Activist Investor Ancora Targets Norfolk Southern's New Operating Chief Over Past Misconduct

As of April 2023, Norfolk Southern finds itself embroiled in a contentious dispute with activist investor Ancora. The conflict, which has been ongoing for nearly two months, revolves around attempts by Ancora to instigate significant changes within the railroad company, including the removal of CEO Alan Shaw from his position. The latest development in this standoff sees Ancora targeting Norfolk Southern's new operating chief, John Orr, over his controversial buyout package and a history of alleged workplace misconduct that includes allegations of racial and sexual discrimination.

Last month, Norfolk Southern attracted attention when it hired John Orr from rival CPKC, reportedly paying tens of millions of dollars to buy him out of his previous contract. This move was widely perceived as a response to operational criticisms from Ancora and received positive feedback from several Wall Street analysts. Despite Orr's recent tenure of just three weeks, Ancora has raised concerns about his hiring, citing both alleged and substantiated workplace misconduct from his past.

1. The Canadian National Allegations: An appointee of the Canadian Arbitration Board substantiated allegations that Orr verbally abused a female employee, including the use of derogatory language and verbal aggression in the early 2000s.
2. Racial Discrimination Lawsuit: In 2019, a lawsuit was filed against Canadian National by a Black executive, describing Orr's treatment of employees and subordinates as "abysmal" and alleging racial discrimination.
3. Repercussions and Settlement: The severity of Orr's behavior led to Canadian National providing executive coaching for him, and the case was eventually settled in 2022.

Ancora has also taken issue with the substantial financial cost incurred by Norfolk Southern in the hiring of Orr, including an agreed payment of $25 million in cash to Orr's prior employer. Furthermore, Norfolk Southern also committed to providing additional unspecified concessions for a key rail hub and route in the southern U.S., estimated to represent around 1% of the company's revenues. The company's disclosure of the initial impact of these concessions and their long-term effects has been questioned by Ancora, leading to a dispute around their true financial implications.

Activist Investor's Goals and Opposition

In its efforts to overhaul Norfolk Southern's leadership, Ancora aims to replace CEO Alan Shaw and the newly hired John Orr with former UPS CEO Jim Barber and former CSX Executive Vice President Jamie Boychuk, respectively. Ancora asserts that Norfolk Southern is significantly underperforming compared to its peers and holds Shaw and the board responsible for this alleged underperformance. On the other hand, Norfolk Southern has defended Orr, emphasizing his track record of improving performance and operating with integrity.

Stakeholder Backing and Stock Performance

Ancora's stance has garnered support from other stakeholders, such as Neuberger Berman, which has announced its backing for Ancora's slate, attributing its decision to the railroad's history of poor governance. Meanwhile, Norfolk Southern's stock performance has remained relatively stagnant since a freight train derailment incident in February 2023, contrasting with the broader positive trend in the S&P 500.

Analysts have deemed the possibility of a settlement between Norfolk Southern and Ancora as unlikely, and the company has offered Ancora a limited number of board seats in an attempt to reach a resolution. However, Ancora remains steadfast in its pursuit of a comprehensive board refresh and the removal of CEO Alan Shaw, while Norfolk Southern has reiterated its confidence in Shaw's leadership and expressed disinterest in any settlement leading to his departure.