With the proxy battle at Norfolk Southern headed to a climax next week at the annual meeting of shareholders, management and the board of directors have taken a major hit to their survival efforts following the recommendation of Glass Lewis to back the proxy battle undertaken by Ancora Holdings.
Glass Lewis is an independent proxy advisory firm that makes recommendations to institutional shareholders about how to vote in proxy battles. News reports about the firm inevitably use the word “influential” to describe it.
For example, Glass Lewis came out in support of the existing management of Disney in a proxy battle with activist investor Nelson Pelz, a fight that Disney management won.
As of publication time, the Glass Lewis report was not available, but Ancora, which is challenging the management of Norfolk Southern (NYSE: NSC), released a statement Monday on the proxy adviser’s recommendations that institutional investors back the effort to replace Norfolk Southern CEO Alan Shaw, newly hired COO John Orr and seven directors.
“Having given due consideration to the arguments presented by each side, we believe Ancora has presented a compelling case for supporting a substantial overhaul of the Company’s current leadership,” Glass Lewis said in its report, as reported by Ancora. “Based on our review, we believe the operating performance of the Company has been consistently worse than its peers for an extended period. We are also inclined to agree with Ancora’s critique of the Company’s current operating strategy as being one that relies on inherently incompatible railroading concepts.”
And in a pointed critique, Glass Lewis said that “it’s not readily evident to us the Company’s current leadership had built up a sufficiently positive track record such that investors might reasonably have the patience to allow management to implement a relatively novel operating strategy.”
Transportation analyst Jason Seidl at TD Cowen said in a Monday commentary that with the Glass Lewis recommendation, there is “momentum” toward ousting the current management.
Waiting now for word from ISS
He noted that ISS, a company similar to Glass Lewis, has not checked in with its recommendation. It is expected later this week.
“Regardless, we see Monday’s news as more momentum in favor of the activist,” Seidl wrote. “If ISS comes out in favor of Ancora, we believe this could make it much more difficult for current management to win the shareholder vote next week.”
But he added that shareholders at other companies have at times voted contrary to the recommendations of proxy advisory companies.
As the days draw closer to the Norfolk Southern annual meeting May 9, both sides are touting various endorsements of their slate of directors, though none may carry more weight than the Glass Lewis recommendation.
For example, in a recent proxy filing, Norfolk Southern carried a long list of commentary from unions and independent analysts backing current management.
Unions backing the current management include a group listed as the Coalition of Rail Unions and the Sheet Metal, Air, Rail and Transport Workers Transportation Division.
A quote from Vertical Research Partners is typical of what Norfolk Southern cites in one of its recent proxy statements. “We believe that the best option is to give current management time to let John Orr implement his changes under Alan Shaw’s new modified plan — the Canadian precision railroading model, not the CSX model,” Vertical is quoted as saying. “Activism can always be revisited.”
Teamsters divisions back Ancora
Ancora recently has been able to cite its support from the Brotherhood of Locomotive Engineers and Trainmen as well as the Brotherhood of Maintenance of Way Employees, both divisions of the Teamsters. Those endorsements both came down last week.
Ancora’s proxy statements also have said it has the backing of institutional shareholders Edgepoint Investment Group and Neuberger Bergman.
Ancora’s campaign has cited Norfolk Southern’s financial performance, which has trailed most Class 1 rail peers, including Eastern rival CSX (NASDAQ: CSX) for several years, as the key reason to replace existing management.
Its plan is to hire Jim Barber, a former UPS executive, as the CEO to replace Shaw. The plan also includes bringing on as COO Jamie Boychuk, a former CSX executive, to replace Orr, who recently was brought to Norfolk Southern from Canadian Pacific Kansas City Ltd. (NYSE: CP) after Norfolk Southern agreed to considerations whose total value is at least $25 million. Ancora has charged the ultimate cost will be well above that.
Those considerations include modification in the management structure of the Meridian Speedway, a joint venture between Norfolk Southern and CPKC. The speedway is a more than 300-mile rail line between Louisiana and Mississippi that is seen as a key link between the southeastern and southwestern U.S. and ultimately the gateway to Mexico.
In Norfolk Southern’s most recent earnings call, Shaw said the arrangement with CPKC over the Meridian Speedway is “by no means a consequential concession, and it does not impact Mexico. We said it impacts the Dallas business, which is largely defined by abundant truck capacity.”
Norfolk Southern’s financial performance can be measured multiple ways. But since early March 2020, right before the pandemic, Norfolk Southern’s stock is up about 17.5%. By contrast, CSX has risen about 31.5% in that time.
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