Norfolk Southern proxy fight draws heavyweight politicians and regulatory scrutiny a year after derailment

Just over a year in the past, a Norfolk Southern freight train derailed in East Palestine, Ohio, releasing poisonous chemical compounds into the setting and prompting a political fight relating to railroad security.

Now the corporate is on the early levels of a proxy battle, with opposing lineups that already characteristic heavyweight politicians and the eye of business regulators.

Last week, an investor group led by Ohio-based activist Ancora Advisors and backed by EdgePoint Investment Group launched a proxy fight with the goal of including eight administrators to the board and ousting CEO Alan Shaw. Among the names on the board slate was former Ohio governor John Kasich, who ran in opposition to Donald Trump within the 2016 Republican presidential main.

Norfolk Southern’ has underperformed each its friends and the broader market during the last year. The inventory jumped 9% on Feb. 1, after Ancora’s stake was first reported. Still, it is up simply 13% previously year, in comparison with 27% for the S&P 500.

Ancora says in its presentation that Shaw is a “30-year insider” who lacks “the strategic operating and financial experience needed to effectively oversee Norfolk Southern during this critical period.” Ancora additionally stated Shaw spent “millions of dollars” on “lobbying and public relations efforts” to save lots of his job.

The activist group seeks to interchange Shaw with former UPS govt Jim Barber and set up railroad govt Jamie Boychuk as working chief.

Norfolk Southern responded on Monday, rejecting that slate and asserting it could nominate former Amtrak CEO Richard Anderson and former U.S. Senator from North Dakota Heidi Heitkamp to the corporate’s board. Heitkamp served as senator for the state from 2013 via 2019 and was the final Democrat to signify North Dakota in congress.

The firm has vigorously disputed Ancora’s claims about Shaw in public filings, and the board maintains full confidence within the CEO, in keeping with folks aware of the matter, who requested to not be named in an effort to focus on confidential issues.

Anderson, who was beforehand CEO of Delta Airlines, serves on the board of Cargill and Medtronic and is well-known to regulators.

“Richard’s a uniquely talented business leader,” stated Frank Blake, ex-CEO of Home Depot and former U.S. Deputy Secretary of Energy, in an interview. “He knows how to operate in a detailed, safety-regulated environment, but also understands strategically how you grow and improve a business.”

Ancora stated Shaw and “his boardroom allies” on Monday had “no credible plan and no viable record to run on.” 

“It makes sense that they would initiate a weak and reactionary refresh,” the group stated in a assertion. The group criticized Anderson for presiding “over numerous safety incidents at Amtrak.”

Norfolk Southern had been within the crosshairs of regulators, politicians and the general public since final year’s derailment displaced residents and raised questions concerning the business’s security practices. Shaw was called to testify earlier than the Senate in March 2023, and stated on the time that the railroad would “be in the community for as long as it takes.” 

Earlier this month, President Joe Biden visited East Palestine and said the derailment was “an act of greed” and that the corporate “failed its responsibility” to take a number of precautions with its trains.

Trump, the main candidate to tackle Biden on this year’s presidential marketing campaign, traveled to the world weeks after the derailment.

“Biden should have gone there a long time ago,” Trump wrote on his platform, Truth Social, relating to the president’s latest go to. “For him to go now is an insult to those who live and work in East Palestine.”

Both sides have laid declare to the protection argument.

“As an Ohio-based firm that is right down the road from East Palestine, we have first-hand knowledge of how railroads intersect with the public,” the activist group stated in a assertion to CNBC, “which is why our slate includes former government leaders and a former major rail customer.”

Ancora is predicated 90 miles from East Palestine, in Cleveland. Ancora’s pitch deck says that protected and dependable operation is a precedence for its group, and has criticized Shaw’s dealing with of the derailment.

Norfolk Southern says in its proxy filings that it is dedicated greater than $100 million in direction of impacted households within the East Palestine space. The railroad additionally cited a six-point plan to deal with shortcomings recognized by regulators.

The firm and Shaw have been praised by regulators for enhancing security requirements and and for his or her response within the final year. Preliminary data counsel that Norfolk Southern did higher than some other main railroad at reducing derailments in 2023.

A key a part of Ancora’s plan for Norfolk Southern is to implement scheduled railroading, which includes use of extra environment friendly routing networks.

Both Norfolk Southern’s working plan and Ancora’s proposed plan draw from components of precision scheduled railroading (PSR), which was pioneered by former railroad govt Hunter Harrison.

Harrison’s PSR, when applied accurately, can cut back working ratio (how a lot a firm spends to make a greenback), a key metric for buyers.

An Ancora spokesperson stated its plan is just not pure PSR. Citing firm filings, Ancora says that beneath Shaw, Norfolk Southern’s community of rail automobiles has waited longer and crews have been delayed extra usually than in years previous.

Unionized railroad workers have expressed considerations when PSR has been applied, saying that it results in deep job cuts. It’s a difficulty that Norfolk Southern says must also fear buyers.

“Recklessly chasing cost reduction at the expense of safety and service is not a winning strategy for creating sustainable shareholder value,” the corporate stated in its announcement. 

“A plain reading of our presentation and materials reveals no emphasis on cost cutting, headcount reductions or short-sighted tactics,” Ancora stated in a assertion to CNBC.

Still, there’s proof that regulators disapprove of Ancora’s efforts. 

The railroad business is regulated on the nationwide degree by the Federal Railroad Administration and the Surface Transportation Board. Martin Oberman, the outgoing chairman of the Surface Transportation Board, informed Progressive Railroading that an Ancora victory could be “a huge detriment to the industry.”

“The activist investors, such as the ones that have surfaced now at Norfolk Southern, have a very short-term goal and it’s not constructive,” Oberman informed the business publication.

Meanwhile, Federal Railroad Administrator Amit Bose wrote to Shaw final week commending Norfolk Southern’s “commitment to investing in safety as those investments are imperative for continuing the unique progress your railroad has made.”

Bose stated that, relating to “recent reports of investor activism” on the firm, “the only avenue to ensure NS’s immediate and long-term success is through a relentless focus on safety.” 

Ancora said it agreed with Bose’s deal with security however stated Shaw is just not the suitable chief and that administration has “overseen multiple derailments and the tragic death of an engineer in 2024.”

“Policymakers and labor leaders should be able to take comfort in our slate’s commitments to honoring union agreements, leveraging the company’s existing workforce and investing in a network strategy that drives growth,” the Ancora-led group added in a assertion CNBC.

For Ancora, which has a profitable monitor document as an activist investor, the proxy fight at Northern Southern could be its largest ever. EdgePoint controls nearly all of the group’s stake however Ancora and its activism lead, Jim Chadwick, have been driving the marketing campaign, in keeping with proxy filing supplies. Chadwick joined the agency in 2014.

Ancora beneficially owns greater than 923,000 of the railroad’s shares, in keeping with a presentation filed with regulators. EdgePoint managed 3.four million Norfolk Southern shares as of Dec. 31, or about 1.5% of shares excellent.

Ancora says that scheduled railroading applied by “qualified individuals” is protected and can enhance profitability. Barber, the agency’s selection for CEO, does not have railroad expertise, however was a longtime govt at UPS, which counts one-third of all U.S. Teamsters as workers. Boychuk labored beneath Harrison, who pioneered PSR, at Canadian National.

Norfolk Southern has highlighted Barber’s lack of expertise as a railroad govt and famous in its proxy filings that Boychuk stays beneath a non-compete settlement with CSX, certainly one of Norfolk Southern’s rivals, via the top of the year. 

Ancora informed CNBC that Boychuk’s non-compete was expiring and that in his tenure, CSX outperformed “Norfolk Southern on every key operational, service, and safety metric.” In an analyst word Tuesday, Deutsche Bank stated it expects CSX would negotiate a launch if Ancora’s slate had been to emerge victorious.

While the battle between Ancora and Norfolk Southern solely lately turned public, the activist investor has been searching for Shaw’s removing for a while, proxy filings present.

Ancora’s counsel indicated that the agency deliberate to appoint a rival board slate in November, and first met with a few of Norfolk Southern’s board a month later.

A collection of conferences via January and February did not produce a settlement. One set of conferences was performed to permit present board members to satisfy with and interview Ancora’s nominees. Ancora informed CNBC’s these conferences averaged about 20 minutes.

Earlier this month, Ancora’s Chadwick informed Amy Miles, Norfolk Southern’s lead impartial director, that any settlement must embody Shaw’s ouster, filings present. Miles and one other director, Claude Mongeau, stated the board did not suppose a CEO change was “responsible” however that it was open to some board adjustments. Ancora informed CNBC it made “sincere attempts” to settle and that it could have accepted minority illustration if the board changed Shaw.

Chadwick informed CNBC’s Leslie Picker final week that Ancora had nominated a rival slate of administrators and was searching for an overhaul within the firm’s high ranks. Norfolk Southern has but to set a date for the annual shareholder assembly.

Disclosure: Heidi Heitkamp is a CNBC contributor.

WATCH: Ancora’s Jim Chadwick explains why the activist is targeting Norfolk Southern