Sparring shareholders cause governance train wreck

It’s no longer clear who’s driving the train at Norfolk Southern NSC. Chief Executive Alan Shaw narrowly survived a dissident campaign against him, but independent Chair Amy Miles did not, according to preliminary results released last week. Three of seven director nominees from pushy investment firm Ancora also won seats on the board. The muddled outcome flashes a warning signal about how revised U.S. shareholder voting rules, however welcome, can send governance off the rails.

The fight at the $50 billion U.S. freight carrier pitted Shaw and his convoluted attempts to “balance” productivity, safety, service and shareholder returns against Ancora’s stronger focus on efficiency. Each side presented competing strategies and marshaled support from stakeholders, including customers and union workers. Ancora aggressively targeted Norfolk Southern’s industry-lagging operating ratio, a key measure of operating costs against revenue, while the company touted Shaw’s response to a derailment involving hazardous chemicals, which occurred under his watch last year, and initiatives to improve financial performance.

Instead of being forced to simply choose one slate or the other, however, investors in U.S. companies are now allowed to pick competing board nominees using so-called universal proxy cards rolled out two years ago. À la carte is a better approach than preset menus, but Norfolk Southern’s contest exposed the kind of messiness it can create. Rival advisory firms Glass Lewis and Institutional Shareholder Services both backed most of Ancora’s candidates, but not enough to give them control and only agreed on four of the activist’s hopefuls while disagreeing over the management-sponsored candidates, too. ISS recommended voting for Shaw; Glass Lewis did not.

Although both sides can declare victory, the final vote tallies are likely to show that some directors triumphed by only modest margins. The restructured board will nevertheless have to elect a new chair and replace the heads of some key committees. Competing strategic agendas also threaten to undermine consensus-building and put Shaw under greater pressure to defend his approach. It adds further to the awkwardness for Chief Operating Officer John Orr, whose hiring amid the proxy battle was fiercely opposed by Ancora.

Most of the fear-mongering predictions about universal proxy cards, including a rise in activist-investor activity and more contests going to a vote, have been wrong so far. Instead, the Norfolk Southern episode – the first dissident director ballot victory this year – suggests that corporate executives would be better served thinking through the implications of split tickets and the dividing lines they betray between hedge fund managers and their passive counterparts at places like BlackRock BLK. In some cases, making seemingly painful concessions might help avoid a train wreck.

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CONTEXT NEWS

Norfolk Southern shareholders on May 9 elected three of activist investor Ancora’s seven nominees to the 13-member board, but did not oust the railway operator’s chief executive, Alan Shaw, as the dissident fund had sought in its campaign.

Chair Amy Miles lost at the ballot, according to preliminary tallies, as did Jennifer Scanlon, chair of the company’s governance and nominating committees, and John Thompson, chair of the human capital and compensation committees.

The Ancora candidates elected to the Norfolk Southern board were Wiliam Clyburn, a former commissioner of the U.S. Surface Transportation board; Sameh Fahmy, a former executive at rival Kansas City Southern; and MidRail Chairman Gilbert Lamphere.