May 9th, 2024, is gearing up to be a big day for any stakeholder of Norfolk Southern Corporation (NYSE:NSC), owner and operator of one of America’s biggest and most important intermodal rail networks.
Investors, big and small, clients of all sizes, and employees are all holding their breaths, bracing for the shareholder vote that will decide the outcome of a proxy fight between the company’s current management and Ancora, an activist firm pushing for changes at the helm.
A lot is at stake, and with the big day approaching fast, here are key things you need to know about the standoff.
Ancora’s Push for Change
It all began late in January of 2024, when several media outlets reported that a group of investors led by Ancora, an Ohio-based wealth management firm, has taken a $1B stake in Norfolk Southern.
The group was said to have nominated a majority slate of directors to the company’s board in a push to remove Alan Shaw – NSC’s CEO since May of 2022.
Rumors were soon confirmed, when Ancora issued a public statement calling for changes at both executive and board levels, citing “industry-worst operating results, sustained share price underperformance and a tone-deaf response to the devastating East Palestine, Ohio derailment.”
“The future looks equally bleak under Mr. Shaw,” the fund argued, as it proposed Jim Barber, a former UPS executive as new CEO, and Jamie Boychuk, an ex-CSX executive as new COO.
Ancora also sought board changes and proposed eight new nominees, citing current “Board’s poor decisions with regard to the Company’s leadership, safety priorities and strategy.”
Norfolk Southern, for its part, was quick to respond, pushing back against allegations and highlighting “management's successful execution of our strategy to balance safe and reliable service, continuous productivity improvement, and the pursuit of smart, sustainable growth.”
“The board regularly evaluates its composition and will continue its careful review of Ancora's nominees with a focus on advancing our goal of building the safe, reliable, and resilient railroad our customers and shareholders expect,” the company said.
As is often the case with proxy fights, the two sides have since been in a continued back and forth of mutual allegations and rebuttals. Here’s what the arguments come down to:
What Ancora Wants
Ancora’s pitch is simple: “Norfolk Southern has underperformed peers across all relevant financial metrics,” and there’s a “value creation opportunity,” should the company change its ways.
The fund estimates NSC may achieve $800M in additional cost savings over the next 12 months, by removing inefficient locomotives and train cars, reducing fuel consumption per Gross Ton Mile, and redesigning the switching system.
The $800M cost trim is projected to bring down NSC’s operating ratio – a key railroad performance indicators calculated as a percentage ratio of operating expenses to revenue – to 62-63%, significantly lower and therefore healthier than NSC’s 2023 ratio of 67.4%.
To implement the plan, Ancora nominated seven independent directors to the company’s board of thirteen, seeking to gain a majority.
The theoretical next move is to replace Norfolk’s current CEO Alan Shaw with Jim Barber, the former COO at UPS, and install Jamie Boychuk, ex-EVP of operations at CSX (NASDAQ:CSX), as new COO.
“Norfolk Southern shareholders have the opportunity to install operationally proficient leadership with a proven strategy for transforming the railroad's infrastructure and running a PSR-powered Scheduled Network that drives superior safety, customer service and financial performance,” Ancora said in its presentation.
The plan seems to have gained both attention and some traction – over the past several weeks, it received endorsements from two worker unions, BLET Teamsters and BMWED Teamsters, which collectively represent “approximately half of Norfolk Southern’s unionized workforce.”
It also earned support of Lourenco Goncalves, CEO of Cleveland-Cliffs Inc (NYSE:CLF), “one of the largest customers of Norfolk Southern as well as a meaningful supplier of steel rails.”
What Says Norfolk Southern
Comments by Norfolk Souther’s current board and management paint an entirely different story.
Alan Shaw was brought on as CEO in May of 2022 with emphasis on fixing the company’s broader operations and improving key operational metrics.
His efforts yielded some very clear results – NSC’s train speed rose by 22%, terminal dwell fell by 11%, and on-time service performance increased by 30%, all since Shaw took over.
Putting operations back on track, metaphorically and literally, has come at a cost of lower margins, but now that the dirty work is behind, management believes it is “on a clear and achievable path to close the margin gap with peers by achieving a sub-60% operating ratio in 3-4 years.”
The company’s comments also underscore that Ancora fails to “acknowledge the obvious and significant financial impact of East Palestine.”
While Norfolk Southern accepts full responsibility for the disastrous incident, it argues that it’s a one-off, “black swan”-type of event that overshadowed an otherwise clear trend of operational and financial improvements.
For its emphasis on operations and safety, NSC’s current management received endorsements from “the vast majority of rail unions.”
Additionally, Norfolk Southern questions Ancora’s cost-savings plan and believes it is mathematically unrealistic without major furloughs, noting: “Achieving near-term targets would require ~2,900 employee furloughs, putting service and safety at substantial risk, sparking backlash from regulators, and jeopardizing long-term shareholder value.”
Lastly, the company is a vocal critic of the proposed new management, as it notes that the CEO candidate has no prior railroad experience, and the COO has questionable safety and operations record from his time at CSX.
Coupling the last two points together, NSC seems to question – if Ancora isn’t willing to set realistic financial targets, how can anyone expect the proposed questionable management to execute on them?
What Proxy Advisors Think
Independent proxy advising companies are another major party in any proxy fight, as their opinion is often the key factor determining how major institutional investors, such as mutual funds, pension funds, and endowments, vote on their shares.
In this case, the two biggest proxy advisors – ISS and Glass Lewis – made matters more complicated, not less.
For Ancora’s plan to work, it needs to secure a majority on the board, meaning shareholders need to vote in favor of all seven directors it has nominated.
While ISS and Glass Lewis both endorsed Ancora’s proposals, the former recommended clients vote for only 5 directors, notably excluding proposed CEO Jim Barber, while the later supported 6 nominees – neither firm’s recommendation gives Ancora a majority on the board, potentially making it problematic for the fund to proceed with its plans.
It should be noted that proxy advisor recommendations are not deal-breakers, and the vote may still go either way.
What the Wall Street Thinks
Wall Street’s brightest minds also couldn’t shy away from such a big story, especially considering “neither here, nor there” sentiment from proxy advisors.
UBS analysts had the following to say about the ISS recommendation: “the result reflects both an indication of the need for change but also a continuation of the current CEO Alan Shaw” – a less than ideal case for Ancora, which made removing Alan Shaw the center point of its activist campaign.
The sentiment is echoed by their counterparts at Bernstein who said: “assuming this goes to a vote, and advisory firms recommendations are followed, the newly constituted board will have 4-5 incumbents, 3 new directors put forward by the company, and 5-6 activist candidates.”
The Big Day
Company executives, fund managers, advisors, and analysts may be loud and emotional in their arguments, but it’s the shareholders who decide what happens next.
The vote, set to take place exactly one week and one day from today, on May 9th will show which side has been more persuasive.
One major indicator – the market itself – appears undecided: while NSC shares recorded strong gains following Ancora's original announcement, the stock has given them all back since and currently trades more or less where it was pre-announcement.
What’s next for Norfolk Southern? We will learn on May 10th.