Norfolk Southern’s management has taken a second hit this week from an independent proxy advisory firm as the Class 1 railroad fends off activist investor Ancora Holdings, but the latest report, while mostly critical of NS, recommends that CEO Alan Shaw keep his job.
Whereas proxy adviser Glass Lewis recommended that shareholders not vote in favor of Shaw to remain as a Norfolk Southern (NYSE: NSC) director — in essence, a vote to oust him because the CEO would be expected to also serve as director — ISS’ recommendation is that shareholders vote to keep Shaw on the board at the company’s annual meeting May 9 (though voting is already underway).
At the same time, ISS recommends that five of the proposed directors put up by Ancora be elected to the board to steer the company in a different direction.
One Ancora nominee ISS doesn’t back for a seat as a director: James Barber, the former UPS executive whom Ancora has picked to be the new CEO of Norfolk Southern if it controls the board. If Shaw stays as CEO under ISS’ scenario, there isn’t room for 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 wrote of Barber. “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.”
Reflecting a growing view that some if not all of Ancora’s director nominees will be elected to the board, ISS said “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.”
The scorecard is that on the proxy card that voters would use if they support the Ancora effort, both ISS and Glass Lewis are recommending votes for dissident nominees William Clyburn, a former Surface Transportation Board member; Sameh Fahmy, a former executive at Kansas City Southern who led the implementation of precision railroading; Gilbert Lamphere, described in an Ancora proxy as the “original financier of Precision Scheduled Railroading”; and Wall Street transportation analyst Allison Landry.
ISS isn’t recommending Barber or dissident candidate Betsy Atkins, the CEO and founder of a venture capital company.
Both proxy advisers are also recommending management nominees Richard Anderson, the former CEO of both Amtrak and Delta; Philip Davidson, a former career Navy officer and now a management consultant, Francesca DeBiase, a former supply chain executive with McDonald’s; Marcela Donadia, a former Ernst & Young partner; and Christopher Jones, formerly an executive with Northrop Grumman. Anderson is recommended as a new member of the board; the others are incumbents.
A Governor versus a Senator
In the political arena, ISS is recommending election of dissident candidate and former Republican Ohio Gov. John Kasich. It is not recommending existing board member Heidi Heitkamp, former Democratic U.S. senator from North Dakota. But Glass Lewis recommends Heitkamp while not recommending Kasich, which brings the recommended slate of dissidents ISS is recommending to five.
Although the two are not running against each other for an individual seat, ISS writes as if they were. “There is no evidence suggesting that Heitkamp is in any way unfit to serve, but dissident nominee John Kasich has comparable regulatory and administrative experience,” ISS said. “He would add a strong voice to the dissident contingent, as well as a proven ability to facilitate compromise.”
The Glass Lewis and ISS recommendations, beyond where they are in agreement, offer other mixes of management and dissident board of directors candidates to get to 13 seats, including Glass Lewis’ recommendation of Barber.
The key differences in the recommendations of the management slate is that Glass Lewis isn’t recommending Shaw but ISS is. With neither group recommending Atkins, it means that Glass Lewis is recommending six dissident board candidates while ISS is recommending five.
No support for current chair
Neither proxy adviser is recommending incumbent Norfolk Southern Chair Amy Miles. ISS said of her: “She has a decade of tenure, and her leadership of the board has coincided with many of the concerning developments underpinning the dissidents’ case for change.”
The ISS report could be described as a grade of D but suggests that improvement lies ahead already; it just needs a different set of advisers.
The spin that Norfolk Southern put on the ISS report in a prepared statement is that ISS backed a majority board of Norfolk Southern nominees as directors, which is accurate; the ISS recommendation is for five directors suggested by Ancora out of a board of 13, as well as the recommendation not to get rid of Shaw.
“ISS’s recommendation against Jim Barber is a clear indication that a change in management is not warranted, and further, adding him to the board may create an unfavorable dynamic in the boardroom that would impede the Company’s progress and momentum,” Norfolk Southern said in response to the ISS report.
The ISS report focuses a great deal of attention on the February 2023 derailment in East Palestine, Ohio, which can be viewed as starting the process that ultimately led to Ancora looking to oust Shaw and numerous members of the board.
“The derailment was costly, in both a monetary and a reputational sense,” ISS wrote. “However, it also punctuated efforts to implement a somewhat novel operating model, exposing safety, corporate governance, and operational deficiencies in the process. These issues form the basis of the dissidents’ campaign, which was publicly launched in February.”
Norfolk Southern’s hiring of John Orr as COO, lured away from Canadian Pacific Kansas City Ltd. with significant financial considerations, also is a key issue in the proxy fight. ISS said Orr’s hiring validates some of the criticisms leveled by Ancora. “This decision effectively embodied the dissident’s criticisms, and has come to mark the boiling point in this proxy contest,” ISS writes.
But after reviewing many of the metrics that show Norfolk Southern is lagging its peers, ISS ultimately argues that Shaw should keep his job. While there is no vote from the shareholders on who serves as CEO, leaving Shaw on the board and not voting Barber on to the panel effectively would leave Shaw in place as CEO.
“It is important to establish from the outset that there is a clear case for change,” ISS writes. “NSC has been guided for much of the journey by a new CEO, and it started at a deficit to its closest peer in a challenging operating environment.”
Clear chase for change, but not a new CEO
After ripping into the board — though not Shaw — for defensiveness and poor communication skills, ISS eases up. “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 wrote. “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.”
Orr “appears to be capable and could help” ongoing efforts, according to ISS.
Amit Mehrotra, the lead transportation analyst at Deutsche Bank, said he believes there will be some degree of electoral success for the dissident shareholders. The question is how much.
“Based on our discussions, we still believe the activist’s slate has unanimous support from institutional investors, and the reports from proxy advisors all but assures meaningful change at the Board level of NSC, in our view,” he wrote. “In this context, either way, major change is coming to NSC and it’s a notable outcome to see independent proxy advisors recommend such dramatic change at a Class 1 Railroad. If nothing else, this is a meaningful message being sent to NSC’s current Board.”
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