Norfolk Southern to Shareholders: Reject Activist Board Nominees
Norfolk Southern is fighting back against the activist investor looking to overhaul its board and top executive ranks, offering up two new board nominees of its own.
In a proxy statement shared with the Securities and Exchange Commission (SEC), Norfolk Southern board chair Amy Miles urged shareholders to back the current management team and vote in the 13 total nominees proposed by the board.
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The board unanimously recommended that shareholders vote in the Norfolk Southern nominees, and reject all eight of the nominees selected by minority stakeholder Ancora Holdings, Inc. on Feb. 20.
Ancora, which previously pressured Kohl’s and Pitney Bowes to replace their CEOs, wants to replace Norfolk Southern CEO Alan Shaw with former UPS chief operating officer Jim Barber, and also wants to swap out chief operating officer Paul Duncan with Jamie Boychuk, a former executive vice president of operations at CSX.
The move is likely heavily influenced by the push to implement precision scheduled railroading (PSR) at Norfolk Southern, according to Lawrence Gross, president and founder of Gross Transportation Consulting. Boychuk and two Ancora-nominated board candidates have experience running PSR systems.
PSR is a strategy that involves consolidating rail networks through the use of point-to-point delivery tactics and consistent departure schedules, along with staff reductions and longer trains—ultimately with the goal of boosting service and profit. Norfolk Southern had planted the seeds to run PSR from 2020 to 2022, before reneging on the model.
But PSR has been controversial among workers in the field, with Gross noting that it has not been beneficial to intermodal volumes, which have dropped since 2019 nationwide, after most major rail companies adopted the system.
“A lot of trimming occurred in the industry,” Gross told Sourcing Journal. “What PSR wants are very large trains running from A to B, with minimal work in the interim, minimal switching—a very low cost, very efficient operation. And that’s a noble goal. But domestic freight doesn’t really behave that way. Domestic, truckload freight is an inherently complex market with lots of lots of lanes, lots of volume moving in all different directions, and very robust service requirements.”
Gross called PSR a “reasonably short-term outlook” that values near-term profitability at the expense of long-term growth.
Aside from any potential operational changes, Miles also called Ancora’s strategy “short-sighted.” The board chair said in a separate statement that Norfolk Southern’s board determined that none of Ancora’s nominees possess skills or experiences “that are not already well represented among our board nominees.”
The two new candidates floated by the railroad operator’s board include Richard H. Anderson, former CEO of American transportation giants Amtrak and Delta Air Lines, and former U.S. Senator Mary Kathryn “Heidi” Heitkamp (D-N.D.).
The remaining nominees are current board members.
All board members serve one-year terms, with the voting taking place at the company’s annual shareholder meeting. The meeting does not have a date set yet, but typically takes place in May.
Miles reaffirmed the company’s support of Shaw in the shareholder letter, saying the board was “confident that Shaw and the rest of the management team are focused on delivering safe, reliable service to customers, enhancing value for all shareholders, and fulfilling our commitments to our stakeholders.”
Shaw received a 37 percent increase in compensation last year, reeling in $13.4 million in 2023, even after the train derailment in East Palestine, Ohio in February. This prompted Ancora to call Shaw’s compensation an alarming “failure of corporate governance” that “reinforces the need for sweeping changes.”
The East Palestine accident caused a spill of hazardous chemicals that caused and fueled a massive fire, effectively forcing many of the town’s residents to evacuate for days. The accident also caused many, including those in U.S. Congress, to question the overall safety of railways across the U.S.
Norfolk Southern said last month that the derailment cost $1.1 billion, but that this number will continue to increase as cleanup continues to grow and lawsuits and penalties haven’t been settled.
The rail operator said it reduced its mainline accident rate 42 percent in 2023, with the company registering its fewest mainline accidents since 1999. The company also said it completed more than $1 billion in comprehensive infrastructure improvement projects throughout its 22-state network to further enhance safety and efficiency.
Ancora’s push for a new board, CEO and COO comes as Norfolk Southern’s financial performance in some metrics has falling behind some Class I railroad contemporaries. The hedge fund identified one major metric, operating ratio, as a profit killer. Total operating expenses represented 67.4 percent of overall revenue in 2023, far off the Class I average of 61.1 percent.
Gross called the metric “the holy grail for Wall Street,” but noted that the focus on operating ratio is misplaced.
“It’s fairly easy to improve your operating ratio in the near term by cutting costs and raising prices faster than the rate of inflation,” Gross said. “But it’s getting to the point where both of those levers are beginning to become constraints. The revenue from a regulatory standpoint, and the cost just because the low-hanging fruit has been harvested, and it’s becoming more difficult to pull costs out without impacts.”
