NS: Proxy Battle Ends With Favorable Results

Written by William C. Vantuono, Editor-In-Chief, Railway Age
Norfolk Southern President and CEO Alan Shaw remains in place and said he “is confident that we will have a strong and constructive relationship with our new directors.”
Norfolk Southern President and CEO Alan Shaw remains in place and said he “is confident that we will have a strong and constructive relationship with our new directors.”
NS Photograph

The votes from Norfolk Southern’s May 9 42nd Annual Meeting Shareholders have been tabulated and the results are clear. Following a months-long proxy battle launched by activist investor Ancora Holdings Group and punctuated by harsh rhetoric and personal attacks, 10 of Norfolk Southern’s existing Board members remain in place. Ancora won three seats. President and CEO Alan Shaw will not be replaced. Nor will Executive Vice President and Chief Operating Officer John Orr.

Gil Lamphere, Sameh Fahmy and William Clyburn Jr.—all excellent additions, in my humble opinion—will join Richard H. Anderson, Philip S. Davidson, Francesca A. DeBiase, Marcela E. Donadio, Mary Kathryn “Heidi” Heitkamp, John C. Huffard, Jr., Christopher T. Jones, Thomas C. Kelleher, Claude Mongeau and Alan H. Shaw on Norfolk Southern’s 13-member board. Once finalized, each will serve a one-year term expiring in 2025.

(The results are considered preliminary until final results are tabulated and certified by the independent Inspector of Elections. Final results will be reported on a Form 8-K that will be filed with the Securities and Exchange Commission.)

Lamphere is Chairman of MidRail Corporation and co-founder of MidSouth Rail Corporation. Fahmy is former EVP of Precision Scheduled Railroading at Kansas City Southern. Clyburn Jr. is a former Commissioner and Vice Chairman of the U.S. Surface Transportation Board.

“We appreciate the support of our shareholders and the valuable perspectives they have shared with us in the months leading up to our Annual Meeting,” said NS in a statement. “Our shareholders recognize that positive change is under way at Norfolk Southern. Moving forward, we will continue building on the significant progress Alan Shaw, John Orr and the entire team have already achieved. Together, we are building a safer, more profitable railroad, closing the margin gap with our peers, and ultimately growing value for our shareholders. We welcome William Clyburn, Jr., Sameh Fahmy, and Gilbert Lamphere to our board. We will work constructively and collaboratively on behalf of our shareholders unlocking the full potential of our powerful franchise.

“We thank Amy E. Miles, Jennifer F. Scanlon, and John R. Thompson for their dedication and service to our franchise. We also thank outgoing directors Thomas Bell, Mitchell Daniels, Steven Leer and Michael Lockhart, each of whom did not stand for re-election to the Board, for their multiple years of service to Norfolk Southern.”

“We have the best team in the industry,” said Shaw. “I’m confident that we will have a strong and constructive relationship with our new directors. Our work is not done.”

So, for the second time in as many years, Ancora failed to achieve its objective. Curiously, iins separate interviews with CNBC “Closing Bell: Overtime” co-anchor Morgan Brennan and Wall Street Journal reporter Esther Fung, Ancora Alternatives LLC President Jim Chadwick provided two very different perspectives.

“What does success look like?,” asked Brennan roughly two months ago. “I know you have seven board nominees, which would be the majority of the board, looking to change the management, but it could go a variety of ways here. How are you gaming it out, and what are the lessons learned from some of your previous proxy fights, including at other freight and logistics companies like C. H. Robinson?

“That‘s a good example because that probably is one of the primary lessons learned is when you‘re in a situation where you‘re trying to drive change at the top. When I mentioned those rail activists, examples of Canadian Pacific and CSX, that was involving change at the CEO position. Whenever you‘re trying to change out the CEO, and that‘s what’s required to drive ultimate value in the company, it requires a greater amount of change in support on the board. We’ve seen in the case of C.H. Robinson, even when you have phenomenal people as potential candidates to run those companies, if you don‘t have really the numbers on the board to make that happen, a board that is prone to making bad decisions will continue to make bad decisions. This board here at Norfolk Southern has shown over and over again, just as they did here with this Meridian Speedway arrangement for John Orr, that they are concerned about themselves and entrenchment. And ultimately, I think if shareholders want a plan and want a team that‘s going to execute and really win that, look, there‘s a lot of versions of success, but I think the message around the vote for seven, ultimately, that‘s how we control our own fate and we have a plan and we believe we‘re going to execute it.”

“We have repeatedly stated a desire to settle for minority change of the board and an orderly CEO transition, which appears inevitable at this point given fading confidence in Mr. Shaw,” Ancora told the WSJ in a May 6 statement.

Chadwick, as expected, took a few final, exaggerated parting shots in his allocated three-minute remarks prior to the call for final proxy votes. He mentioned how the East Palestine accident—which of course was awful—“destroyed a town in my home state.” It did not, and Norfolk Southern’s response was not “tone deaf,” as Ancora said at the outset.

Now that the dust has just about settled, and cooler, experienced heads—Lamphere, Fahmy and Clyburn—have prevailed (and I have it on good authority that none of the new board members were pleased with the nasty rhetoric spewed by Ancora and its public relations outfit, but nevertheless had little recourse but to swallow it), the work will continue at NS. As Alan Shaw said, “Our work is not done.”

Need I say more?

TD Cowen Insight

By Jason Seidl (Railway Age Wall Street Contributing Editor), Matt Elkott, Elliott Alper and Uday Khanapurkar

NSC‘s proxy battle concluded with disappointing results for activist Ancora, which secured only three Board seats and was unable to dislodge current CEO Alan Shaw. Shareholders voted to reinstate 10 NSC directors but did not support the Board Chair, conveying the expectation that operational improvements should continue to be the focus at the Eastern Class I, in line with ISS’s commentary ahead of the meeting.

With just three directors, Ancora only has a minority representation on the Board and will likely find it difficult to steer change in their desired direction in our view. We believe the activist will continue to advocate for its CEO and COO candidates, but to little avail. We saw this pattern play out during Ancora’s activist campaign at CHRW which resulted in only two Board seats and the inability to place Jim Barber in the CEO role (we note that is the second time Ancora has failed to place him in a CEO role).

While shares are down on the news, operating changes have already been put into motion at NSC with John Orr’s appointment (early improvements in service metrics were discussed extensively on the 1Q earnings call). We expect NSC to remain committed to its 2024 exit OR rate of 64%-65% and further convergence with peers beyond that as the Class I continues to reorient toward traditional PSR implementation. We also note that price action today should moderate the valuation gap between NSC and CSX ($34, Hold). With today’s intraday decline, our $253 PT currently implies ~13% upside to the stock.

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