Norfolk Southern shareholders should elect five of an activist investor’s seven board candidates but retain embattled CEO Alan Shaw, proxy advisory firm Institutional Shareholder Services recommended today.
If institutional shareholders follow the ISS guidance at the NS annual meeting on May 9, it would leave Ancora Holdings two seats short of a majority on the railroad’s 13-member board. And the activist’s CEO candidate, former UPS executive Jim Barber Jr., would be left out.
“Although it appears that the dissident’s position has resonated with shareholders, and that many of those shareholders view this contest as an all-or-nothing affair, we find that questions about the management and direction of the company would be best answered by a reconfigured board with more extensive and balanced industry expertise and the benefit of access to all available information,” ISS said in its 33-page report.
On Sunday, the other proxy advisory firm, Glass Lewis, recommended that shareholders back six of Ancora’s candidates, including Barber [see “Influential proxy advisory firm recommends …,” Trains News Wire, April 29, 2024]. The proxy firms’ recommendations are influential with the passive institutional investors who hold nearly 20% of Norfolk Southern’s shares, analysts say.
Like Glass Lewis, ISS recommended that shareholders oust NS independent Chair Amy Miles. But ISS said investors should retain board member Claude Mongeau, the former Canadian National CEO.
The report also says that shareholders should back Ancora candidates with experience that would strengthen the NS board: Former Surface Transportation Board member William Clyburn, former Kansas City Southern and CN executive Sameh Fahmy, former Ohio Gov. John Kasich, rail financier Gil Lamphere, and former Wall Street transportation analyst Allison Landry.
“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.”
Ancora has sought to gain control of the NS board and oust Shaw and new Chief Operating Officer John Orr, citing the railroad’s lagging financial and operational performance, as well as its response to the disastrous 2023 hazardous materials derailment in East Palestine, Ohio.
Ancora has proposed a full-blown implementation of the low-cost Precision Scheduled Railroading operating model, with former CSX operations boss Jamie Boychuk as chief operating officer.
NS wants to stick with Shaw’s resilience strategy, which was launched just weeks before the wreck in East Palestine. Shaw says his strategy is a balanced approach to service, productivity, and growth with safety at its core. It relies on a PSR-based operating model, he contends, but involves keeping engineers and conductors on the payroll during freight downturns so that the railroad can maintain service levels, capture volume as it returns, and avoid the costly service meltdowns that drive shipments to the highway.
NS and Ancora are both targeting a sub-60% operating ratio, but NS says its more measured approach would take a year longer.
“Although there is a clear case for change, NSC 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 said.
ISS said it had serious concerns with the board’s oversight and accountability at the railroad. But it also acknowledged that the rollout of Shaw’s “novel strategy” was complicated by East Palestine.
“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 tenure,” ISS said.
Yet ISS said East Palestine unmasked problems at NS. “The derailment set back operations, but also exposed numerous reasons for shareholders to believe that their best interests were not being prioritized. These beliefs have only been reinforced by the board’s defensive actions in this proxy contest, and its approach to other governance matters,” ISS said.
Norfolk Southern said the ISS report was “a clear endorsement of the company’s management and strategy.”
Ancora said the ISS and Glass Lewis recommendations were an indication of the need for change at NS.
“The leading proxy advisory firms have collectively sent a clear message about the need for significant, shareholder-driven change at Norfolk Southern,” Ancora CEO Frederick DiSanto and Ancora Alternatives President James Chadwick said in a statement. “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’s ‘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.”
Note: Updated at 12:56 p.m. Central with comment from Ancora.
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