STB Chairman Oberman takes activist investor Ancora to task for its attempt to take over Norfolk Southern

At this point, anyone who has seen Martin J. Oberman, Chairman of the Surface Transportation Board (STB), a Washington, D.C.-based independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers, speak at a freight railroad conference, knows he is not holding anything back. That again was the case, when he gave a keynote speech at last week’s Southeastern Association of Rail Shippers (SEARS) 2024 Spring Meeting in Atlanta.

When I have seen Oberman speak in the past, he typically focuses on a whole host of familiar freight railroad-focused trends and themes, including: service issues; employment and staffing; regulatory developments; and M&A, among others.

He touched upon these at SEARS, to be sure, but his primary focus was centered around the ongoing back-and-forth between Class I railroad carrier Norfolk Southern (NS) and Cleveland-based hedge fund Ancora holdings.

In short, over the last several weeks, Ancora has taken steps to take over the NS board, reduce headcount, and terminate current NS CEO Alan Shaw. These steps, Oberman said, are the most recent “effort by a Wall Street firm—with short-term dollar signs in its eyes—to strip resources out of railroads.” What’s more, he observed that these moves by Ancora follow similar efforts made by another hedge fund, Soroban, to get rid of Union Pacific CEO Lance Fritz, which came to fruition, “not because [Fritz] was adding resources—but because he wasn’t cutting fast and deep enough.”

Oberman made it clear that actions taken by these hedge fund activist investors have gained influence, and in some cases, outright control, of some railroads, with them being what he called natural monopolies, as well as the only transportation option for a high percentage of their customers.

“Ignoring the essential role that railroads play in supporting the success of their customers, i.e., the manufacturers that drive our GDP, these investors succeeded in pressuring railroad management to exploit this monopoly power to achieve short-term profits,” he said. The strategy was, largely, to slash workforces, raise prices, and reduce output—i.e., service—which they did—thereby risking long-term viability in pursuit of massive stock buybacks and dividends.”

And he also said that this strategy is not the right one, in that it has a negative impact on the economic output of U.S. industries that require robust rail service, while also raising myriad safety concerns, as rail workers are essential to safe rail operations, and removing railroad staff performing inspections, repairs, and other tasks not only increases threats both to the public and railroad staff alike, it also undermines rail service, too.

Over the course of his speech, Oberman brought up the topic of Precision Scheduled Railroading, or PSR, which began being implemented by Class I railroads around 2014. PSR was created by the late CSX President and CEO E. Hunter Harrison, whom passed away in December. PSR requires cargo to be ready when rail cars arrive for loading or risk being left behind, a practice that served both CP and CN well under his leadership, with both companies seeing multiple positive results in the form of lower operating ratios, improved service, record amounts of reinvestment into networks, as well as creating significant shareholder value.

A key component of PSR, noted Oberman, was railroads cutting staff by around 30%, or 45,000 people. This reduction in workforce, he said, subsequently led to what was viewed as a service crisis by the 2021-2022 timeframe, on the heels of the economy starting to find its post-pandemic footing.

That service crisis, or “service meltdown,” as Oberman called it, led to a well-documented two-day, STB-hosted public hearing, featuring testimony by shippers bringing up things like missed shipments and delayed service having a negative impact on business. Which Oberman said was due to Class I railroads short of the number of workers it needed to serve customers, such as engineers, conductors, carmen, mechanics, and electricians, coupled with white-collar challenges, too, with shippers having a hard time reaching salespeople and customer service.

Freight railroad staff numbers—since the April 2022 hearing—are heading back up, with railroads having hired and trained around 9,000 workers, with the railroads remaining 14,000 short of pre-pandemic numbers. And with the economy pegged to grow in the coming years and months, Oberman made it clear that the railroads needs to continue to expand both its workforce and infrastructure, too, something he said NS has promised and already started to deliver on.

This is what makes the recent moves by Ancora troubling on various fronts, according to Oberman.

“Any campaign, proxy or otherwise, that threatens to undo recent efforts to rebuild the railroad resilience and move toward significant long-term growth would be a major setback,” he said.” It would undercut safety and be the opposite of good business, the opposite of fulfilling the common carrier obligation, and the opposite of meeting the Congressional commandment to serve the public. Regardless of what happens with Norfolk Southern’s governance, it is crucial that management take seriously their duties to customers and the public.”

Oberman referred back to Union Pacific to provide an example of what could be coming down the tracks should for NS should its strategy be laid out by an activist investor instead of a Board and CEO focused on the railroad’s best interests.

And he added that NS is, in a sense, feeling the pressure from Ancora, as it recently announced buy outs for 7% of its management and staff, and also terminated some lower-density intermodal lanes, even though intermodal now accounts for nearly half of all U.S. rail volumes.

But that did not stop him from calling Ancora out, citing a letter the investor sent him, indicating that they had taken a $1 billion stake in NS to become a safer railroad.

“The measure of Ancora’s disingenuous pitch to improve safety is that its slide deck completely omits reference to FRA data which shows that, in the last year, NS has been an industry leader in reducing mainline rail accidents and derailments,” he said. “And NS is the only Class I railroad which has joined the Department of Transportation Confidential Close Call Reporting System, a major advance in instituting a safe culture in any workplace.”

Instead, he said, Ancora is keenly focused on NS lowering its operating ratio (OR) in order to drive cash payouts and increase its stock price, adding that a misguided focus on lowering railroad’s OR was a key factor for railroads eliminating thousands of workers and leading to the service crisis.

And a rapid reduction in OR can only be achieved through new major workforce reductions, he said, coupled with Ancora rejecting both NS’s long-term growth strategy and its focus on intermodal traffic.

“Clearly, their plan is to install a CEO ordered to reverse Norfolk Southern’s recently instituted corporate strategy to maintain a resilient workforce and to invest more in infrastructure to grow the railroad’s capacity long term,” said Oberman. “The implications of significant cost-cutting at one railroad are ominous for the US economy. The fall out could extend to the entire freight rail system. Railroads crisscross North America in an intertwined network; freight is often handed from one railroad to another before reaching its destination. When one railroad has a service meltdown, it has a ripple effect across all other railroads. Such a debacle occurred in 2017 when CSX went on a cost-cutting rampage—a shock to the system from which it took years to recover. Already, industrial customers of Norfolk Southern and shortline railroads that feed into Norfolk Southern have raised serious concerns that significant cost-cutting would undo the progress of the last two years.”

This situation creates a situation in which it is difficult to ponder how things could look should Ancora’s bid be successful.

For one thing, Oberman said it could have railroad CEOs being deterred from pursuing long-term strategies, as well as a national rail network with two of the four U.S. carriers, UP and NS, being led by CEOs that answer to shareholders focused on short-term returns and also to the detriment of rail customers and rail workers and, by extension, the U.S, economy and general public.

“Under those circumstances, I do not expect the STB will sit by and watch and wait while another service crisis unfolds as we confronted in 2022,” said Oberman. “On the contrary, if service suffers, ultimately the STB would be called in—and may have little alternative but to institute more accountability hearings and more regulatory intervention to protect the public, an outcome which neither railroad investors nor the STB would relish.”

As usual, Oberman was direct and succinct in explaining a challenging and difficult situation. Have railroads learned from every challenge they have faced in recent years? I cannot 100% answer that, and I am not sure many truly can. But, at the same time, it is likely fair to say they are taking steps, from safety, operational, and business perspectives, to help them focus on future growth and revenue gains while not cutting corners on safety and staffing levels, something which Oberman held their feet to the fire on. The ongoing issues between NS and Ancora look to be far from settled. Indeed, it will be interesting to see what happens next.