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Clash of the Railroad Titans: Norfolk Southern's Corporate Struggle with Ancora Investor

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Benjamin Hughes

April 5, 2024 - 22:08 pm

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Turmoil at Norfolk Southern: Activist Investor Puts Pressure on Railroad Titans

Amidst Controversy, Ancora Challenges Leadership and Demands Change

For nearly two months, a state of corporate conflict has gripped Norfolk Southern, a prominent player in the railroad sector. The company has found itself locked in a heated struggle with activist investor Ancora, as the firm embarks on a crusade to revamp the railroad’s board and seek the replacement of current CEO, Alan Shaw. This corporate drama unfolded with yet another twist on Friday as Ancora hurled criticisms at Norfolk Southern’s freshly appointed Chief Operating Officer, John Orr. The investor group lambasted what it deemed an "excessive" buyout package for Orr, alongside levying heavy allegations about Orr's professional history which includes charges of racial and sexual discrimination.

The battle began in earnest as Ancora commenced its campaign to upset the existing power balance within Norfolk Southern by pushing for CEO Alan Shaw’s removal. The skirmish has intensified as the investment firm set its crosshairs on John Orr, the newly anointed COO, assailing the legitimacy of his compensation as well as bringing to light troubling episodes from his professional chronicle.

In an aggressive move last month, Norfolk Southern wooed Orr away from competing firm CPKC, committing tens of millions to extricate him from his previous contract. This bold recruitment, perceived as a countermeasure to Ancora’s operational critiques, was met with applause from several renowned Wall Street analysts, affirming the perceived strategic value Orr brought to the table.

Ancora escalated its offensive by publishing a public letter to Norfolk Southern's shareholders this past Friday. Within this communiqué, Ancora spotlighted past incidents involving Orr that arguably cast a shadow over his recent appointment. This scathing revelation comes despite noticeable operational improvements that have occurred under Orr's embryonic tenure spanning a mere three weeks.

The letter compiled by Ancora wasn't just a scattershot of accusations; it meticulously laid bare both alleged and substantiated instances of Orr’s workplace misconduct dating back to his tenure as a mid-level executive with Canadian National. The details are sobering — in the early 2000s, a decision from the Canadian Arbitration Board substantiated claims that Orr had engaged in verbally abusive behavior, directing a tirade of profanity-laden insults at a female colleague. This statement of facts was corroborated by a witness in the course of employment tribunal proceedings.

Moreover, further allegations surfaced when a Black executive initiated litigation in 2019, describing Orr's interactions with employees as "abysmal" and lodging a formal accusation of racial discrimination against Canadian National. Orr's vexatious behavior purportedly reached a level of severity that necessitated intervention in the form of executive coaching, a revelation brought forward in a legal document filed in 2020. Despite a deposition under seal, settlement ensued in 2022.

Before Orr's hiring became public knowledge, Ancora sought to preemptively expose concerns about his conduct in correspondences to two Norfolk Southern board members, communications that were later obtained by CNBC. Ancora's statement last Friday didn't mince words, categorizing Orr’s hiring as a lavish error that has begun to erode shareholder value. Norfolk Southern had agreed to payout $25 million in cash to Orr’s former employer, alongside yielding additional concessions pertaining to a strategic rail hub and route in the American South, a portion of which, according to Norfolk Southern, generates about 1% of its revenues. Public transparency regarding the immediate and long-term financial repercussions of these concessions was notably deficient at the time of Orr’s hiring announcement.

Norfolk Southern, in a retort to CNBC, retrenched Ancora's valuation of route transactions — the Meridian Speedway agreement — labeling it as "completely inaccurate" and grounded on a defective premise. They contended that it constitutes an overestimation of the revenue actually forfeited. "This revised agreement is by no means a consequential concession," the railroad firm reiterated.

The activist's rallying cry isn’t merely to shuffle executive leadership but to position former UPS CEO Jim Barber and ex-CSX Executive Vice President Jamie Boychuk as replacements for Shaw and Orr, respectively. Ancora's indictment is clear; they accuse Norfolk Southern of stark underperformance relative to competitors and lay the blame squarely with Shaw and the incumbent board.

Norfolk Southern, defending Orr’s reputation, portrayed him as an executive with a sterling record of enhancing performance in a manner both safe and integral. In contrast, they disparaged Ancora's alternative COO candidate, Jamie Boychuk, suggesting that the two candidates’ track records and industry esteem are not even remotely on par.

February 2023 saw a Norfolk Southern freight train meet with disaster as it derailed in East Palestine, Ohio — spilling hazardous chemicals, wreaking environmental havoc, and propelling a political debate on the topic of railroad safety. Since the calamity, the company's stock has seen a stagnant period, in stark contrast to the S&P 500, which enjoyed a 26% uptrend.

As the stage is set for Norfolk Southern's shareholder meeting on May 9, Ancora’s efforts have not gone unnoticed, winning endorsements from other notable shareholders. Neuberger Berman, for instance, threw its weight behind Ancora's picks for board seats, citing longstanding issues with governance that predate the company's reform campaigns.

Despite the brewing storm, a compromise seems a remote prospect. Don Bilson, an analyst at Gordon Haskett, cast doubt on the likelihood of a settlement in a note to clients on Friday. Shaw previously conveyed to CNBC that the company had extended an offer to Ancora proposing the allocation of a "couple" of board positions, in hopes of reaching an accord.

Continued settlement negotiations appear to hinge upon a complete overhaul of the board and Shaw's exit — conditions to which the board seems staunchly opposed, having declared steadfast belief in Shaw's leadership. Ancora, revealing its perspective to CNBC, indicated that it has persistently sought out resolution through both direct dialogue and intermediaries, albeit to no avail.

In the broader corporate saga ensuring at Norfolk Southern, investors and market watchers are poised for an unfolding chapter of corporate governance drama, as Ancora continues its vociferous campaign for change. The coming months will be pivotal as shareholders and the board confront the activist's demands, and the outcome stands to shape the company’s future course — in leadership, strategy, and operational integrity alike.

A Corporate Shakeup on the Horizon?

With the shareholder assembly on the immediate horizon, the battleground is set, and the actors are in place. Will Ancora’s campaign for an executive shakeup succeed? Or will Norfolk Southern's leadership weather the storm of these fraught corporate battles? The industry watches with bated breath as the narrative unravels.

Further Changes to Railroad Spur a Showdown of Titans

What is evident is the profound impact these tussles will have on the organizational structure and strategic direction of one of America’s railroad titans. Ancora, with the support of fellow investors, may precipitate a series of leadership transformations that could herald a new era for Norfolk Southern.

Norfolk Southern's stock performance, static in the face of market upswings, reflects more than just the aftermath of an operational mishap in Ohio — it underscores a simmering discontent among stakeholders, who now seem determined to steer the course of the company toward what they believe will be a more prosperous track.

As barbs are traded and the proxy war rages on, the shareholders' meeting may see the culmination of Ancora's assertive moves to reshape Norfolk Southern. The resolution of this conflict, be it through continued confrontation or an eleventh-hour settlement, encapsulates not only a defining moment for Norfolk Southern but also a significant narrative in corporate governance and shareholder activism.

Conclusion: A Railroad Reimagined or Leadership Affirmed?

Is Ancora ushering in a renewed vision for Norfolk Southern, setting the stage for what it views as necessary renovation? Or will the current leadership vindicate their strategies and retain control of a historic American railway? Investors nationwide await the verdict with the shareholder meeting just on the horizon, ready to witness the culmination of an extraordinary squabble with implications that echo beyond the tracks of Norfolk Southern.

Barclays Weighs In

A significant nod from Barclays, who upgraded Norfolk Southern's position amidst the activist surge, hints at the broader financial community's perception of the unfolding corporate narrative. Their analysis provides another dimension to the discussion, one that recognizes the potential for growth and reform within Norfolk Southern's corporate structure.

As Norfolk Southern faces a defining moment, the interplay between shareholder interests, executive capabilities, and the company’s trajectory remains at the forefront of discussions. Regardless of the outcome, this contest for control highlights the potent influence of activist investors in today's corporate landscape, and the critical role of governance in shaping business successes and failures.

In the looming shadow of the rail yard, where corporate strategy meets the tracks, the future of Norfolk Southern hangs in the balance. One thing remains certain; the outcome of next month's proceedings will reverberate across boardrooms and the market at large, signifying potent tremors not just within the company, but across the landscape of American enterprise.