Norfolk Southern Train Derailment Puts More Pressure on Proxy Fight
Another train derailment has befallen Norfolk Southern as the rail operator contends with its ongoing proxy fight.
The National Transportation Safety Board (NTSB) investigated the derailment involving three Norfolk Southern trains in eastern Pennsylvania on Saturday, which occurred along the Lehigh River in Lower Saucon Township. There were no reported injuries or leaks of hazardous materials, according to the board, although diesel fuel and plastic pellets had spilled before the cleanup efforts.
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The Pennsylvania wreck came 13 months after a train derailment in East Palestine, Ohio, caused a massive fire fueled by toxic chemicals, leading to the evacuation of much of the town’s residents. That incident caught national attention and brought concern among U.S. lawmakers about general railroad safety.
On the news of the derailment, activist investor Ancora Holdings wasted no time in again calling for the immediate replacement of Norfolk Southern’s board of directors and termination of CEO Alan Shaw.
“Our proposed slate and management team are unanimous in their view that Norfolk Southern must become a safer and more reliable railroad before it can ever reach its full potential,” said Ancora in a Saturday statement. “An incident like this, which is drawing national news coverage and resulting in more embarrassment for the railroad, should put an end to the board’s unsustainable efforts to save a tainted CEO with no long-term future. How can anyone defend this?”
Ancora has sought to insert its own board, CEO and chief operating officer as part of a new go-forward plan to focus the rail operator on profitability. A day prior to the derailment, the activist investor’s president, Jim Chadwick sent an open letter to Norfolk Southern chair Amy Miles, calling it “astonishing” that Shaw received a 37 percent increase in compensation in 2023.
Norfolk Southern fought back against Ancora Monday morning, calling the investment firm’s claims “false and misleading,” while highlighting its 42 percent reduction in mainline accident rate year-over-year.
With regards to Shaw’s compensation, Norfolk Southern said the board did not raise Shaw’s compensation 37 percent, indicating that he saw a 33 percent reduction in his realizable compensation at the end of the year, in comparison to his target compensation.
“The facts about the compensation of Norfolk Southern’s management team have been distorted,” said the statement. “The Norfolk Southern board took clear and decisive action in its 2023 compensation decisions, including exercising discretion to eliminate annual performance-based incentive payouts for 2023.”
Norfolk Southern said that 92 percent of Shaw’s target compensation was provided in the form of at-risk or performance-based incentives that were tied to pre-set performance goals or stock price performance.
Specifically, 60 percent of Shaw’s equity awards issued in 2023 are performance-based and will only be earned if certain metrics and targets are met at the end of a three-year performance period. The remaining 40 percent is delivered in a mix of restricted stock units and stock options that vest over four years, which tie to directly stock price performance.
Norfolk Southern maintains that it has engaged constructively, and in good faith, with Ancora to avoid a proxy contest.
While the rail company’s board says it remains open to any opportunity to find a reasonable resolution, “it was after thoughtful consideration that we determined Ancora’s proposed changes to the Norfolk Southern board, management team, and strategy would undermine the important progress we have made to protect and enhance our business and franchise, and would lead to the deterioration of shareholder value.”
Norfolk Southern is calling on the reelection of its 13 director nominees, and to reject all eight of the candidates selected by Ancora.
Beyond the compensation callout, Chadwick’s letter also accused the rail company of misrepresenting its views to regulators in Washington, D.C. Although Chadwick didn’t highlight exactly in what way the claims were misrepresented, he said in the letter that both Miles and Shaw “are no doubt aware that our published materials reveal no emphasis on cost cutting, headcount reductions or short-sighted tactics.”
Ancora instead wants to implement a network strategy that will leverage Norfolk Southern’s existing assets, namely through “responsible cost management” principles of scheduled railroading, said Chadwick. The precision scheduled railroading (PSR) model is designed to bolster delivery timeliness and efficiency, and is known for its longer trains, more flid rail capcity and more direct point-to-point delivery routes.
But the overhaul rail network consolidation has many industry workers saying PSR would result in cost cuts, fewer employees and a potential negative impact on safety standards, while arguing it is more aimed at pleasing Wall Street than improving rail operations.
Ancora’s partner in the proxy fight, EdgePoint Investment Group, had the hedge fund’s back in in a Monday letter, saying it believed the status quo at Norfolk Southern “would lead to continued underperformance of the railroad.”
