Ohio-based Ancora Holdings Group, LLC (collectively with its
affiliates, “Ancora” or “we”), which owns a large equity stake in
Norfolk Southern Corporation (NYSE: NSC) (“Norfolk Southern” or the
“Company”), today issued the below letter to fellow shareholders
regarding the Board of Directors’ (the “Board”) apparent failures
of diligence and poor judgment in appointing John Orr as COO.
***
April 5, 2024
Fellow Shareholders,
Ancora is a sizable shareholder of Norfolk Southern, meaning our
interests and your interests are squarely aligned. 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. 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 (“CPKC”) and make him the third COO in two and a half years
under Mr. Shaw. They did this to try to lend some semblance of
credibility to their sudden embrace of scheduled railroading and
repeatedly updated guidance, which we deem unattainable with the
Company’s existing infrastructure and marketing-centric leadership
still in place.
Here are just a few of the key points you need to know about
this latest failure of governance:
- The Board's reactive process for
hiring a COO was run from a position of weakness and did not even
include a discussion with our proposed candidate, Jamie Boychuk,
who helped CSX Corporation (“CSX”) outperform Norfolk Southern on
every key railroading metric during his tenure as EVP of
Operations.
- Based on Norfolk Southern’s own
disclosures and statements regarding the importance of the Meridian
Speedway and Terminal, we estimate the undisclosed consideration
paid by the Company to hire Mr. Orr as COO may far exceed the $84
million paid by CSX to hire industry legend Hunter Harrison as
CEO.
- In addition to depriving shareholders
of the same type of vote that CSX held when it paid $84 million for
Mr. Harrison, the Board and Mr. Shaw have failed to disclose all of
the relevant details about Norfolk Southern’s agreement with
CPKC.
- The Board did not aggressively search
for or hire a COO with important experience at an Eastern Class I
railroad, but rather one of convenience with ties to current
director Claude Mongeau.
- The Board did not hire a COO with
expertise in Precision Scheduled Railroading (“PSR”)
implementations; to the contrary, one of our nominees – Sameh Fahmy
– joined Kansas City Southern in 2019 as EVP of PSR to lead the
successful network transformation that Mr. Orr (who joined in April
2021) erroneously claims credit for.
- Mr. Orr has been accused of abusive
behavior and serious misconduct in the workplace, according to
legal filings found by Ancora and interviews Ancora has conducted
with executives in the industry.
- Concerns about Mr. Orr’s workplace
behavior at Canadian National Railway Company (“Canadian National”)
should have been known to the Board based on our private warning
and the fact that one of Norfolk Southern’s current directors, Mr.
Mongeau, was CEO of Canadian National for years.
- The only industry endorsements for Mr.
Orr since his appointment as COO have come from Mr. Mongeau and
individuals at CPKC, which just received massive financial and
strategic consideration from Norfolk Southern in exchange for Mr.
Orr.
It is important to stress that Ancora warned the Board about Mr.
Orr’s history and the pitfalls of taking a costly, hasty action on
the eve of an election contest. The Board ultimately rejected our
private warning in favor of paying outsized and poorly disclosed
consideration to CPKC – without shareholder approval – to hire a
COO who lacks the necessary qualifications. At this year’s Annual
Meeting, we intend to hold the Board accountable for its
self-serving gambit.
In the meantime, we want to provide evidence of the Board’s poor
judgment. We will not sit quietly as Norfolk Southern brazenly
contends that one highly questionable hire is the primary cure for
the strategic, operational and cultural issues that exist under
incumbent leadership. We have worked with experts in corporate
governance, disclosure and railroad sector compensation to analyze
the Board’s decisions. We have also conducted a review of Mr. Orr’s
past behavior, leadership style and track record, similar to the
type of rigorous background searches that credible boards of
directors and CEOs carry out when diligencing a possible senior
hire.
1. The Board and Mr.
Shaw provided CPKC with excessive financial and strategic
consideration that weakens Norfolk Southern’s long-term competitive
positioning.
Norfolk Southern agreed to pay $25 million in
cash and give up part of the Company’s franchise – in the form of
concessions related to the Meridian assets – to hire an individual
whose most recent role at CPKC was just eliminated altogether.
Norfolk Southern neglected to remind shareholders in its sparse
disclosures pertaining to the arrangement that the Company invested
approximately $300 million for a 30% stake in the Meridian assets
in 2006, suggesting a net present value of significantly more for
Meridian in 2024. 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. For example,
it is publicly disclosed that CPKC is separately pursuing a
transaction with CSX involving the Meridian & Bigbee Railroad.1
Notably, one right that stands out to us from public disclosures is
Norfolk Southern’s right to purchase valuable assets, which we are
concerned may have been implicated by the concessions given up in
the deal for Mr. Orr.
When Norfolk Southern and CPKC’s predecessor
entered into their joint venture, public disclosures to the Surface
Transportation Board show that the Company obtained the option to
purchase the Wylie Intermodal Terminal in Texas in May 2024.2 In
the wake of the deal to secure Mr. Orr, we do not expect Norfolk
Southern to exercise that purchase right, meaning the Company will
lose the opportunity to acquire the Wylie Intermodal Terminal.
According to Norfolk Southern’s public submission to the Surface
Transportation Board, the terminal handles 47% of the intermodal
traffic from the Meridian Speedway (representing approximately 10%
of Norfolk Southern’s intermodal volume). This implies the Board
may have given away concessions to one of Norfolk Southern’s key
competitive advantages pertaining to a critical area of its
business.
It appears the prospect of securing a
fleeting PR win in the form of Mr. Orr’s hire was enough to
mitigate long-standing, substantive concerns regarding competitors’
expansion efforts. We highly doubt that the Board and Mr. Shaw
would do a complete 180-degree turn if not for their focus on
bolstering their hand in a contest.
2. The Board and Mr.
Shaw are unwilling to disclose the key details related to what
seems to be a material agreement with CPKC.
Norfolk Southern’s most recent 10-K lists
Birmingham to Meridian as one of its corridors with the heaviest
freight volume. Moreover, Norfolk Southern previously told the
Surface Transportation Board that “[t]he Meridian-Wylie Route
represents a significant component of NS’s commercial and
operational offerings to intermodal customers.”3 The same
submission also noted that “NS intermodal shippers who utilize the
reliable and fast service over the Meridian-Wylie Route are at risk
of being forced to a much longer rail route or switch to highways,
which would cause loss of efficient, competitive transportation
options and significant harm to the public interest.” Despite the
importance of the Meridian assets, Norfolk Southern provided just
two sentences of description about vague concessions in its nearly
1,800-word press release on Mr. Orr’s appointment and then one
paragraph of cherry-picked information in its second fight
letter.
In the Company’s April 2nd letter, it states
that the agreement with CPKC impacts approximately 1% of revenues.
This equates to $120 million in annual revenue, which at a
conservative 70% Operating Ratio translates to approximately $29
million in post-tax, full-year Operating Income. Based on a
conservative 20x multiple, this amounts to $580 million in equity
market value being impacted by the concessions. We do not
understand how the Board, during an election contest, would not
provide shareholders more information on such a material
agreement.
Altogether, we estimate the $25 million cash
payment and tangible concessions linked to the valuable Meridian
assets represent a nine-figure cost in the coming years for Norfolk
Southern. This means the immediate and estimated costs of hiring
Mr. Orr far exceed the $84 million that CSX paid to hire an
industry legend like Mr. Harrison, representing damning evidence of
the Board’s poor judgment and focus on self-preservation.
3. The Board and Mr.
Shaw overlooked Mr. Orr’s weak credentials before subsequently
embellishing his qualifications.
Norfolk Southern’s decision to hire Mr. Orr
has not just deprived shareholders of the best available COO and
strengthened other Class I railroads, but the Company has installed
an individual with (i) very limited experience as an operations
chief, (ii) no oversight role in any network-wide PSR
implementation and (iii) no background at an Eastern Class I
railroad. The fact is that Mr. Orr was appointed EVP of Operations
at Kansas City Southern after it
announced its merger with Canadian Pacific and years after Mr. Fahmy, our nominee, initiated the
multi-year network transformation as EVP of PSR at Kansas City
Southern. This means the Board’s claims that “John shaped and
guided precision scheduled railroading initiatives at KCS” and that
he “[d]esigned and implemented a precision scheduled railroading
strategy at KCS that improved safety, service, and productivity”
are outright misrepresentations.
Mr. Orr was passed over for the COO role upon
the closing of the CPKC merger, and his subsequent role was
eliminated altogether when he left CPKC last month. CPKC’s Keith
Creel and Patrick Ottensmeyer endorsed Mr. Orr after their railroad
received massive consideration from Norfolk Southern. In short, we
believe that Norfolk Southern vastly overpaid for a candidate with
weak credentials and a questionable workplace history.
4. The Board and Mr.
Shaw ran a reactive process that deliberately excluded highly
qualified COO candidates – all to the detriment of
shareholders.
After ardently defending former COO Paul
Duncan, who was in his role for a little more than a year, we were
shocked to see the Board throw Mr. Duncan under the bus and rush to
bring in a third COO under Mr. Shaw. We were equally confounded by
the decision to reject our multiple offers to speak with Mr.
Boychuk, who was the EVP of Operations at CSX when it outperformed
Norfolk Southern on every key railroading metric and delivered the
best operating margins in the history of Eastern railroads. We
question how the Board and Mr. Shaw can claim to be prioritizing
shareholders’ interests when the COO replacement process
deliberately excluded a potential candidate who has the respect of
many analysts and shareholders. Unlike Mr. Orr, Mr. Boychuk has a
background leading operations at an Eastern Class I railroad and
recently overseeing a successful PSR implementation. Mr. Orr, on
the other hand, was apparently a candidate of convenience because
he previously worked under Mr. Mongeau at Canadian National.
At bottom, the Board and Mr. Shaw made an
ill-timed and self-serving decision. Putting aside the availability
of a superior candidate in Mr. Boychuk, Norfolk Southern was not in
a good position to attract high-quality COO candidates and
negotiate from a position of strength during a proxy contest.
Norfolk Southern operated from a position of desperation, and
shareholders and other stakeholders now stand to pay a steep
price.
5. The Board and Mr.
Shaw disregarded the serious allegations levied against Mr.
Orr.
During his tenure at Canadian National, legal
filings in the public domain show that Mr. Orr was accused of
abusive behavior and serious misconduct.4 An adjudicator appointed
by the Canada Arbitration Board described such verbal abuse in
detail, finding that “Mr. Orr repeatedly
threatened [REDACTED]’s job. He called her a ‘f-----g wuss’ ‘stupid
b---h’ and ‘f-----g idiot.’ He said to [REDACTED] in front of
[REDACTED] ‘Do you always need someone to hold your hand — can't
you do your f-----g job?’ and similar comments which belittled her
or threatened her job.”5 Mr. Orr denied the verbal abuse
allegations, but the adjudicator found that evidence of verbal
abuse by Mr. Orr was credible. 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.”6
Another complaint filed against Canadian
National and Illinois Central Railroad was made by an African
American employee, who held a management position and reported
directly to Mr. Orr. The employee alleged racial discrimination,
claiming that he was continually passed over for promotions in
favor of Caucasian employees.7 Legal filings in the action allege
“Orr’s significant management flaws,
including the malicious abuse of his subordinates.”8 In
particular, the employee claimed “Orr’s
conduct was so bad that CN had to hire (for years and at a
substantial expense) executive ‘coaches’ to counsel Orr on how to
behave professionally in the workplace.” This same employee
was also willing to testify “that he had
conversations with Orr about CN’s decision to transfer [the
executive] to Memphis because he was Black.”9
Our representatives also spoke with a number
of Mr. Orr’s former colleagues and subordinates, including certain
employees whom he allegedly abused. All of these individuals agreed
to speak with us voluntarily and without any compensation for their
time. The responses further indicated reasons for concern about Mr.
Orr’s behavior. One former female subordinate, who worked for Mr.
Orr for years until his exit from Canadian National in 2019, stated
that “John Orr is racist, demeaning to women,
especially women who don’t entertain his advances.” She and
others indicated that they would provide sworn affidavits regarding
Mr. Orr’s conduct. We do not understand how the Board and Mr. Shaw
have decided to bet the Company’s future on Mr. Orr.
In closing, we recognize that many long-time railroaders have
reputations for being rough around the edges. Industry legend
Hunter Harrison, for example, was well known for being hot-tempered
at times. However, there is a difference between being a hardnosed
boss and stickler for precision, like Jamie Boychuk is, and having
a history of alleged misconduct marked by legal actions, like John
Orr does. There is no comparison between these two individuals – on
any level.
As always, we remain open to an appropriate settlement with
Norfolk Southern, provided it entails an orderly management
transition and a reconstitution of a portion of the Board. This
compromise would enable the Company to adopt our recommended
leadership’s PSR-powered Scheduled Network, which can drive
expedited improvements in Norfolk Southern’s lagging Operating
Ratio and depressed share price. With or without Mr. Orr, Norfolk
Southern will not be in a position to run this type of
value-enhancing network if its current infrastructure and existing
Board and CEO remain in place.
Hopefully, the Board continues to hear feedback from
shareholders who support necessary changes in leadership and
strategy. We, as Norfolk Southern’s owners, deserve much better
than the status quo.
Regards,
Frederick D. DiSanto
Chairman and Chief Executive Officer
Ancora Holdings Group LLC
James Chadwick
President
Ancora Alternatives LLC
***
About Ancora
Founded in 2003, Ancora Holdings Group, LLC offers integrated
investment advisory, wealth management, retirement plan services
and insurance solutions to individuals and institutions across the
United States. The firm is a long-term supporter of union labor and
has a history of working with union groups and public pension plans
to deliver long-term value. Ancora’s comprehensive service offering
is complemented by a dedicated team that has the breadth of
expertise and operational structure of a global institution, with
the responsiveness and flexibility of a boutique firm. For more
information about Ancora, please visit https://ancora.net.
Advisors
Cadwalader, Wickersham & Taft LLP is serving as legal
advisor, with Longacre Square Partners LLC serving as
communications and strategy advisor and D.F. King & Co., Inc.
serving as proxy solicitor.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
The information herein contains “forward-looking statements.”
Specific forward-looking statements can be identified by the fact
that they do not relate strictly to historical or current facts and
include, without limitation, words such as “may,” “will,”
“expects,” “intends,” “believes,” “anticipates,” “plans,”
“estimates,” “projects,” “potential,” “targets,” “forecasts,”
“seeks,” “could,” “should” or the negative of such terms or other
variations on such terms or comparable terminology. Similarly,
statements that describe our objectives, plans or goals are
forward-looking. Forward-looking statements relate to future events
or future performance and involve known and unknown risks,
uncertainties, and other factors that may cause actual results,
levels of activity, performance or achievements or those of the
industry to be materially different from those expressed or implied
by any forward-looking statements. Norfolk Southern Corporation, a
Virginia corporation (“Norfolk Southern”), has also identified
additional risks relating to its business in its public filings
with the Securities and Exchange Commission (the “SEC”). Ancora
Alternatives LLC (“Ancora Alternatives”), and as applicable the
other participants in the proxy solicitation, have based these
forward-looking statements on current expectations, assumptions,
estimates, beliefs, and projections. While Ancora Alternatives and
the other participants, as applicable, believe these expectations,
assumptions, estimates, and projections are reasonable, such
forward-looking statements are only predictions and involve known
and unknown risks and uncertainties, many of which involve factors
or circumstances that are beyond the participants’ control. There
can be no assurance that any idea or assumption herein is, or will
be proven, correct. If one or more of the risks or uncertainties
materialize, or if the underlying assumptions of Ancora
Alternatives or any of the other participants described herein
prove to be incorrect, the actual results may vary materially from
outcomes indicated by these statements. Accordingly,
forward-looking statements should not be regarded as a
representation by Ancora Alternatives that the future plans,
estimates or expectations contemplated will ever be achieved. You
should not rely upon forward-looking statements as a prediction of
actual results and actual results may vary materially from what is
expressed in or indicated by the forward-looking statements. Except
to the extent required by applicable law, neither Ancora
Alternatives nor any participant will undertake and specifically
declines any obligation to disclose the results of any revisions
that may be made to any projected results or forward-looking
statements herein to reflect events or circumstances after the date
of such projected results or statements or to reflect the
occurrence of anticipated or unanticipated events.
Certain statements and information included herein have been
sourced from third parties. Ancora Alternatives does not make any
representations regarding the accuracy, completeness or timeliness
of such third party statements or information. Except as may be
expressly set forth herein, permission to cite such statements or
information has neither been sought nor obtained from such third
parties. Any such statements or information should not be viewed as
an indication of support from such third parties for the views
expressed herein.
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
The participants in the proxy solicitation are Ancora Catalyst
Institutional, LP (“Ancora Catalyst Institutional”), Ancora Merlin
Institutional, LP, (“Ancora Merlin Institutional”), Ancora Merlin,
LP (“Ancora Merlin”), Ancora Catalyst, LP (“Ancora Catalyst”),
Ancora Bellator Fund, LP (“Ancora Bellator”), Ancora Impact Fund LP
Series AA (“Ancora Impact AA”) and Ancora Impact Fund LP Series BB
(“Ancora Impact BB”) (each of which is a series fund within Ancora
Impact Fund LP) (Ancora Catalyst Institutional, Ancora Merlin
Institutional, Ancora Merlin, Ancora Catalyst, Ancora Bellator,
Ancora Impact AA and Ancora Impact BB, collectively, the “Ancora
Funds”), Ancora Advisors, LLC (“Ancora Advisors”), The Ancora Group
LLC (“Ancora Group”), Ancora Family Wealth Advisors, LLC (“Ancora
Family Wealth”), Inverness Holdings LLC (“Inverness Holdings”),
Ancora Alternatives, Ancora Holdings Group, LLC (“Ancora Holdings”)
and Frederick DiSanto (collectively, the “Ancora Parties”); and
Betsy Atkins, James Barber, Jr., William Clyburn, Jr., Sameh Fahmy,
John Kasich, Gilbert Lamphere and Allison Landry (the “Ancora
Nominees” and, collectively with the Ancora Parties, the
“Participants”).
Ancora Alternatives and the other Participants have filed a
definitive proxy statement and accompanying BLUE proxy card (the
“Definitive Proxy Statement”) with the SEC on March 26, 2024 to be
used to solicit proxies for, among other matters, the election of
its slate of director nominees at the 2024 annual meeting of
shareholders of Norfolk Southern.
IMPORTANT INFORMATION AND WHERE TO FIND IT
ANCORA ALTERNATIVES STRONGLY ADVISES ALL SHAREHOLDERS OF NORFOLK
SOUTHERN TO READ THE DEFINITIVE PROXY STATEMENT, ANY AMENDMENTS OR
SUPPLEMENTS TO SUCH DEFINITIVE PROXY STATEMENT, AND OTHER PROXY
MATERIALS FILED BY ANCORA ALTERNATIVES AS THEY CONTAIN IMPORTANT
INFORMATION. SUCH PROXY MATERIALS ARE AVAILABLE AT NO CHARGE ON THE
SEC’S WEBSITE AT WWW.SEC.GOV AND AT ANCORA ALTERNATIVE’S WEBSITE AT
WWW.MOVENSCFORWARD.COM. THE DEFINITIVE PROXY STATEMENT AND
ACCOMPANYING PROXY CARD WILL BE FURNISHED TO SOME OR ALL OF THE
COMPANY’S SHAREHOLDERS. SHAREHOLDERS MAY ALSO DIRECT A REQUEST TO
THE PARTICIPANTS’ PROXY SOLICITOR, D.F. KING & CO., INC., 48
WALL STREET, 22ND FLOOR, NEW YORK, NEW YORK 10005 (SHAREHOLDERS CAN
CALL TOLL-FREE: +1 (866) 227-7300).
Information about the Participants and a description of their
direct or indirect interests by security holdings or otherwise can
be found in the Definitive Proxy Statement.
1
https://www.trains.com/trn/news-reviews/news-wire/cpkc-and-csx-detail-their-plans-to-connect-their-networks-via-meridian-bigbee-shortline/.
2 The relevant documents are available on our website, which
include a filing made by Norfolk Southern to the Surface
Transportation Board on February 28, 2022 that references the
purchase option (see p. 15), and the agreement that grants such
right, which was separately filed with the Surface Transportation
Board. Please go to www.MoveNSCForward.com for more
information.
3 We have included this filing, made in connection with the
Surface Transportation Board’s review of the combination of
Canadian Pacific and Kansas City Southern, on our website. Please
go to www.MoveNSCForward.com for more information.
4 See documents filed in connection with Drew v. Canadian
National Railway Co. and Miller v. Canadian National Railway Co.
Copies of each public legal filing from which the information in
this letter is quoted can be obtained at
www.MoveNSCForward.com.
5 For documentation and context of these allegations in the
employee’s larger relationship with Mr. Orr, see the judgment of an
appointed adjudicator of the Canadian Arbitration Board in Drew v.
Canadian National Railway Co., specifically paragraph 222. A copy
of the public legal filing can be obtained at
www.MoveNSCForward.com.
6 See Drew v. Canadian National Railway Co., paragraphs 188-190.
A copy of the public legal filing can be obtained at
www.MoveNSCForward.com.
7 See Miller v. Canadian National Railway Co. A copy of the
public legal filing can be obtained at www.MoveNSCForward.com.
8 For a detailed description of Mr. Orr’s alleged management
behavior, see p. 4 of the response to a Motion In Limine to Exclude
Evidence Regarding John Orr’s Performance as a Manager or his
Character, filed in connection with Miller v. Canadian National
Railway Co. A copy of the public legal filing can be obtained at
www.MoveNSCForward.com.
9 See the response to a Motion In Limine filed in connection
with Miller v. Canadian National Railway Co., p. 3. A copy of the
public legal filing can be obtained at www.MoveNSCForward.com.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20240405644700/en/
Longacre Square Partners Joe Germani / Charlotte Kiaie,
646-386-0091 MoveNSCForward@longacresquare.com
D.F. King & Co., Inc. Edward McCarthy 212-229-2634
MoveNSCForward@dfking.com
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