217.370.8505 cory@bletislb.org

Boardroom battle at Norfolk Southern heats up as rail regulators weigh in

Activist investor Ancora Holdings, which has begun a battle to replace the management of Norfolk Southern Rail (NS), is experiencing headwinds from its embattled NS board and regulators who view the move as a bid to return to the “detrimental excesses” of precision railroading.

NS directors have urged shareholders to vote down the Ancora proposal and have nominated two new candidates for the board, to be elected at the general meeting this year.

In a letter to shareholders NS chair Amy Miles said none of Ancora’s nominees possessed skills or experience not already represented on the board, and that a takeover would be “highly disruptive to our operations, our workers and the North American supply chain”.

Even stronger opposition has been voiced by regulators expressing concerns of a deterioration in performance and safety and a possible regulatory pushback.

In a presentation outlining its reasons to elect eight new independent directors to the NS board, Ancora mentioned the impact that scheduled railroading can have on lowering operating ratios – a key mantra of the precision railroading approach that held sway in the US rail industry prior to 2021.

Moreover, Ancora’s designated new COO, Jamie Boychuk, was a disciple of the late precision railroading pioneer Hunter Harrison and followed his mentor to CSX to implement the concept there.

Martin Oberman, chairman of the US Surface Transportation Board (STB), has argued that the cost cutting and labour reductions associated with precision railroading would be “a huge detriment” not only to NS but the entire rail industry. And the concept has also put constant pressure on carriers to reduce investment, he added.

This has taken the blame for Class I carriers’ failure to grow volumes and compete more aggressively with the trucking industry.

Above all, he said, precision railroading cuts had left rail carriers unable to cope with the surge in traffic in 2021-22, which precipitated a service meltdown and congestion throughout the rail system. In STB hearings last year, numerous shippers vented their frustration over the dramatic decline in service that left many shipments delayed or stranded.

Mr Oberman argued that, while activist investors had a role to play in the economy, their focus on short-term profits was ill-suited to the rail industry because it is a regulated monopoly with a common carrier obligation to the public interest and the national economy.

He said rail carriers had taken positive steps over the past two years towards a more sustainable strategy, partly in response to push from regulatory bodies like the STB, and he described NS as “one of the leaders in shifting gears and building workforce and capital investment for the future”.

If this strategy could be derailed by an activist investor at NS, it would augur ill for the other Class I carriers, he argued.

Mr Oberman hinted that should Ancora be successful, it could face regulatory pushback and referenced STB considerations to introduce rules for reciprocal switching, which has been opposed by the carriers but is finding favour with shippers.

Repercussions could also arise at the Federal Railroad Administration. Its administrator, Amit Bose, has written to NS CEO Alan Shaw advising him to stay focused. He warned: “Any backsliding, as a result of a change in leadership or otherwise, on the safety-oriented path you have laid out and communicated to us will likely attract renewed oversight attention from my office.”

In response, Ancora said its scheduled network strategy would position the railway to enhance safety and reduce risks by “shrinking the number of trains on the track and reducing dangerous workloads that can lead to exhaustion-driven mistakes”.

To sceptics, this rings hollow; precision railroading focuses on running fewer, longer trains to maximise profits on lower volumes and revenues.

Nevertheless, its future strategy currently appears to rest with NS shareholders, who may find the temptation of short-term profits irresistible.