ISS Endorses NS Director Slate—Mostly (Updated)

Norfolk Southern photo.

ISS—not the International Space Station weighing in from 1.33 million feet (246 miles) above the earth’s surface in orbit, but that other ISS, proxy advisory firm Institutional Shareholder Services—is endorsing seven of Norfolk Southern’s 13-member independent director slate plus CEO Alan Shaw, and five of Ancora’s, all to be voted on at the railroad’s May 9, 2024 Annual Meeting of Shareholders. Interestingly, Glass Lewis, another proxy advisory firm, just two days earlier also backed five of Ancora’s candidates but recommended replacing Shaw with Ancora candidate James Barber. Both recommendations—ISS’s only slightly in NS’s favor—make the proxy vote outcome appear rather murky.

The seven NS independents ISS endorsed are John Huffard, Claude Mongeau, Richard Anderson, Philip Davidson, Francesca DeBiase, Marcela Donadio, and Christopher Jones. NS said that while ISS “recognized the strengths of our crisis-tested CEO Alan Shaw, along with independent directors,” it “disagrees with ISS’s recommendation as it relates to certain members of Ancora’s slate. ISS recommended that Norfolk Southern shareholders support a majority of our director nominees … [reflecting] a clear endorsement of the company’s management … [underscoring] the strength and effectiveness of our board and the ongoing and effective execution of the company’s strategy. Specifically, ISS acknowledges that ‘[t]he prevailing strategy appears to be logical, particularly when considered alongside evolving views on rail service … ISS’s recommendation against [proposed CEO] Jim Barber is a clear indication that a change in management is not warranted, and further, adding him to the board may create an unfavorable dynamic in the boardroom that would impede the company’s progress and momentum.”

“Under Alan’s leadership, Norfolk Southern is accelerating a strategy that balances service, productivity, and growth, with safety at its core, and will deliver top-tier revenue and earnings growth with industry-competitive margins,” NS said. ”At this critical point in Norfolk Southern’s transformation, replacing members of our board with Ancora’s inferior nominees would impede this progress, introduce significant risk, and ultimately destroy long-term shareholder value. All of Norfolk Southern’s director nominees collectively add a wealth of highly relevant experience in the railway and transportation sectors, and important operations, safety, sustainability, risk management, and government regulation expertise. Our highly engaged board is fit-for-purpose to oversee the execution of Norfolk Southern’s balanced strategy, enhance safety and operational performance, and drive smart and sustainable long-term growth for our shareholders.”

The ISS recommendation of Ancora nominees William Clyburn, Sameh Fahmy, Gilbert Lamphere, Allison Landry and John Kasich “jeopardizes the election of Norfolk Southern’s board candidates, who are critical to the effective oversight of the company—Amy Miles (current chair), Heidi Heitkamp, Thomas Kelleher, Jennifer Scanlon and John Thompson,” NS said. 

ISS did not summarily dismiss Ancora’s candidates, Barber among them. “Although we are not supporting dissident nominee and CEO selection James Barber, he appears to be a capable candidate with experience and skills that should be transferable to the railroad industry, which makes him a credible director and CEO candidate,” ISS said. “However, adding him to the board at this juncture risks creating a dynamic that could delay the board’s ability to reach a needed compromise.”

“Although there is a clear case for change, NS is not a broken company, and operational performance does not reflect a situation so dire as to suggest that a change in board control and an accompanying overhaul of strategy and leadership is immediately required,” ISS concluded. “The prevailing strategy appears to be logical, particularly when considered alongside evolving views on rail service, and it was not entirely unsuccessful during the initial phase of the CEO’s (Alan Shaw’s) tenure. For instance, select productivity metrics improved, and NS posted better TSR than peers prior to the derailment. However, the company’s inconsistent messaging of strategy has made it challenging for shareholders to assess whether the prevailing plan deserves more time to play out, and has undermined their confidence in the ability of the management team to eventually close the gap with peers. The new COO (John Orr) appears to be capable, and could help in that effort; nonetheless, he was hired under concerning circumstances—at a substantial (and perhaps not fully understood) cost to the company—which is effectively an indictment of the board. Shareholders have also been provided with numerous reasons to believe that their best interests are not being prioritized by the board. These are serious problems, and they reflect underlying issues with oversight and accountability that will require substantial change to rectify.” 

Ancora said the recommendations of ISS and Glass Lewis “have collectively sent a clear message about the need for significant, shareholder-driven change at Norfolk Southern. On the heels of Glass Lewis recommending six of our seven director candidates, including proposed CEO Jim Barber, we are pleased to see ISS conclude that it is ‘justifiable for shareholders who have already lost faith in the current management team to support the entire dissident slate.’ Both proxy advisory firms accurately diagnosed that Norfolk Southern has been plagued by disappointing corporate governance, misaligned executive compensation, poor safety and an unproven operating strategy that hasn’t produced shareholder value.”

ISS’s 133-page report curiously takes repeated aim at Miles, almost placing sole responsibility for NS’s performance as well as fault for the East Palestine accident on her shoulders:

“As board chair, Amy Miles arguably bears the most responsibility for this state of affairs. She has a decade of tenure, and her leadership of the board has coincided with many of the concerning developments underpinning the dissident’s case for change.” 

Said one industry observer, ”ISS’s level of competence and logic, and how they evaluate people in our industry, is scary. It’s disconcerting that major institutional investors are going to give their recommendation a lot of weight.”