ATLANTA — Norfolk Southern shareholders delivered a split verdict today, sparing CEO Alan Shaw while electing three of activist investor Ancora Holdings’ insurgent director candidates and ousting its independent chair, Amy Miles.
Investors sent a clear message that ends the bitter proxy fight. They backed Ancora’s desire for change but sought to give Shaw & Co. more time to prove the railroad’s service and resiliency strategy, which was interrupted by the disastrous Feb. 3, 2023, hazardous material derailment in East Palestine, Ohio.
The wreck — at $1.1 billion the costliest in U.S. history — did not result in injuries or fatalities, but it did put NS under intense pressure from Congress, regulators, and investors as media shined a spotlight on rail safety. Shaw has pledged to “make things right” in East Palestine.
Although Ancora’s candidates gained three seats on the railroad’s 13-member board, it was far short of the majority that the Cleveland-based activist investor had sought. And investors rejected Ancora’s CEO candidate, former UPS executive Jim Barber Jr., and by extension his preferred candidate for chief operating officer, former CSX operations boss Jamie Boychuk.
James Chadwick, president of Ancora Alternatives, said the firm’s board candidates had overwhelming support from the railroad’s active shareholder base. “This was a referendum for change,” he said, noting that the board’s chair and the head of its governance and compensation committees lost their seats.
But he criticized the passive institutional investors for a lack of support.
“For the passive investors: If anything should go wrong here and there’s another derailment and people die, this is on you,” Chadwick said at the NS annual meeting. “You ignored the recommendation of the proxy advisors, the unions, the largest customer of the company. You gave us literally no support and we still won three board seats without you. What happens to Norfolk Southern now is on your firms and your conscience.”
Ancora has said that the East Palestine wreck was the catalyst for the proxy contest it launched. Chadwick said the firm’s board candidates would work with other NS board members to drive change at the railroad that has struggled to meet financial and operational targets.
In a statement, Ancora said investors sent a “loud and clear message to replace the Company’s unqualified CEO and reconsider its ineffective strategy, which has driven industry-worst customer delivery times, severe derailments, and persistent share price underperformance. Notably, CEO Alan Shaw received what we deem a resounding vote of no confidence based on preliminary voting results that indicate he barely received support from holders of 50% of the Company’s outstanding shares.”
Shaw pledged to work constructively and cooperatively with the new board members. And he says the railroad’s goal remains the same: Take a balanced approach to service, productivity, and volume growth while delivering top-tier earnings and closing the profit margin gap with other railroads.
“We appreciate the support of our shareholders and the valuable perspectives they have shared with us in the months leading up to our Annual Meeting,” NS said in a statement. “Our shareholders recognize that positive change is underway at Norfolk Southern. Moving forward, we will continue building on the significant progress Alan Shaw, [Chief Operating Officer] John Orr, and the entire team have already achieved.”
Shaw told NS employees, “I am grateful for your unwavering commitment to our railroad and our customers. Each day, you embody the values of A Better Way, and I am proud to be your colleague. We’re going to keep building on the significant progress already made and working together to achieve our fullest potential.”
Ancora’s candidates who will take seats on the board include former Surface Transportation Board member William Clyburn Jr.; former Canadian National and Kansas City Southern executive Sameh Fahmy; and rail financier Gil Lamphere.
They will replace Miles, Jennifer F. Scanlon, and John R. Thompson.
Ancora argued that Shaw’s strategy — which relies in part on not furloughing train crews during downturns so the railroad could maintain service and capture volume in a rebound — was incompatible with the principles of Precision Scheduled Railroading.
A full-blown implementation of the low-cost PSR operating model, Ancora said, would improve NS operations and financial performance, ultimately leading to a 55% operating ratio.
NS said it also would reach a sub-60% operating ratio, but it would take a year longer than Ancora’s plan.
“This was a big win for the home team,” independent analyst Anthony B. Hatch says.
The new board members all bring relevant transportation experience, Hatch says, and are independent of Ancora. “They’ll bring a fresh perspectives to NS and put Ancora in the rearview mirror,” he says.
Yet investors, Wall Street analysts, and the media will be closely watching NS to measure its progress improving its operational and financial performance in the months ahead, he adds.
Hatch says the East Palestine derailment and its aftermath, as well as the proxy fight, were huge distractions for the railroad and that ultimately NS needed more time for its long-term strategy to play out.
Shaw unveiled the “better way” strategy in December 2022, less than two months before East Palestine. It de-emphasized the short-term focus on the operating ratio in favor of a long-term approach that relies on not furloughing train crews during freight downturns. The idea is that the railroad would be able to maintain service levels and capture more volume and revenue when demand rebounds. And by providing consistent service through thick and thin, NS would be able to encourage shippers to build more of their supply chains around the railroad.
As Ancora ramped up its criticism of NS and its lagging operational and financial performance, Shaw cut more than 300 management jobs, pruned low-volume intermodal lanes, and named former Canadian National and Canadian Pacific Kansas City executive John Orr as chief operating officer in order to accelerate operational improvements.
The NS board also made the operating ratio the largest single component of the executive incentive compensation plan, and Shaw said the railroad would make significant productivity gains this year as operations improve.
Unions react
The Brotherhood of Locomotive Engineers and Trainmen, which initially supported Shaw in the opening days of the proxy battle, flipped to supporting Ancora earlier this month.
“BLET’s leaders look forward to working with the new board and the railroad’s leadership on strategies that will grow the railroad, make it more competive and safer for both workers and the communities served. We also will not hesitatate to call out decisions that are not in the best interests of investors and union railroaders,” the union’s NS general chairmen said in a statement today.
“Alan Shaw and his team showed real leadership after the East Palestine disaster and made major moves to make the railroad safer and more competitive,” the union leaders said today. “However, changes in his team and strategy in recent weeks left many stakeholders and shareholders feeling uncertain about the railroad’s future direction. BLET members in particular were alarmed by Shaw’s pivot to Precision Scheduled Railroading.”
Most other unions maintained support for Shaw and were pleased with today’s results.
“While we certainly do not agree with Mr. Shaw on everything, we asked for him to remain because we believe he has made meaningful safety improvements since the train derailment in East Palestine, Ohio last year,” Greg Regan, president of the Transportation Trades Department of the AFL-CIO, said in a statement. “We also believe his leadership would better serve rail customers, workers, and shareholders in the long run. Any way you slice it, Mr. Shaw is better than Ancora’s proposed alternative.”
The election of the three Ancora nominees shows “an appetite for change,” Regan said, but he cautioned against adopting tenets of Precision Scheduled Railroading.
“We look forward to working with all members of Norfolk Southern’s leadership team and Mr. Shaw to execute this mandate for change in a way that retains shareholder value, benefits the workers who make the railroad profitable, and ensures the long-term success of the company,” he added.
The president of the International Association of Machinists, Artie Maratea, said Ancora’s proposed leadership “would’ve signaled a return to the cut-at-all-costs mentality and would’ve pressured the rest of the industry to double down on what got us into this mess.”
With a pointed reference to the BLET’s move, Maratea added, “I’m proud that our union stood with Alan Shaw, even when some chose to abandon their principles in pursuit of short-sighted gains.”
— Updated at 9:30 a.m. Central with comment from Anthony B. Hatch and the engineers’ union; updated at 1:10 p.m. with reactions from TTD and Machinists Union; updated at 1:20 p.m. with Shaw message to NS employees.
I am glad that Ancora substantially lost and that Alan Shaw will remain as CEO. However, NS will still be under pressure to reduce the O.R., but how will they do it? Maybe one way is to shed marginally profitable branch lines that don’t fit into the PSR framework. Companies like WATCO, G&W, Omnitrax, etc., will be the beneficiaries and provide better service to lower margin shippers than NS ever could.
The FAIR question isn’t where will Ancora go next. The Question should be WHAT will happen to ANCORA. Ancora is controlled by FOCUS FINANCIAL PARTNERS Network. With this setback (previously they always got what they wanted), what is FOCUS” next move with Ancora. Are they going to merge them into the company or is FOCUS going to do what Ancora planned to do to NS (slash and burn the company out of existance).
A fair question to ask is, “Where does Ancora go next?” Related to this, what about Barber and Boychuk? Who will be their next targets?
I’m glad PSR won the fight! Shaw should double his pay to $66 million for a job well done!
They are called ACTIVIST INVESTORS for a reason..Slice and dice is the game, big money fast. ANCORA could care less about railroading, railroaders or businesses. HOW MUCH CAN WE MAKE?. People have forgotten the results of so called PSR on CSX. They are still struggling. Another article covers how CSX has the lowest recrew averages of the class 1s, change train identification. Example; train XY closing in on 12 hrs on 200 mile run, has ran only 102 miles. Swap crews at nearest depot. Redesignate train from XY to XP, originating at that depot swap. Sounds about right.
BLET should be ashamed of themselves, backing ANCORA, be aware you may get more than you ask for, not in a good way. ANCORA has made BLET empty promises.
“”But he criticized the passive institutional investors for a lack of support.
“For the passive investors: If anything should go wrong here and there’s another derailment and people die, this is on you,” Chadwick said at the NS annual meeting.””
Now you know why they stayed long term and passive and didn’t listen to you. That is the most immature, child like response I have ever heard on a business result in my life. Ancora clearly under estimated the passive institutions and why they hold NS shares.
The 3 new members can push Orr now and his performance, but getting totally petulant about not getting what they wanted clearly undermines Ancora’s reputation in the investment/hedge community (if their is one to maintain anymore).
Not only that, but following Ancora’s logic then they’re also saying that if they had won then the next crash would be on them!
And then this gem: “Ancora argued that Shaw’s strategy — which relies in part on not furloughing train crews during downturns so the railroad could maintain service and capture volume in a rebound — was incompatible with the principles of Precision Scheduled Railroading.”
How’s that for a privleged glimps of the blatently obvious!
“another derailment will rest on Shaw’s shoulders?” Derailments are part of railroading. Sounds like a lame idle threat to me. Kinda’ like building a round-a-bout at a busy intersection to reduce accidents, but people have been known to get in an accident going around them. Ancora>can you spell sore loser boys and girls?
Well, hopefully something positive will come out of this proxy fight! Now that the votes 🗳 have been tallied maybe they can focus on how to make Norfolk Southern a more profitable & successful railroad without having to ✂️ cut everything down to the bone 🤔?
Ancora response is why I didn’t want none of them on the board and why as a shareholder I will not support the 3 on the board now.
Talk about a sore loser. Ancora sounds totally unhinged — blaming the board in advance if any accident occurs. Blood will be on your hands, Chadwick says.
It was a shame though that Richard Anderson, he who wrecked AMTRAK, was elected. At least the Ancora backed candidates who won come with a good railroad background.
Unfortunately, although Ancora didn’t secure the board seats it wanted, it may have won ultimately — what with the panicked hiring of Orr and the return to OR as a basis for CEO bonuses.
Now all the NS trainmen need to dump the BLET that sold them out!
And not even for full price, Nathanial. The union bosses only got twenty-nine pieces of silver.
Agreed. The membership of any union that supported Ancora should immediately begin looking for other organizations to represent them. They should also call no-confidence votes on their leaders if they have that right. The rank and file were unforgivably betrayed and those responsible should pay the price sooner rather than later.
Great comment, Mr. Landey.