Activists Gunning for Control of Norfolk Southern and Ouster of CEO
Norfolk Southern has a looming proxy fight on its hands.
Activist investor Ancora Holdings is leading a group of investors who want change at the railroad operator. To do so, they’ll need to reconstitute the company’s board, hence the upcoming proxy battle. Once its gets a majority of its nominees onto the board, the next item on the agenda is to oust Norfolk Southern’s CEO Alan Shaw.
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“The Norfolk Southern board and management team regularly engage with shareholders and take their perspectives seriously,” a Norfolk spokesman said. “We are committed to acting in the best interests of the company and our shareholders as we continue to execute our strategy to balance safe, reliable service, continuous productivity driven by our precision scheduled operating model, and the pursuit of smart, accretive growth.”
According to the Wall Street Journal, which first reported on the planned proxy fight, the activist group has a $1 billion stake in the company, and its slate of nominees include former Ohio Gov. John Kasich and former Kansas City Southern railroad executive Sameh Fahmy. The report also noted that hedge funds Sachem Head Capital Management and D.E. Shaw have begun building stakes in Norfolk Southern.
Activists target companies whose share price are believed to be undervalued. And while they try to hold what they call “constructive” conversations with management about how to improve operations to get that share price rising again, oftentimes they complain about management digging in their heels.
In the case of the current board battle at Gildan Activewear, activists are claiming the board’s recent actions amount to nothing more than an attempt at self-entrenchment. And contrary to the usual pattern, the Gildan battle erupted after the activewear firm fired its CEO, with activists now pushing for his reinstatement.
Back in 2021, Ancora joined forces with three other activists—Macellum Advisors, Legion Partners Asset Management and 2010 Capital—to agitate for change at the Kohl’s. In addition to pushing for faster inventory turns and resetting women’s apparel as a traffic driver—they claimed the focus on active and athleisure had failed to drive top-line growth—the investor group was looking to unlock the retailer’s real estate via a sale-leaseback program.
The investors in a settlement ultimately were able to get an agreement in place that saw the department store retailer install three of the investor group director nominees in 2021 to avoid a proxy fight. But a year after its successful shakeup of Kohl’s board, Ancora was back seeking the removal of its chairman and CEO. Former CEO Michelle Gass left Kohl’s in December 2022 to become president and CEO-to-be at Levi Strauss & Co., where she just became CEO. Kohl’s named Tom Kingsbury its permanent CEO, after having served as interim CEO since following Gass’ departure, in February 2023. Kingsbury was one of three new directors added to Kohl’s board in 2021, and his appointment suggests that maybe the activists were right all along about the need for change.
In the case of Norfolk, the company said at the end of January that income from railway operations for the fourth quarter fell 32 percent to $808 million, including a $150 million charge associated with a freight train derailment, versus $1.2 billion in profit in the same 2022 quarter. But even on an adjusted basis excluding the charge, income was still down 19 percent from the comparable year-ago quarter. Revenue was down 5 percent to $3.1 billion.
For 2023, income was down 41 percent to $2.9 billion inclusive of the charge from 2022, and down 18 percent on an adjusted basis. Revenue for the year was also down 5 percent to $12.2 billion. The company posted first, second and third quarter declines in income, inclusive of charges connected to the derailment.
Cargo on the train included hazardous materials in several cars, resulting in a toxic chemical spill. To curtail the chemical damage from vinyl chloride, a known carcinogen, the Environmental Protection Agency did a burn-off that resulted in smoke and ash polluting the local waterways. Businesses were shut for months and local residents near the derailment were given evacuation orders. While the company and Shaw have been in talks with the East Palestine community and working on remediation efforts, how the Norfolk handled the derailment is a bone of contention among Ancora’s director nominees. The director nominees also reportedly are closely eyeing other issues, including why Shaw has failed to meet key operating metrics.
Norfolk has made health and safety investments for the community, including $20.7 million in direct relief to residents and $4.3 million for the safety of drinking water in the town. But it is also on the receiving of several lawsuits from business owners, shareholders, the Ohio attorney general in state court, and the EPA and the U.S. Justice Department in federal court seeking, among other claims, a declaratory judgment on liability for past and future cleanup costs. Norfolk has filed suit against rail car owners and chemical firms to recoup some of the cleanup costs.
