Ancora letter to Norfolk Southern Corp

$NSC

March 1, 2024

Norfolk Southern Corp.
Attn: Amy Miles, Chair of the Board of Directors
650 W. Peachtree Street NW
Atlanta, Georgia 30308

Dear Amy,

Prior to publicly disclosing our slate of director candidates and proposed management team, the Investor Group spent more than two months privately providing you and your fellow directors with data and facts that demonstrated the urgent need for meaningful change at Norfolk Southern. We made clear that your current CEO has presided over industry-worst operating results, sustained share price underperformance and an ineffective and tone-deaf response to the preventable derailment in East Palestine, Ohio. We also exposed the impractical elements of management’s go-forward strategy and spotlighted persistent issues with respect to safety, as evidenced by this year’s new derailments and the recent death of an engineer. As these points were raised, we offered viable solutions in the form of exceptional people with a strategic vision for delivering better service, enhanced safety, improved growth and stronger value creation. We even offered to settle for minority representation on the Board in the event the Company initiated an orderly management change.

Although we were initially disappointed with the Board’s dismissiveness, the Company’s recently filed proxy statement and ongoing low-road smear campaign against us have clarified a great deal. It appears that the Board is serving at the pleasure of CEO Alan Shaw – rather than the other way around. But with each passing day of disruptive fear mongering and transparently manufactured attacks on our people, we contend that current leadership is simply sealing its fate with the shareholders to whom it owes fiduciary duties. Norfolk Southern’s owners, who appear to share our view that a railroad should be pro-labor, safe and value-generating all at once, recognize the playbook being run.

We ask that the Board reflect on the points below before continuing to spend Norfolk Southern’s money, time and reputational currency on a scorched-earth campaign that will forever be associated with the incumbent directors.

I. Shareholders are confounded by the Board’s decision to award Mr. Shaw a raise for 2023.

It is astonishing to us that the Board would reward Mr. Shaw with a 37% increase in the value of compensation to a total of $13.4 million for a year in which the Company’s customers, employees, shareholders and community partners all suffered.¹ This figure includes more than $10 million in stock and option awards, which were granted to Mr. Shaw even though he missed all six annual incentive targets pertaining to financial performance, customer service and safety.² To add insult to injury, Mr. Shaw appears to be a major beneficiary of the “East Palestine Adjustment” that increased Performance Stock Unit payout percentages from 56% to 96.3% of target.³

We challenge the Board’s determination that it had to adjust executive compensation in 2023 to “retain key talent.”⁴ We do not see how the Board could have actually viewed Mr. Shaw as a flight risk. In addition to being a more than 30-year insider at Norfolk Southern, he was a relatively new, unproven CEO off to an extremely rocky start. The fact that this decision was made suggests concerning deference to management and a lack of respect for shareholders and stakeholders.

While we recognize policymakers will not determine the outcome of the vote at the Annual Meeting, we are nonetheless surprised that the Board made a compensation decision that is a direct affront to President Joe Biden’s recent comments about greed and a lack of accountability at Norfolk Southern.⁵ There are numerous examples of boards of directors taking the responsible step of reducing – not raising – executive pay following disasters. In situations we deem comparable to the East Palestine derailment, like BP p.l.c.’s 2010 oil spill and The Boeing Company’s 737 MAX accidents, boards of directors typically terminate or hold the CEO accountable. To the contrary, Norfolk Southern’s Board instead rewarded its CEO with a massive pay raise, elevating his compensation to more than 100x that of the median employee.⁶

II. Shareholders are concerned the Board is pursuing a scorched-earth campaign that involves poisoning the well with key stakeholders of the railroad.

Norfolk Southern is a beacon of American commerce due to its exceptional employees, strong customer base and storied brand. This is one of the primary reasons why we were able to attract director candidates and proposed executives who have achieved tremendous success over the course of their careers in the public and private sectors. Amongst this collection of high-integrity individuals, there is a unanimous view that neither side should go into the gutter during an election contest. There was an assumption that the Company’s Board, which includes highly respected individuals like Admiral Philip Davidson (retired) and Thomas C. Kelleher, would share our view.

Unfortunately, you have not responded to our prior private letter that encouraged Norfolk Southern to avoid poisoning the well with valued stakeholders. You have also failed to address our concerns about the manner in which Norfolk Southern appears to be sending private planes to Washington, D.C. and misrepresenting our views to regulators. You, as Chair, and Mr. Shaw, as CEO, are no doubt aware that our published materials reveal no emphasis on cost cutting, headcount reductions or short-sighted tactics. To the contrary, our slate and proposed management team have repeatedly committed to pursuing stronger growth and implementing a network strategy that will leverage Norfolk Southern’s existing assets. We find it extremely disingenuous for the Company to miscast our intentions, especially since Mr. Shaw stated during 4Q23 earnings that Norfolk Southern’s “cost structure is too high.”⁷ For the avoidance of doubt, our network strategy accounts for responsible cost management and the principles of scheduled railroading – just like Mr. Shaw’s resilience strategy, as can be seen in numerous public statements.

When it comes to safety, you and Mr. Shaw are also undoubtedly aware of what we have committed to. Our proposed CEO, Jim Barber, believes the health and safety of the Company’s constituencies is the bedrock of long-term success. Our proposed COO, Jamie Boychuk, helped CSX dramatically improve customer service and go roughly two-and-a-half years without any work-related fatalities. They firmly believe that the health and safety of Norfolk Southern’s people and communities are the highest priorities. Mr. Barber plans to leverage his background overseeing nationwide networks to bring new risk management technologies and initiatives to Norfolk Southern. He and Mr. Boychuk have a shared vision for employee-led safety committees and establishing programs that reward and spotlight worker contributions to the Company’s harm reduction agenda. Our slate and proposed management team know a better-run Norfolk Southern will have the financial power to invest more in safety and service, while enabling employees to benefit from the prosperity of the railroad.

The more you direct your agents and surrogates to publicize inaccurate information about the Investor Group, the more it looks like incumbent leadership has no track record or viable plans of its own to run on.

III. Shareholders want an election contest to be defined by facts and ideas.

Please recognize that Norfolk Southern’s shareholders, who seem to have no appetite for campaigns built on incessant smears, are the ones who will ultimately determine which slate is elected at the Annual Meeting. Please know that we are going to run a contest defined by a transparent articulation of facts and ideas. This means we are going to be publicly critical of leadership’s business mistakes when they can be cited and documented. This also means we are going to be candid about our slate’s transition plan and strategy, including their components and targets.

To avoid destabilizing the Company more than it already has been over the past 12 months, we urge you to reduce your reliance on advisors and shadow games in favor of starting to run a high-road contest focused on track records and plans. And, to the extent you want to reengage with us about a settlement framework that accounts for Board refreshment and orderly management changes, we are here to have private conversations. Either way, you and your fellow directors owe it to Norfolk Southern and all of its stakeholders to run a campaign befitting of this great organization.

Sincerely,

Jim Chadwick, on behalf of the Investor Group

Source:

https://www.sec.gov/Archives/edgar/data/702165/000110465924029681/tm247441-3_dfan14.htm