What next for Norfolk Southern after split decision in board battle with Ancora?

By James Rogers

Norfolk Southern and Ancora, which holds a large equity stake in the company, have been locked in a battle over the railroad operator's board

Activist investor Ancora Holdings Group's attempt to gain control of Norfolk Southern Corp.'s board resulted in three of its seven nominees gaining seats on the 13-member board at the railroad operator's annual shareholder meeting Thursday.

However, Norfolk Southern (NSC) shareholders voted to elect 10 of the company's 13 director nominees, including Chief Executive Alan Shaw. Ancora had planned to replace Shaw.

"With just three directors, Ancora only has a minority representation on the board and will likely find it difficult to steer change in their desired direction, in our view," TD Cowen analyst Jason Seidl wrote in a note released Thursday. "We believe the activist will continue to advocate for its CEO and COO candidates, but to little avail."

Related: Norfolk Southern shares down 3.2% after shareholders' split decision in board battle

Ancora has been pushing for the appointment of Jim Barber, a former chief operating officer at United Parcel Service Inc. (UPS), as CEO of Norfolk Southern.

But Lawrence Elbaum, a partner at law firm Vinson & Elkins, told MarketWatch that the three seats won by Ancora's nominees is still significant. "I think that anytime an activist can get three seats on the board of a company of this size it definitely sends a message to the rest of the board and the company," he said. "We shouldn't forget that the board underwent a lot of changes and management underwent a lot of changes after the proxy fight began."

Norfolk Southern appointed a new chief operating officer, John Orr, in March, and also announced the appointment of a new chief communications officer and a chief compliance officer, a new strategic role for the company.

Related: Norfolk Southern touts progress and slams activist Ancora's 'reckless' plan in board battle

"During proxy fights, companies usually make a lot of promises to win votes," he added. "Now that the proxy fight is over I think that the market, and particularly Ancora, will be looking closely to make sure that promises made are promises kept."

In a statement Thursday, Ancora pointed to the ouster of three incumbent board members in the shareholder vote, including board chair Amy Miles, and highlighted the election of Ancora nominees William Clyburn, Jr., Sameh Fahmy and Gilbert Lamphere. This means that a majority of Norfolk Southern's board will now be comprised of directors nominated or unopposed by Ancora, the company said.

"Notably, CEO Alan Shaw received what we deem a resounding vote of no confidence based on preliminary voting results that indicate he barely received support from holders of 50% of the company's outstanding shares," said Frederick D. DiSanto, CEO of Ancora, and James Chadwick, president of Ancora Alternatives, in the statement. "The first step toward turning around Norfolk Southern has been taken by electing Messrs. Clyburn, Fahmy and Lamphere."

Related: War of words over Norfolk Southern board battle intensifies as railroad slams activist Ancora's labor negotiation

DiSanto and Chadwick noted there is no standstill agreement in place between Ancora and Norfolk Southern. "We will continue to hold Mr. Shaw to account and push for the appointment of a qualified operator who can actually drive shareholder value," they added. "The campaign for change at this great American railroad will continue."

Operating changes have already been put into motion at Norfolk Southern following Orr's appointment as COO, according to TD Cowen's Seidl. "Early improvements in service metrics were discussed extensively on the 1Q earnings call," the analyst said. "We expect NSC to remain committed to its '24 exit OR [operating ratio] rate of 64%-65% and further convergence with peers beyond that as the Class I continues to reorient towards traditional PSR implementation." TD Cowen has a hold rating for Norfolk Southern.

Orr is a former chief transformation officer at Canadian Pacific Kansas City Ltd. (CA:CP) (CP) and former executive vice president of operations at Kansas City Southern.

Related: Norfolk Southern reaches agreement to settle East Palestine derailment class action

Precision Scheduled Railroading, or PSR, focuses on the movement of individual train cars, rather than whole trains. A key railroad industry trend of recent years, PSR aims to boost efficiency by streamlining operations.

Evercore ISI analyst Jonathan Chappell described the proxy outcome as "somewhat surprising" but said that Norfolk Southern is a different proposition now compared to when Ancora launched its activist campaign. "Where NSC's current management team and operational plan stands today is quite different from when Ancora went public with its dissidence in late January," he wrote in a note Thursday. "After hiring a new COO (John Orr, from CPKC), the operating plan for the next six months points to an additional 300+ locomotives being removed from the fleet plus myriad other productivity enhancements." Evercore has an outperform rating for Norfolk Southern.

Of 27 analysts surveyed by FactSet, 14 have an overweight or buy rating and 13 have a hold rating for Norfolk Southern.

Related: Norfolk Southern says Baltimore bridge collapse's cost is more than $25 million per month

Jeffrey Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management, said that Ancora "has very little anchor" on Norfolk Southern's board. "They have fewer than a quarter of the seats so their voice will be inconsequential if they push for Ancora's full agenda," he said, in a statement emailed to MarketWatch. "However, the background of the three Ancora-backed members have relevance and as we have seen with activist-backed reps on other boards (e.g. Pepsi), they may come to be supportive of the wisdom of management in time if they engage constructively as productive board members."

The results of the shareholder vote are considered preliminary until final results are tabulated and certified by an independent inspector of elections, Norfolk Southern said Thursday. Final results will be reported on a Form 8-K filed with the Securities and Exchange Commission.

Norfolk Southern shares have fallen 2.3% in 2024, compared with the S&P 500 index's SPX gain of 9.5%.

-James Rogers

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05-13-24 1623ET

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