Norfolk Southern Corp. management, led by CEO Alan Shaw, has made a multimillion-dollar mistake in hiring an embattled executive as its new chief operating officer, says activist investor Ancora Holdings Group LLC, which will attempt a company takeover at the Norfolk Southern shareholder meeting on May 9.
“We all want a safer, more reliable and higher-performing railroad with a substantially greater share price,” says Ohio-based Ancora, the investment group that in January took a $1 billion stake in Norfolk Southern. “Unfortunately, the board and CEO Alan Shaw continue to take actions that place their self-preservation ahead of our shared goal.”
Norfolk Southern recently inked a deal to pay railroad competitor Canadian Pacific Kansas City Ltd. (CPKC) a whopping $25 million plus concessions on the Meridian Speedway railroad track (worth potentially many multiples of the $25 million cash component) to hire John Orr, an executive previously accused of racial discrimination and workplace harassment. Norfolk Southern also gave up its stake in a valuable Texas rail line — a move Ancora calls short-sighted.
On March 20, Norfolk Southern announced that Orr would serve as executive vice president and COO, reporting directly to Shaw and overseeing the company’s railway operations, including safety, transportation, network planning and operations, engineering, and equipment maintenance.
The railroad said in a statement that throughout Orr’s four-decade career, he’s earned a reputation as “a proven leader in applying scheduled railroading principles to drive sustainable long-term value creation.”
Shaw recruited Orr from CPKC, where Orr served as executive vice president and chief transformation officer, overseeing network operations planning and design, labor relations, and regulatory affairs.
To nab Orr, Norfolk Southern agreed to a one-time cash payment to CPKC of $25 million, and will make certain additional unspecified concessions related to the Meridian Terminal and the Meridian Speedway, a key rail hub and route in the southern United States.
Ancora slammed the Norfolk Southern deal to buy Orr, saying the board and Shaw failed to disclose all of the relevant details about Norfolk Southern’s agreement with CPKC.
“We will not sit quietly as Norfolk Southern brazenly contends that one highly questionable hire is the primary cure for the strategic, operational and cultural issues that exist under incumbent leadership,” Ancora wrote in an April 5 open letter to fellow shareholders.
Ancora also released an April report, entitled “Move NSC Forward: The Case for Operationally Proficient Leaders and a PSR-Powered Scheduled Network,” in which the company lays out its case for why it thinks the board has failed Norfolk Southern shareholders, as well as its plan to change management at the railroad company.
“The board has proven itself unable to effectively oversee management and the company, and has destroyed shareholder value,” Ancora says in the report.
Specifically, the company says Norfolk Southern’s complacency in several areas is to blame, including appointing a chairman with no operating or industry experience; promoting a long-time executive with limited operational experience to the CEO role; and failing to select and retain a strong COO.
The Norfolk Southern board also has failed to adequately include a safety component in the CEO’s initial compensation package and to address lagging operational performance relative to Class I peers and the company’s closest competitor, Ancora charges, while also failing to maintain adequate safety and risk management protocols prior to the East Palestine, Ohio, train derailment.
Additionally, Ancora says that Norfolk Southern failed to add a qualified Class I railroader or policymaker with applicable skills to the board during its reactive refresh, and inked “a costly and poorly disclosed deal with CPKC” that gave up a valuable part of Norfolk Southern’s franchise, according to its report.
For example, according to Ancora, the board and Shaw provided CPKC with “excessive financial and strategic consideration that weakens Norfolk Southern’s long-term competitive positioning” by giving up part of the railroad’s long-term franchise — in the form of concessions related to the Meridian assets — to hire Orr.
“The Meridian assets afforded Norfolk Southern better access to several large addressable markets,” Ancora’s report says. “CPKC could leverage these Meridian concessions according to its own plans, including its publicly disclosed transaction with CSX involving the Meridian & Bigbee Railroad.
“We believe that Norfolk Southern will not exercise its right to purchase the Wylie Intermodal Terminal in Texas as part of the concessions given up in the deal for Mr. Orr,” says the report.
And despite the importance of the Meridian assets, Norfolk Southern provided just two sentences of description about “vague concessions in its nearly 1,800-word press release on Mr. Orr’s appointment, one paragraph of cherry-picked information in its second fight letter, and filed a Form 8-K three weeks after the announcement that still leaves shareholders with more questions than answers,” according to the report.
Altogether, Ancora estimates that the $25 million cash payment and tangible concessions linked to the valuable Meridian assets could over time represent a nine-figure cost in the coming years for Norfolk Southern.
In its April 5 letter to fellow shareholders, Ancora also came out especially strongly against Orr.
For example, Ancora said the board and Shaw disregarded serious allegations levied against Orr, including a complaint filed against Canadian National Railway Company and Illinois Central Railroad that was made by an African American employee who held a management position and reported directly to Orr.
The employee alleged racial discrimination, claiming that he was continually passed over for promotions in favor of Caucasian employees. Legal filings in the action alleged “Orr’s significant management flaws, including the malicious abuse of his subordinates,” according to Ancora’s letter.
Ancora also pointed to previous accusations against Orr of “abusive behavior and serious misconduct in the workplace” when he worked as a mid-level executive at Canadian National.
While Orr denied the verbal abuse allegations, Ancora said that an adjudicator found the evidence to be credible, noting that “the employee ‘was belittled, had her job threatened, and was subjected to yelling and swearing’ to such an extent that ‘no employee could be expected to persevere in employment in such circumstances.’”
In its report, Ancora also goes on to say that it is “extremely unlikely” Orr will be able to create value that repays Norfolk Southern shareholders for the massive consideration paid to CPKC, and he lacks the right experience to lead operations at an eastern U.S. railroad.
Orr also isn’t a PSR implementation expert and has never redesigned a rail network, although there are claims to the contrary, Ancora said.
Norfolk Southern did not respond to a request for comment regarding Ancora’s concerns about the hiring of Orr.
At the same time, Ancora also isn’t thrilled about CEO Shaw, who assumed his position at Norfolk Southern in December 2021. Ancora says that Norfolk Southern’s safety issues prove that Shaw makes too much money and should be replaced.
Specifically, Ancora says that Shaw — a 30-year Norfolk Southern insider with experience in cost analysis, marketing, chemical and coal staff positions — has minimal operational or financial experience, no network management or logistics experience, delivered anemic revenue CAGR of one percent over the six years he served as chief marketing officer at Norfolk Southern, and oversaw a flawed resilience railroading strategy as CEO.
On its website movenscforward.com, Ancora alleges Shaw is ineffective as a CEO with a track record of failing to deliver growth, that Norfolk Southern’s leadership’s operating plan has resulted in higher costs and shrinking margins; that Norfolk Southern has underperformed Class I railroad peers on every relevant operating metric; and that the board has failed to hold management accountable for its widening peer gap, lax operating culture, and increasing rate of accidents.
The “tone deaf” response to the derailment is the last “cause for change” listed, Ancora says.
On the flip side, several Wall Street analysts have praised both Shaw and the appointment of Orr. Unions also support them.
Nevertheless, Ancora’s campaign to oust Norfolk Southern’s management team is gaining support.
For instance, New York private investment management firm Neuberger Berman Group LLC, which holds a small position in Norfolk Southern, recently provided an advanced vote disclosure in which it fully supports Ancora’s proposed board members.
“Given limited research and development or the introduction of new products in the rail industry, we believe a strong management team that is capable of driving consistent operational performance is that much more critical to both customer satisfaction and stock performance success,” Neuberger Berman said. “As such, we believe a change in management and refreshment of the board at [Norfolk Southern] are warranted and could stimulate improved operations and thus equity performance.”
Takeover specifics
Norfolk Southern at its May 9 shareholders meeting wants shareholders to approve the 13 board candidates it has recommended.
Meanwhile, Ancora is recommending that Norfolk Southern shareholders approve seven independent board directors who promise to hire former UPS executive Jim Barber, Jr., as CEO and former CSX executive Jamie Boychuk as COO.
To replace Shaw, Ancora suggests hiring Barber, who has a track record of growth and significant experience in operations, supply chain, strategic planning, employee relations and risk management from his 35-year career as a leader in the shipping and logistics industry, according to his bio on Ancora’s website.
Barber also “has a clear vision for the team, operating plan and growth needed to turn around Norfolk Southern.”
Barber previously served as the COO of UPS, one of the country’s largest railroad customers and a $125 billion market value parcel carrier with a global network that generates more than $90 billion in sales annually. Boychuk also has held key leadership positions in UPS’ Domestic and International business units, as well as in Supply Chain Solutions.
Barber is also credited with leading much of UPS’ growth, including in both mature and emerging international markets, and has reached scores of effective labor agreements through constructive negotiations, while overseeing lauded safety initiatives in both the Ground network and the UPS airline.
Boychuk — who was not interviewed for the Norfolk Southern COO job now held by Orr — would be an “ideal partner” for Barber, says Ancora, and together they represent “an operational dream team” with vast transportation network experience.
Boychuk is a lifelong railroader with the safety record and scheduled railroading acumen needed to help turn around Norfolk Southern, according to his bio, which points to his previous positions as the executive vice president of operations at CSX, where Boychuk led a variety of operational initiatives during a period in which the railroad improved performance across all operating metrics and unlocked significant value for shareholders. Under Boychuk’s leadership, CSX delivered the best rail operating margin in the history of eastern railroads.