STB chairman rips activist investors for threatening viability of railroad industry

ATLANTA — The activist investors targeting Norfolk Southern pose a threat to the railroad industry and the U.S. economy and may prompt new regulations, outgoing Surface Transportation Board Chairman Martin J. Oberman told a shipper conference today.

Oberman was highly critical of Ancora Holdings’ proxy battle against NS, along with its efforts to replace current management and reverse the railroad’s long-term resiliency strategy. The STB has no authority over Wall Street, but Oberman used his bully pulpit to lambast activist investors.

“This effort by a Wall Street firm — with short-term dollar signs in its eyes — to strip resources out of a railroad, of course, is not new,” Oberman said, according to the prepared text of his remarks to the Southeast Association of Rail Shippers, which were published on the STB’s website.

Activist investors such as Ancora and Soroban Capital, which last year was instrumental in the ouster of Union Pacific CEO Lance Fritz, aim to make a quick buck by making short-term decisions that improve a railroad’s operating ratio to 60% or below, Oberman said.

“The problem with activist investors bowing down to the cult of the O.R. is that they are impatient and want immediate returns,” he said. “Their approach to lowering O.R. as fast as possible can only be accomplished by drastically cutting payroll and other resources in the short term.”

Oberman praised CSX, Canadian National, and NS for aiming to improve their operating ratios the harder way: By increasing traffic volume and revenue.

“Thus far, those CEOs and their Boards have resisted pressure from activist investors to eviscerate workforces and cut spending on expansion capital. They understand that planning and spending for the long run—while taking time—will ultimately benefit shareholders more than short-term cost cutting, which is detrimental to the long-term vitality of the railroads and undermines efforts to improve safety,” Oberman said. “And of course, a long-term, future-focused strategy is essential if the railroads are to support the nation’s economy and the public interest.”

Oberman noted that the massive job cutbacks that accompanied the implementation of Precision Scheduled Railroading in the U.S. contributed to crew shortages in 2021 and 2022 that snarled rail service.

Ancora’s presentation that makes a case for making changes at NS “principally and repeatedly focuses on a rapid lowering of the O.R. to drive cash payouts and raise its stock price, harshly criticizing present NS management for not making a lower O.R. the objective,” Oberman said. “We now know that this is wrong-headed thinking. Making O.R. the corporate objective is what led to elimination of thousands of workers which caused the service crisis.”

Since the STB’s April 2022 hearings on widespread service problems at the big four U.S. railroads, the Class I roads have boosted their payrolls by 9,000 people, Oberman noted. Service improvements have followed.

“Any campaign, proxy or otherwise, that threatens to undo recent efforts to rebuild the railroad resilience and move toward significant long-term growth would be a major setback,” Oberman said. “It would undercut safety and be the opposite of good business, the opposite of fulfilling the common carrier obligation, and the opposite of meeting the Congressional commandment to serve the public. Regardless of what happens with Norfolk Southern’s governance, it is crucial that management take seriously their duties to customers and the public.”

The proxy fight has already prompted change at NS, Oberman noted, including a voluntary separation program to eliminate more than 300 management jobs as well as the elimination of service in some low-volume intermodal lanes.

Oberman was critical of layoffs and a reduction in capital spending at Union Pacific under new CEO Jim Vena, who rejoined the railroad in August 2023. He noted that Federal Railroad Administration Administrator Amit Bose sent Vena a letter today to express concerns about UP’s commitment to safety.

“If Ancora is successful, we will have a national rail network, in which half of it — UP and NS — will be run by CEOs answering to short term, cash maximizing, shareholders to the detriment of the long-term investors — and most dangerously to the detriment of rail customers and rail workers — and ultimately the U.S. economy and every member of the public,” Oberman said. “Under those circumstances, I do not expect the STB will sit by and watch and wait while another service crisis unfolds as we confronted in 2022.”

The STB may take up rulemaking that would grant sole-served rail customers access to a second railroad, Oberman said, as well as consider eliminating the so-called bottleneck rule that prevents sole-served shippers from accessing a nearby competing railroad.

“To be clear: Railroads are a regulated monopoly. They have a common carrier obligation to the public interest and to the nation’s economy. Unlike other businesses, railroad management and owners are not just free to manipulate the business by draining the company’s resources for short-term gain,” said Oberman, who will leave office at the end of March.

Oberman also was skeptical of Ancora’s claim that its proxy battle was motivated by improving safety at Norfolk Southern. Ancora is based in Cleveland, about 90 miles from East Palestine, Ohio, the site of the disastrous Feb. 3, 2023, hazardous materials wreck involving a Norfolk Southern train.

“Several weeks ago, Ancora wrote me a letter. The essence of their message was that they had taken a $1 billion dollar stake in NS in order for it – quote – ‘to become a safer railroad.’ Really? What hedge fund raises $1 billion to promote safety anywhere? The measure of Ancora’s disingenuous pitch to improve safety is that its slide deck completely omits reference to FRA data which shows that, in the last year, NS has been an industry leader in reducing mainline rail accidents and derailments,” Oberman said. “And NS is the only Class I railroad which has joined the Department of Transportation Confidential Close Call Reporting System, a major advance in instituting a safe culture in any workplace. Ancora has nothing to say about what it could do better. I think we can assume that if Ancora succeeds in its bid to control NS, its next move will be to put the Brooklyn Bridge on the market.”