Commentary

Norfolk Southern Pulling Out of the Station After Proxy Fight, Leaving Activist Ancora in the Dust

Written by Jeffrey Alan Sonnenfeld and Steven Tian
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Norfolk Southern photo.

As we predicted last month, shareholders resoundingly rejected an attempt by activist investor Ancora to take control of Norfolk Southern’s board and fire CEO Alan Shaw at Norfolk Southern’s annual meeting this week, a dramatic and decisive finale to one of the most hostile, hard-fought proxy fights in recent memory. Based on our decades of corporate governance expertise across thousands of proxy fights, here’s what we believe went wrong for Ancora’s highly-hyped activist campaign, with Ancora squandering a good hand through its own self-inflicted missteps as we see it, and what it all means for Norfolk Southern’s promising future and the path forward.

What Went Wrong for Ancora: Squandering a Good Hand Through Self-Inflicted Missteps

Despite Ancora’s best efforts to weave some positive spin from winning three board seats on a 13-person board, this week’s outcome was a disappointment for Ancora by almost any definition, including their own. As Ancora activism leader Jim Chadwick confidently declared on CNBC last month, Ancora was gunning for nothing less than control of the board, putting up seven Ancora-backed nominees, and waged an all-out war to fire the CEO, Alan Shaw, whom Chadwick identified as “the problem” and attacked in deeply personal terms. But Ancora massively under-delivered, with analysts calling the outcome “a major surprise” in light of the lofty expectations Ancora had set.

Ironically, the result Ancora achieved, three board seats, was virtually the same settlement as what Norfolk Southern offered to Ancora several months ago, so Ancora could have accomplished largely the same result while saving themselves time, expense, and reputational harm had they merely accepted the settlement instead of going through the wringer for naught. The proxy fight likely cost Ancora tens of millions of dollars, not to mention tens of millions for Norfolk Southern as well – funds which could have better gone toward the East Palestine community, the railroad workforce, or improving Norfolk Southern’s efficiency.

But even more important, with only three board seats, Ancora has very little anchoring on the new Norfolk Southern board. And after such a hostile battle, even these Ancora-backed directors know it will be futile to push for Ancora’s full agenda on the board, and are already rumored to be rushing to distance themselves from Ancora—a savvy move if these directors wish to forge productive, constructive relations with their new colleagues.

But Ancora’s abject miss was far from pre-ordained; indeed, were it not for a series of self-inflicted missteps, it is conceivable that Ancora could have ended up with a far more favorable outcome. For years, many analysts identified Norfolk Southern as a ripe target for activists, especially in the wake of four prominent instances over the last decade where activist investors successfully replaced a Class I rail CEO, followed by dramatic operational improvements. Had Ancora stuck to its substantive case for change, it might well have struck a chord.

Instead, we heard privately from several large Norfolk Southern shareholders that Ancora’s increasing reliance on over-the-top, “viciousad hominem smear campaigns rubbed many the wrong way.

Ancora’s nasty, intensely personal locker-room style taunts seemingly knew no bounds as its campaign dragged on, ranging from dropping opposition research dumps targeting individual Norfolk Southern board members under the guise of SEC filings to mudslinging new Norfolk Southern employees publicly and privately.  We experienced a dose of Ancora’s lame intimidation tactics ourselves after we published an objective analysis of the proxy fight in Fortune, though we quickly swatted away Ancora’s amateurish dirty tricks and laughably false claims with a definitive SEC filing correcting Ancora’s defamatory innuendo with real facts.

Ancora’s aggressive tactics seemingly backfired badly on them, even amongst those inclined to be natural allies. Perhaps it is no coincidence that fellow activists such as EdgePoint Investment Group, which holds a 2% stake in Norfolk Southern, abruptly severed cooperation with Ancora after initially entering into a cooperation agreement; while several big railroad names rumored to be involved with initial discussions, such as respected former Kansas City Southern CEO Pat Ottensmeyer, rushed to distance themselves as Ancora became increasingly nasty. Even Ancora’s own nominees were rumored to be uncomfortable with Ancora’s “nasty rhetoric”; and one highly qualified Ancora nominee even withdrew herself from consideration on the eve of the vote, an extremely rare occurrence. Between Ancora’s tragicomic belligerence, its lack of any rail expertise, its small ownership stake of merely 0.15% of NS as of the end of 2023, as well as its own undistinguished investment track record of underperformance as we revealed earlier, it could be said that Ancora squandered a good hand through its own mistakes.

The opportunity remains for Ancora to be a constructive, influential voice in driving value at Norfolk Southern—which would be a win for all involved and which we would celebrate eagerly—if only they could stop shooting themselves in the foot. Unfortunately for them, even after their defeat in the proxy contest, Ancora still does not seem to realize that the more they resort to wild, desperate ad hominem thrashing, the more they squander their own credibility in the eyes of many key stakeholders.

For example, during his allotted time slot at the Norfolk Southern Annual Meeting, Ancora activism leader Jim Chadwick inexplicably ranted against the largest shareholders of Norfolk Southern: “For the passive investors, if anything should go wrong here and there’s another derailment and people die, this is on you … You gave us literally no support … What happens at Norfolk Southern now is on your firms and your conscience.”

With this reckless slash-and-burn style, no wonder some Wall Street analysts are beginning to treat Ancora as an inconsequential gadfly: in a fresh note after the vote, TD Cowen analyst and Railway Age Wall Street Contributing Editor Jason Seidl wrote poignantly, “We believe Ancora will continue to advocate for its CEO and COO candidates, but to little avail.” Every observer should hope that Ancora can re-establish the credibility and trust needed to help drive Norfolk Southern forward as constructive partners, but the ball is in Ancora’s court, and they face a steep climb.

In response, Ancora would surely deny they are even mildly disappointed over the result, while pledging to continue their campaign against Alan Shaw, as they did in their press release after the votes were announced – but as Railway Age Editor-in-Chief William C. Vantuono insightfully alluded to, the before-and-after difference in Ancora’s definition of success speaks for itself.

NS Pulling Out of the Station at Long Last

Now that the proxy fight is finally behind Norfolk Southern, NS leadership can finally return their full focus towards running the company—a much better use of their time than defending themselves against malicious personal attacks and false innuendo. And after having listened intensely to shareholder feedback, making rapid adjustments in real time during the proxy fight, their mandate is clear: Shareholders have made it clear they are expecting greater operational efficiency and productivity from Norfolk Southern, in addition to continued safety improvements and driving volume and top-line revenue growth.

At the same time, shareholders clearly recognize and appreciate the ongoing, genuine improvements that are taking place at Norfolk Southern, which have accelerated since Alan Shaw’s appointment as CEO in 2022, as we documented in our earlier research slide deck.

Norfolk Southern President and CEO Alan Shaw. NS photo

Between the East Palestine derailment and the proxy fight, few new CEOs in any industry have navigated a more eventful first two years than Shaw, yet he has handled crisis after crisis with aplomb and skill, not to mention personal integrity and admirable strength of character. Shaw, new COO John Orr and the rest of NS’s crisis-tested leadership team are well positioned to continue driving productivity: During the past year, Norfolk Southern’s average train velocity has increased by 25% while reducing average dwell time by 33%, en route to a sub 60% operating ratio (OR) within three years’ time, while growing crucial intermodal volume.

Several key operating metrics have shown marked improvement since John Orr’s appointment as COO March 20. NS photo.

Unlike the activist’s COO candidate, who pledged to strip Norfolk Southern “down to the studs” raising concerns among key regulators such as powerful Surface Transportation Board Chair Marty Oberman (who retired May 10), Shaw is driving productivity growth while bringing along key stakeholders as partners on the train ride, ranging from regulators to labor unions to customers.

William Clyburn Jr.
Gil Lamphere

Shaw will report to a newly reconstituted Board with many fresh voices—but one which could prove less ungovernable than some cynics expect. Since the three Ancora-backed Board members represent less than a quarter of Board votes, their voice will be inconsequential if they stridently push for Ancora’s full agenda. More important, the three individual Ancora-backed members who won—Gil Lamphere, Sameh Fahmy and William Clyburn—are highly experienced and qualified in their own right and widely respected by all, while some of the more controversial and mercenary Ancora nominees lost their elections.

Sameh Fahmy

On many other boards, ranging from Pepsi to Disney, we have seen activist-backed board members grow and evolve to become supportive of the wisdom of management in time, as they engage constructively as productive board members and earn the respect of board colleagues. For example, former Heinz CEO Bill Johnson joined the PepsiCo board in 2015 as Nelson Peltz’s voice but became instantly very supportive of CEO Indra Nooyi and her leadership team. Similarly, Carolyn Everson, the widely admired and accomplished former President of Instacart, joined the Disney Board at the recommendation of activist Dan Loeb of Third Point, and improbably became one of Disney CEO Bob Iger’s most outspoken defenders during the recent Disney proxy fight with Nelson Peltz after having won the respect and trust of her board colleagues and key shareholders alike.

Already, Lamphere, Fahmy and Clyburn are rumored to be distancing themselves from Ancora’s excesses—and they ought to be commended for seeking to represent all shareholders, not only the idiosyncratic whims of a small 0.15% shareholder whose vision has already been roundly rejected by the shareholder base. The Board will need to elect a new Chair in the next few weeks as the first major order of business, which will offer revealing insights into whether this new Board can work constructively together.

Regardless, even though the proxy fight is now over, there is every reason to think that Norfolk Southern management and its Board will continue to operate under heightened scrutiny moving forward, and the public narrative will soon shift to how to measure the progress Norfolk Southern is making. As we see it, the Norfolk Southern Board should be careful to continue benchmarking the progress of management against its own stated goals, and avoid the pitfalls and pressure cooker of artificial false comparisons promoted by some naïve outside commentators. In particular, while it is an indisputable fact that Norfolk Southern trails its nearest peer competitor, CSX, in many operating metrics, it is unrealistic to think Norfolk Southern can close the margin gap with CSX overnight.

Such a comparison also ignores recent history—especially as CSX was essentially torn down to the studs in 2017 by the late Hunter Harrison, who juiced CSX’s margins unsustainably while setting off transportation crises across the nation, and CSX’s network is only now being rebuilt by CEO Joe Heinrichs and his leadership team. Norfolk Southern should continue making progress on its own path and on its own timeline, and bringing all its stakeholders along for the ride, without falling into the trap of trying to be CSX or any other railroad.

Ancora tried to railroad shareholders but failed. As Norfolk Southern finally pulls out of the station, leaving its proxy fight and activist detractors shouting on the side to the tracks, the future is promising, and there is every reason to think that Alan Shaw will continue this remarkable turnaround saga of a great American company.

Jeffrey Sonnenfeld (left) is the Lester Crown Professor in Management Practice and Founder and President of the Yale Chief Executive Leadership Institute at the Yale School of Management. Steven Tian is Director of Research at the Yale Chief Executive Leadership Institute and a former quantitative investment analyst with the Rockefeller Family Office.

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