Norfolk Southern proxy fight draws heavyweight politicians and regulatory scrutiny a year after derailment

• A proxy fight at Norfolk Southern was formally launched last week and is already drawing in politicians and regulators.
• Activists at Ancora have sharply criticized Norfolk Southern CEO Alan Shaw, while the railroad company's board has expressed concerns about Ancora's proposed management team.
• The battle is taking place a little over a year after a Norfolk Southern freight train derailed in East Palestine, Ohio.

Just over a year ago, a Norfolk Southern freight train derailed in East Palestine, Ohio, releasing toxic chemicals into the environment and prompting a political fight regarding railroad safety.

Now the company is at the early stages of a proxy battle, with opposing lineups that already feature heavyweight politicians and the attention of industry regulators.

Last week, an investor group led by Ohio-based activist Ancora Advisors and backed by EdgePoint Investment Group launched a proxy fight with the aim of adding eight directors to the board and ousting CEO Alan Shaw. Among the names on the board slate was former Ohio governor John Kasich, who ran against Donald Trump in the 2016 Republican presidential primary.

Norfolk Southern' has underperformed both its peers and the broader market over the last year. The stock jumped 9% on Feb. 1, after Ancora's stake was first reported. Still, it's up just 13% in the past year, compared to 27% for the S&P 500.

Ancora says in its presentation that Shaw is a "30-year insider" who lacks "the strategic operating and financial experience needed to effectively oversee Norfolk Southern during this critical period." Ancora also said Shaw spent "millions of dollars" on "lobbying and public relations efforts" to save his job.

The activist group seeks to replace Shaw with former UPS executive Jim Barber and install railroad executive Jamie Boychuk as operating chief.

Norfolk Southern responded on Monday, rejecting that slate and announcing it would nominate former Amtrak CEO Richard Anderson and former U.S. Senator from North Dakota Heidi Heitkamp to the company's board. Heitkamp served as senator for the state from 2013 through 2019 and was the last Democrat to represent North Dakota in congress.

The company has vigorously disputed Ancora's claims about Shaw in public filings, and the board maintains full confidence in the CEO, according to people familiar with the matter, who asked not to be named in order to discuss confidential matters.

Anderson, who was previously CEO of Delta Airlines, serves on the board of Cargill and Medtronic and is well-known to regulators.

"Richard's a uniquely talented business leader," said Frank Blake, ex-CEO of Home Depot and former U.S. Deputy Secretary of Energy, in an interview. "He knows how to operate in a detailed, safety-regulated environment, but also understands strategically how you grow and improve a business."

Ancora said Shaw and "his boardroom allies" on Monday had "no credible plan and no viable record to run on." 

"It makes sense that they would initiate a weak and reactionary refresh," the group said in a statement. The group criticized Anderson for presiding "over numerous safety incidents at Amtrak."

Norfolk Southern had been in the crosshairs of regulators, politicians and the public since last year's derailment displaced residents and raised questions about the industry's safety practices. Shaw was called to testify before the Senate in March 2023, and said at the time that the railroad would "be in the community for as long as it takes." 

Earlier this month, President Joe Biden visited East Palestine and said the derailment was "an act of greed" and that the company "failed its responsibility" to take a variety of precautions with its trains.

Trump, the leading candidate to take on Biden in this year's presidential campaign, traveled to the area weeks after the derailment.

"Biden should have gone there a long time ago," Trump wrote on his platform, Truth Social, regarding the president's recent visit. "For him to go now is an insult to those who live and work in East Palestine."

Both sides have laid claim to the safety argument.

"As an Ohio-based firm that is right down the road from East Palestine, we have first-hand knowledge of how railroads intersect with the public," the activist group said in a statement to CNBC, "which is why our slate includes former government leaders and a former major rail customer."

Ancora is based 90 miles from East Palestine, in Cleveland. Ancora's pitch deck says that safe and reliable operation is a priority for its group, and has criticized Shaw's handling of the derailment.

Norfolk Southern says in its proxy filings that it's committed more than $100 million towards impacted families in the East Palestine area. The railroad also cited a six-point plan to address shortcomings identified by regulators.

The company and Shaw have been praised by regulators for improving safety standards and and for their response in the last year. Preliminary data suggest that Norfolk Southern did better than any other major railroad at cutting derailments in 2023.

'Chasing cost reduction'

In addition to issues surrounding safety and the environment, there's also labor.

A key part of Ancora's plan for Norfolk Southern is to implement scheduled railroading, which involves use of more efficient routing networks.

Both Norfolk Southern's operating plan and Ancora's proposed plan draw from elements of precision scheduled railroading (PSR), which was pioneered by former railroad executive Hunter Harrison.

Harrison's PSR, when implemented correctly, can reduce operating ratio (how much a company spends to make a dollar), a key metric for investors.

An Ancora spokesperson said its plan is not pure PSR. Citing company filings, Ancora says that under Shaw, Norfolk Southern's network of rail cars has waited longer and crews have been delayed more often than in years past.

Unionized railroad workers have expressed concerns when PSR has been implemented, saying that it leads to deep job cuts. It's an issue that Norfolk Southern says should also worry investors.

"Recklessly chasing cost reduction at the expense of safety and service is not a winning strategy for creating sustainable shareholder value," the company said in its announcement. 

"A plain reading of our presentation and materials reveals no emphasis on cost cutting, headcount reductions or short-sighted tactics," Ancora said in a statement to CNBC.

Still, there's evidence that regulators disapprove of Ancora's efforts. 

The railroad industry is regulated at the national level by the Federal Railroad Administration and the Surface Transportation Board. Martin Oberman, the outgoing chairman of the Surface Transportation Board, told Progressive Railroading that an Ancora victory would be "a huge detriment to the industry."

"The activist investors, such as the ones that have surfaced now at Norfolk Southern, have a very short-term goal and it's not constructive," Oberman told the industry publication.

Meanwhile, Federal Railroad Administrator Amit Bose wrote to Shaw last week commending Norfolk Southern's "commitment to investing in safety as those investments are imperative for continuing the unique progress your railroad has made."

Bose said that, regarding "recent reports of investor activism" at the company, "the only avenue to ensure NS's immediate and long-term success is through a relentless focus on safety." 

Ancora said it agreed with Bose's focus on safety but said Shaw is not the right leader and that management has "overseen multiple derailments and the tragic death of an engineer in 2024."

"Policymakers and labor leaders should be able to take comfort in our slate's commitments to honoring union agreements, leveraging the company's existing workforce and investing in a network strategy that drives growth," the Ancora-led group added in a statement CNBC.

For Ancora, which has a successful track record as an activist investor, the proxy fight at Norfolk Southern would be its largest ever. EdgePoint controls the majority of the group's stake but Ancora and its activism lead, Jim Chadwick, have been driving the campaign, according to proxy filing materials. Chadwick joined the firm in 2014.

Ancora beneficially owns more than 923,000 of the railroad's shares, according to a presentation filed with regulators. EdgePoint controlled 3.4 million Norfolk Southern shares as of Dec. 31, or about 1.5% of shares outstanding.

Ancora says that scheduled railroading implemented by "qualified individuals" is safe and can increase profitability. Barber, the firm's choice for CEO, doesn't have railroad experience, but was a longtime executive at UPS, which counts one-third of all U.S. Teamsters as employees. Boychuk worked under Harrison, who pioneered PSR, at Canadian National.

Norfolk Southern has highlighted Barber's lack of experience as a railroad executive and noted in its proxy filings that Boychuk remains under a non-compete agreement with CSX, one of Norfolk Southern's rivals, through the end of the year. 

Ancora told CNBC that Boychuk's non-compete was expiring and that during his tenure, CSX outperformed "Norfolk Southern on every key operational, service, and safety metric." In an analyst note Tuesday, Deutsche Bank said it expects CSX would negotiate a release if Ancora's slate were to emerge victorious.

While the battle between Ancora and Norfolk Southern only recently became public, the activist investor has been seeking Shaw's removal for some time, proxy filings show.

Ancora's counsel indicated that the firm planned to nominate a rival board slate in November, and first met with some of Norfolk Southern's board a month later.

A series of meetings through January and February didn't produce a settlement. One set of meetings was conducted to allow current board members to meet with and interview Ancora's nominees. Ancora told CNBC's those meetings averaged about 20 minutes.

Earlier this month, Ancora's Chadwick told Amy Miles, Norfolk Southern's lead independent director, that any settlement would have to include Shaw's ouster, filings show. Miles and another director, Claude Mongeau, said the board didn't think a CEO change was "responsible" but that it was open to some board changes. Ancora told CNBC it made "sincere attempts" to settle and that it would have accepted minority representation if the board replaced Shaw.

Chadwick told CNBC's Leslie Picker last week that Ancora had nominated a rival slate of directors and was seeking an overhaul in the company's top ranks. Norfolk Southern has yet to set a date for the annual shareholder meeting.

Disclosure: Heidi Heitkamp is a CNBC contributor.

WATCH: Ancora's Jim Chadwick explains why the activist is targeting Norfolk Southern