Glass Lewis endorses 6 of activist Ancora's nominees for Norfolk Southern board

A Norfolk Southern train is en route on Feb. 14, 2023 in East Palestine, Ohio. Earlier in the month a derailment sent millions of pounds of toxic chemicals into the environment and forced thousands of people to evacuate.Angelo Merendino | Getty Images News | Getty Images

Activist investor Ancora received a powerful endorsement in its efforts to secure a board change and to oust Norfolk Southern CEO Alan Shaw on Monday, when proxy advisory Glass Lewis recommended the railroad's shareholders vote for 6 of Ancora's board nominees.

“We believe Ancora has presented a compelling case for supporting a substantial overhaul of the Company's current leadership,” Glass Lewis said in its report.

The recommendations for the activist nominees, rare at a company of NSC's size and in its industry, could influence how thousands of investors with millions of shares vote ahead of Norfolk Southern's shareholder meeting on May 9.

The proxy advisory recommended that shareholders vote in support of Ancora nominees Betsy Akins, Jim Barber, William Clyburn, Sameh Fahmy, Gilbert Lamphere and Allison Landry.

Significantly, the proxy advisory also recommended that shareholders withhold their support from current CEO Shaw and board chair Amy Miles.

Furthermore, Glass Lewis said Barber, Ancora's pick for CEO, and Jamie Boychuk, the activist's pick for chief operating officer, “have compelling credentials and track records.”

Ancora is seeking to oust Shaw in favor of former UPS executive Barber, who began his 35-year career in the eighties as a Teamster-represented delivery driver and ended it as COO of one of the world's largest logistics companies. He lacks direct experience as a railroad executive but noted that UPS was one of the biggest rail customers worldwide in a CNBC interview earlier this month.

Ancora also seeks to install former CSX executive Boychuk as Barber's COO. Boychuk spent 20 years at Canadian National before joining CSX. Like Barber, Boychuk began his career as a union-represented conductor and rose through the ranks at CN and CSX, where he was executive vice president for operations until 2023.

Norfolk Southern said in a statement Monday that it “strongly” disagreed with Glass Lewis' “misguided” recommendation.

“We are confident that Norfolk Southern shareholders are highly informed and acutely aware that replacing six directors, including our crisis-tested CEO, Alan Shaw, with Ancora's inferior candidates would put the company critical to our nation's economy at significant risk, impede our progress, and destroy long-term value for shareholders,” the company said.

On Friday, two Teamsters unions, representing around half of Norfolk Southern's unionized workforce, said they would support Ancora's plan for change. Their support, coupled with Glass Lewis' endorsement, gives the activist powerful ammunition as it seeks to convince shareholders.

“We are also inclined to agree with Ancora's critique of the Company's current operating strategy as being one that relies on inherently incompatible railroading concepts,” the proxy advisory said in its report.

NSC had initially shied away from pursuing a precision scheduled railroading, or PSR, based approach in favor of a so-called “resiliency” model. Ancora, on the other hand, had argued from nearly the outset that Norfolk Southern's customers, employees and investors would be best served with a PSR-rooted operating plan.

PSR focuses on making sure trains and crews stay moving to minimize wasted hours and equipment, by operating on a fixed schedule like passenger trains rather than rolling trains only when they're filled with cargo. Investors tend to reward companies that adopt PSR and can easily track its implementation via a railroad's operating ratio, which is working expenses as a percentage of revenue.

A resiliency model, by contrast, maintains a strategic reserve of trains and cars throughout downturns in demand, which happen frequently in rail.

The company has since changed its tune, appointing veteran railway executive John Orr to implement an operating plan comibining both PSR and resiliency approaches. Both the activist and some analysts have criticized the plan.

Proxy advisory support is historically key for activists

A general view of the exterior of the headquarters of Norfolk Southern on April 1, 2023 in Atlanta, Georgia. Icon Sportswire | Getty Images

Winning support from proxy advisors is a top priority for both activists and management. It is atypical for activists to receive the level of support that Ancora did at a company this large, but not unprecedented.

ISS backed Pershing Square Bill Ackman's seven director nominees at the former Canadian Pacific in 2017. At CP, however, Ackman had enlisted railroading legend E. Hunter Harrison as his CEO pick.

But support from proxy advisors does not guarantee a slam dunk. Nelson Peltz's 2017 campaign at Procter & Gamble won the endorsement of both ISS and Glass Lewis, another influential proxy advisor, but still ended up being razor close.

A settlement seems unlikely, but not impossible. NSC CEO Shaw has previously told CNBC that the company offered “a couple” board seats to the activist but was rebuffed. Ancora has repeatedly made clear that it holds Shaw accountable for Norfolk Southern's underperformance and what it describes as mismanagement around the East Palestine, Ohio derailment.

The activist has previously said that any deal would require Shaw to step out as CEO.

NSC and Ancora will continue to make their case to investors large and small with little more than a week before the May 9 shareholder meeting. ISS, another influential proxy advisory firm, is expected to issue its recommendation this week.