment does put everything under [scrutiny], but it's not an impediment to innovation or driving value creation in bold ways. However, for smaller companies that are not publicly traded, the costs of [going public] and following all the new requirements can be significant. I believe that with experience, and as long as we find the right balance from a regulatory standpoint, these costs will come down. This shouldn't be an impediment for companies to gain access to vibrant capital markets, whether it's in the U.S., Canada or in Europe.

FE As someone who is keenly aware of the controversial issues surrounding financial management in both Canada and the United States, what are your views on the changing role of the CFO in North American companies?

CM The pressure on CFOs has never been higher. That's a challenge, but it's also an opportunity. You're under scrutiny, and if you do it right and if you help your organization lead change, then it's an opportunity for CFOs to play an even bigger role.

I personally believe that CFOs who are achievers are the ones that define their role in the most strategic manner. You have to do all the things that have to be done in finance and do them up to the standards that are called for by the regulator and by the profession. But you also can't limit your role to being a bookkeeper. You have to be a core member of the management team and an architect for change and driving value in the business through finance. If CFOs do that, the role can only be expanded and become more important than it is today.

FE What advice would you give to other CFOs in North America today who are trying to keep ahead of the rapid changes in both the regulatory and competitive environment?

CM It starts with your team. If you want to be recognized as an achiever and a strong CFO, you'd better look around and develop the people that support you. You're only as good as your team. That's the first thing. The second is, whatever business you're in, set your sights on making a contribution to the broad business agenda. If you define your role in that strategic mindset, you'll be a better CFO and you'll be having more fun in doing what you do.

Ramona Dzinkowski ([e-mail]) is an economist and freelance journalist based in Toronto.