An activist investor group has taken a $1 billion stake in Norfolk Southern and aims to wrest control of the company’s board and oust CEO Alan Shaw, according to a report in The Wall Street Journal this evening.
The investor group, led by Cleveland-based Ancora Holdings, has nominated a slate of directors that includes former Ohio Gov. John Kasich and former Canadian National and Kansas City Southern executive Sameh Fahmy, according to the report.
They have met with NS officials and discussed their disappointment with the way the railroad responded to the Feb. 3, 2023, derailment and hazardous material spill in East Palestine, Ohio, and the company’s failure to meet financial targets, the Journal reported.
NS said it would continue to act in the best interests of its shareholders.
“The Norfolk Southern board and management team regularly engage with shareholders and take their perspectives seriously. 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,” a railroad spokesman said today.
Ancora representatives did not immediately return an email seeking comment.
Costs related to the East Palestine derailment have topped $1.1 billion, NS said last week, and have been a drag on the company’s earnings. The main line outage in East Palestine, subsequent derailments, and temporary restrictions NS put on train length last year snarled the railroad’s operations.
The post-derailment service problems also raised costs and hurt revenue as shippers diverted business to trucks and rival CSX. NS operations and service recovered late in the year, however, and its intermodal volume grew in the fourth quarter as the railroad delivered its best intermodal on-time performance in more than three years.
Shaw, who became chief executive in May 2022, inherited a railroad with widespread crew shortages that led to significant and prolonged service problems. After a conductor hiring spree, NS operations recovered in late 2022.
And in December 2022 Shaw unveiled a long-term strategy called “a better way forward” that revolves around not furloughing train crews during downturns so that the railroad has the resources to capture volume and maintain service when freight volume recovers. Keeping train crews on the payroll during freight downturns would hurt the operating ratio over the short term, Shaw warned. But it would pay off in the long run, he said, by allowing the railroad to maintain service levels. That, in turn, would enable shippers to build more of their supply chains around the railroad, which would bring NS new traffic, higher revenue, and bigger profits.
Analysts initially welcomed the strategy. But some investors began to lose patience with NS during the third quarter, when the railroad’s operating income sank 41% and revenue was down 11%. Fourth quarter results, announced last week, also were a disappointment as costs remained elevated and profits were down again.
Norfolk Southern’s stock price is down 1.8% since Shaw took over, while CSX’s stock price is up 12% over the same span.
Activist investors have had success recently in changing railroad management.
Soroban Capital Partners in February 2023 recommended that Union Pacific replace CEO Lance Fritz with former CN and UP Chief Operating Officer Jim Vena. Vena became CEO in August.
After CN failed to give up its bid to acquire KCS in 2021, the London-based TCI Fund touted Vena as a replacement for CN CEO J.J. Ruest. Vena backed out during the selection process, and CN ultimately reached a settlement with TCI regarding board seats. Tracy Robinson, a former Canadian Pacific executive, became CEO in February 2022.
In March 2017, former CN and CP CEO E. Hunter Harrison became the chief executive at CSX after a proxy battle launched by hedge fund Mantle Ridge.
Mantle Ridge’s founder, Paul Hilal, had been instrumental in bringing Harrison out of retirement in 2012 as part of Pershing Square’s proxy fight that successfully ousted Canadian Pacific CEO Fred Green and a majority of the railway’s board of directors.
Independent analyst Anthony B. Hatch, responding to speculation earlier this month that activist investors may take a run at NS, noted that a proxy contest would be unlike those at UP, CN, CSX, and CP..
“As far as I know, E. H. Harrison is unavailable, and his known acolytes (Creel, Vena, Cory, et al) are otherwise engaged,” Hatch said. “There may be some barbarians massing at the gate, but I see no white knight on the horizon, ready to cross the Rubicon.”
Note: Updated at 1:25 p.m. Central with statement from Norfolk Southern.
Thanks to retiring Baby Boomers and their 401K’s, the only “long-term” investors are those still working. They are the one’s looking for growth. With the demise of company-funded pensions, today’s new retirees depend on the proceeds of their 401K’s for month-to-month income. Thus, the rise of “activist” investors selling their aggressive services by trying to keep food on the table and a roof overhead for their clients, a growing population of retirees who are scared of seeing their savings vaporize. They are more concerned with today and next year, rather than five years from now. Socialist Insecurity was never intended to be a sole income source. And as I said, the demise of company-funded pensions have led to what is essentially a “Wall Street Casino” mentality for retirees merely trying to survive. Company-funded pensions offered an assured income. 401K accounts do not. Does this type of investor make for good corporate decision making? No. But, that’s not the reason why people invest. People invest in order to live. Not merely to make money.
The only thing I fault Alan Shaw on is turning NS into a long-term “Sugar Daddy” with a bottomless wallet for East Palestine, Ohio and the surrounding community. Granted, the long-term environmental and health effects of the accident are unknown. What NS should’ve done IMO, is offered a limited-time (Say, six months) “fair market value” buyout window to property owners in the immediate area of the accident. Do environmental remediation of the area and donate it to the state as a park or “open lands” site. Simultaneous with the remediation, abandon and remove the line through East Palestine. Point-to-point. If there are on-line businesses or industries, they’ll have to find an alternative to rail. Accidents happen. That’s why they’re called “accidents” They should not be seen as privately-funded lottery opportunities by governments or property owners. Someone at NS is eventually going to have to say ‘Enough!”
“Soroban Capital Partners in February 2023 recommended that Union Pacific replace CEO Lance Fritz with former CN and UP Chief Operating Officer Jim Vena. Vena became CEO in August…”
Actually, Soroban Capital Partners only pushed UP to do what they were already thinking as employees and investors wanted Fritz gone for the damage he did to the preeminent railroad franchise in North America. And Vena has seemingly done an about face on what was his former “PSR or nothing” mantra promising to give employees at the operation level more of a say in running the job as they know it has to be done. Time will tell but so far so good…
Greed is good; or, power corrupts; or, those who do not learn from history…
it is interesting how in many spheres, including academia (which used to not indulge, WASPs they were) those fluid Wall St. dollars have impact…
Think of all the roads that deferred maintenance in order to pay dividends.
NS up over $16 per share since market opening. The sharks are responding to the chum Ancora has spread.
What Ancora has failed to do is provide a detailed explanation of what they would have done differently. Until they do that no investor should vote yes (and not necessarily then either).
I wondered how long before the hedgies came for Shaw and the board. “Greed is good” – NOT!
Unfortunately, those kind of analysts believe that “Greed is God” and heartily kneel at that altar. We need a modern day Elijah to “call down fire from heaven,” to return the markets and hedge funds to their rightful places in making long term profits for their stock holders, not the analysts. How many more Bernie Madoff’s do we need. NONE in a perfect world.
Hedge Funds do nothing but destroy companies. There isn’t enough room here to list the companies that have been destroyed or are just a shell of their former entity. Alan Shaw and NS did a tremendous job confronting a horrible situation. It would be interesting to see how a hedge fund manager would have handled the situation. Good job Alan Shaw and NS.
Shaw stood out when others were hiding in closets in DC. I don’t see these funds pushing the FRA or Congress to improve rail safety. Has NS been distracted, yep it has. I think I would be more sore about PanAm Southern than East Palestine from a hedge fund perspective. Shaw decided right up front he was going to take the high road on East Palestine and is leading the safety bandwagon.
But I am sure the hedge funds don’t give a hoot about pushing safety, just pushing nickels and dimes further down the rails. What is safety to them?
I find it fascinating that this culture of second guessing is getting yet larger because there is a bunch of money that will back you up when you do.
I guess we will see Shaw fall on his own sword. Here we go again.
As the old saying goes, “Money talks and bovine by-product walks.”
Unbridled greed will be the end of railroads. Best wishes Mr. Shaw.
I know I will vote to keep Shaw also. I hope NS stands pat.
I will be supporting Shaw when I vote my small number of shares. Hope investors who actually care will do the same thing.
I find it interesting that they’re mad about the response to East Palestine and not the operating practices that led to it happening in the first place.
It’s a good reason why NS is doomed whether Shaw stays or not, customers certainly aren’t leaving because of the response