Commentary: Will We Ever Learn?
Written by David C. Lester, Editor-in-Chief
MARCH 2024 ISSUE OF RAILWAY TRACK & STRUCTURES –– Editor's Notebook
I was surprised and disappointed to see that another so-called “activist” investor has set its sights on Norfolk Southern. The past several years have seen significant upheaval in the rail industry caused by “precision scheduled railroading.” This approach to railroading, for those that chose to adopt it, resulted in significant strife between labor and management and other challenges. According to a 2022 Government Accounting Office report, the major tenets of PSR are: “(1) reductions in staff, (2) longer trains, and (3) reductions in assets such as locomotives. For example, the overall number of staff among the seven largest freight railroads (known as Class I) decreased by about 28 percent from 2011 through 2021.”
From a shipper’s standpoint, the picture was not rosy, either. The GAO report added that “freight rail customers GAO interviewed identified concerns such as reduced frequency and reliability of service, and increased fees. For example, rail customers stated that unreliable service can have significant effects, causing production shutdowns and higher costs.”
I don’t have room in this brief column to discuss all the pitfalls of PSR – in my view, it’s simply a ploy to drive the short-term price of the stock up to a point where the “activist” investors will sell their stock and walk off with a pile of money and not give a damn about the railroad. True investors are interested in the long-term value of their investment and want senior management to consider all of the stakeholders in the company – customers, employees, the communities in which they operate, and shareholders. A railroad with equipment and personnel shortages, and bad customer service is not going to achieve long-term value for the company.
On another note, I understand why true activist investors exist and are in business. There are legitimate situations where a publicly owned company is not managed well, and the responsibility for this rests with senior management. A real activist investor can come in and bring vast improvements to the company that will benefit all stakeholders. This is not the case with Norfolk Southern.
Any significant criticism of Alan Shaw must be muted because the responsibility for managing NS’s response to the East Palestine incident rested squarely on his shoulders. The amount of work and money that was expended by the railroad for remediation in East Palestine was tremendous, and Alan spent considerable time on the ground in Ohio. I’ve written before, and maintain, that that NS has done nearly everything possible to help East Palestine and its people through this crisis.
I believe it is shameful for this “activist” investor to say that Norfolk Southern has been “tone deaf” in its response to the East Palestine disaster. Alan had not been in the CEO chair long enough for it to get warm when the accident occurred, and as I said before, the NS response to rebuilding the community and strengthening its residents has been very strong. I’d like to see how some of the other esteemed individuals involved in the effort to oust Alan would have performed under the same circumstances.
We’ve been through several years where every Class I railroad officer, except for those at BNSF, has walked around with a sign that says “shareholder value” plastered to their foreheads. In my interviews with some executives over the years, I’ve asked them what the first thing they think of when they wake up in the morning, and I received responses like “I hope everyone is safe on the railroad today,” or “I hope we provide improved customer service today,” or something like that. During the PSR era, I asked another executive the same thing, and was told “Need to increase shareholder value.” I nearly threw up. As has been demonstrated, focusing exclusively on “shareholder value” is a road to industry dystopia.
We must remember the real stakeholders in the railroad industry: customers, employees, communities, and shareholders. The railroad industry is not a gambling casino. It’s not a place where you walk in for a short period of time and come out with piles of cash, leaving the industry in shambles. It is a vital part of our national and world economy and should be treated with discipline and respect. Real investors know this. Let’s don’t get back on the PSR merry-go-round.
