Proxy battle for control of NS heats up

EAST PALESTINE -- As revitalization and remediation efforts continue in East Palestine in the wake of last year's Norfolk Southern derailment, so does the setting of the stage for an attempted company takeover at the Norfolk Southern (NS) shareholder meeting which is set for May 9.

An activist investor group led by Ancora Holdings and the embattled board of the railroad are now months into a proxy battle which began in January when the ohio-based group took a $1 billion stake in the railroad and then began a bid to oust current NS CEO Alan Shaw by nominating new majority directors. Those nominations included transportation network leader Jim Barber Jr. as Chief Executive Officer and lifelong railroad operator Jamie Boychuk as Chief Operating Officer. Former Ohio Governor John Kasich was also among the nominees.

On Friday, Ancora sent a letter it sent to its fellow shareholders, taking aim at Norfolk Southern's appointment of John Orr last month as the company's executive vice president and chief operating officer, which was effective immediately.

Orr was lauded by NS when announced as the CCO. The railroad noted his "turnaround of Canadian Pacific Kansas City's (CPKC) Mexico operations" as well as for his "execution of Kansas City Southern's service-focused scheduled railroading initiatives" and the role he played in the "improvements in Canadian National Railway's safety and operational performance." Ancora wasn't as impressed with Orr's resume.

"We all want a safer, more reliable and higher-performing railroad with a substantially greater share price. Unfortunately, the board and CEO Alan Shaw continue to take actions that place their self-preservation ahead of our shared goal," Ancora's letter read. "The most recent example of this is their decision to enter into a costly and opaque agreement to extricate John Orr from Canadian Pacific Kansas City Limited and make him the third COO in two and a half years under Mr. Shaw."

In the letter, Ancora reiterated its criticism of Orr's appointment and repeated accusations of "abusive behavior and serious misconduct in the workplace." Ancora detailed the reported misconduct, alleging that Orr was verbally abusive toward a female employee in the early 2000s while he was a mid-level executive at Canadian National.

"Mr. Orr denied the verbal abuse allegations, but the adjudicator found that evidence of verbal abuse by Mr. Orr was credible," the letter stated. "The adjudicator found that the employee 'was belittled, had her job threatened, and was subjected to yelling and swearing' to such an extent that 'no employee could be expected to persevere in employment in such circumstances.'"

Ancoara also made mention of a lawsuit filed against Canadian National by an employee that made a claim of racial discrimination. That suit was filed in 2019 and ultimately settled.

"Orr's behavior was allegedly 'so bad' that Canadian National was forced to provide executive coaching for him, according to a 2020 filing in the lawsuit," the letter stated. "Orr's deposition is sealed and the case was settled in 2022."

Aside from overlooking Orr's alleged misconduct, Ancora also lambasted Norfolk Southern over what it called Orr's "weak credentials" and accused the railroad of engaging in a process that "deliberately excluded highly qualified COO candidates" and paying an excessive "undisclosed consideration" that included costly concessions to CPKC in a hushed deal to "to hire an individual whose most recent role at CPKC was just eliminated altogether."

Ancora's letter alleges that Norfolk Southern agreed to pay $25 million in cash and give up part of the company's interest in a line of track that runs west from Meridian, Mississippi to Shreveport, Louisiana and is known as the Kansas City Southern-Norfolk Southern Meridian Speedway. Ancora said NorfolK Southern invested approximately $300 million for a 30% stake in the Meridian assets in 2006.

"Granting the cash and undisclosed concessions to a competitor essentially allows Norfolk Southern to hire a single executive with questionable qualifications while permitting CPKC to leverage the concessions according to its own plans," Ancora charged.

Ancora's letter also accused Norfolk Southern of throwing former COO Paul Duncan "under the bus" after "ardently defending" Duncan.

Ancora's inflammatory remarks to stakeholders comes days following Norfolk Southern's urging of shareholders to "vote for only Norfolk Southern's 13 Nominees" in a 12-page letter. Norfolk Southern defended Orr and denied any connection between his appointment and the railroad's Meridian assets.

"It is clear that despite Ancora's statements to the contrary, John Orr is well known as an effective and successful operator," Norfolk Southern stated. "In addition to their misleading claims on Orr's background, Ancora has made highly inaccurate claims regarding our agreement with CPKC in connection with appointing Orr, and the considerations related to the Meridian Speedway and the Meridian Terminal."

Norfolk Southern also dismissed Ancora's proposed plans as nothing more than a "slash and burn" strategy, and praised Shaw for his response to the derailment.

"Alan again proved his leadership following the East Palestine derailment by supporting the needs of the community while protecting the franchise and shareholders," the company stated. "With the support of the board, Alan accelerated investments in safety and made fundamental changes to our operating processes. These investments enhanced our position to deliver long-term growth, and are driving industry-leading safety results and garnering strong support from our customers, regulators, and union leaders."

The Brotherhood of Locomotive Engineers and Trainmen threw their support behind Shaw in February as the proxy battle began to heat up.

Ancora, on the other hand, has called Shaw's response to the rail disaster

"tone deaf" and in a previous statement said, as an Ohio-based company, Ancoara has "loved ones and family who have been directly impacted by the tragedy in East Palestine, Ohio - meaning this campaign is about much more than financial returns to Ancora".

While Shaw and the current regime trade barbs with Ancora, those impacted by the rail disaster are left to wait and wonder -- wait for the outcome of next month's shareholder meeting and wonder what the decisions made at the meeting will mean for the village that is still walking the road to recovery.

So far Norfolk Southern has pledged $103 million to East Palestine and the surrounding areas in Ohio and Pennsylvania to aid in that recovery. The railroad has followed through on most promises made, but over a year later, Norfolk Southern is yet to announce it has established a fund to address medical concerns potentially caused by the disaster. In an emailed statement to the Morning Journal in January, the railroad said "Norfolk Southern continues working on details for a medical compensation fund that is being designed to address long-term health concerns in the community" but, to date, no details of such a fund have been disclosed.

Norfolk Southern committed $4.2 million to protect the municipal drinking water including the installation of a carbon-filtration system that the village called a "precautionary" move, but has denied requests from area residents to have a similar carbon filter placed on their private wells at the cost of the railroad.

Norfolk Southern also pledged "at least $20 million dollars" to build a regional first responder training center in East Palestine that would have profound impacts on how emergency crews respond to similar disasters in the future, but those plans have been lagging since ground was broken on the center in September. Norfolk Southern reported at the groundbreaking that preliminary designs for the new facility were currently in development by architecture and engineering firms and projected the training center, which will offer specialized training for rail response and other transportational-related hazmat emergencies to first responders from the greater region, would be completed or well under construction by the end of 2024. Four months into the year, the former Jasar Recycling facility -- the future site of the center -- remains unchanged.

Still, Norfolk Southern, under Shaw, has taken major steps in improving railway safety since the derailment. Days before the groundbreaking for the first responder training center, the Association of American Railroads (AAR), working with Norfolk Southern, integrated AskRail -- a software that can instantly provide anyone with access to it with accurate up-to-date data of a train car's contents and the dangers of that cargo -- into the Columbiana County and Beaver County emergency management agencies (EMAs) dispatching services.

Also in September, Norfolk Southern deployed its first Digital Train Inspection Portal in Leetonia, just 11 miles from the derailment site. The railroad plans to install 17 portals -- one every thousand miles or less -- by the end of this year. The portal was developed in concert with the Georgia Tech Research Institution and uses advanced machine-visioning technology and artificial intelligence to find potential defects on moving trains.

The portals along with 250 supplemental hotbox detectors were part of a $50 million investment by Norfolk Southern in the wake of the derailment. That investment also includes other wayside equipment, including acoustic detectors that would have picked up the overheated wheel-bearing -- the likely cause of the East Palestine derailment -- as well as expanding employee training and advancing technology to survey the integrity of infrastructure (track, bridges and tunnels) on the Norfolk Southern network.

In addition to the safety upgrades, Norfolk Southern officially joined a pilot program of the Confidential Close Call Reporting System (C3RS), becoming the first Class I railroad to do so. The system allows rail employees to confidentially report unsafe events that they experience while being protected from discipline. The program has been proven to improve rail safety.

Ancora maintains that Norfolk Southern could do more and laid out its own safety plan following a collision of three Norfolk Southern trains in Lehigh Valley on March 2. That plan called for less line congestion, ensuring "the right person is in the right place at the right time doing the right thing in the safest possible way" and better risk management.

Ancora and the current NS board insist that preventing another East Palestine is paramount -- not just from an ethical standpoint but from a business one as well. The derailment has cost Norfolk Southern $1 billion in cleanup costs alone and the railroad faces a slew of lawsuits in the wake of the disaster. In the end, the proxy battle still comes down to profits.

On its website movenscforward.com, Ancora alleges Shaw is ineffective as a CEO with a track record of failing to deliver growth, that NS leadership's operating plan has resulted in higher costs and shrinking margins, that Norfolk Southern has underperformed Class I railroad peers on every relevant operating metric and that the board has failed to hold management accountable for its widening peer gap, lax operating culture and increasing rate of accidents. The "tone deaf" response to the derailment is the last "cause for change" listed.

Meanwhile, Norfolk Southern provided an update Thursday to its shareholders on its plan to deliver on key objectives with no mention of East Palestine. Those objectives were "accelerating operational performance" to increase the speed and efficiency of merchandise movement and "ensuring performance accountability through changes in the compensation program" to align management incentives with meeting the company's financial and operational goals.

Norfolk Southern is expected to release its first quarter 2024 financial results during a live conference call and internet webcast for investors on April 24.