Happening Now

In Defense of Alan Shaw

February 16, 2024

By Jim Mathews / President & CEO

This is a piece you may be surprised to read from me but read on. If activist investors manage to oust Alan Shaw from his perch as CEO of Norfolk Southern, we may lose momentum on positive change across a whole lot of areas we – and I hope you – care about, things like grade-crossing elimination, working more cooperatively on new passenger rail service, working to make trains run on time, and doing the right thing for the residents of East Palestine, Ohio.

On February 1st it emerged in the Wall Street Journal that a group of activists led by Ancora Holdings confirmed they had built a $1 billion block of Norfolk Southern shares, which they intend to use to launch a proxy battle for control of the Board and to replace Shaw. The move followed a tough spate of financial news for the Class I railroad which included the revelation that last year’s East Palestine derailment had so far cost the company $150 million and would likely cost more.

The activist group issued some vague hand-waving statements suggesting they are animated by concerns about how Norfolk Southern “handled” the East Palestine situation, but their statement didn’t say what exactly concerned them or what they meant by handling.

Bill Vantuono, the savvy veteran editor at Railway Age, views it all very cynically.

“This move by Ancora is not about Norfolk Southern improving operations, growing business, becoming safer, or strengthening relations with its employees,” Vantuono offered in a commentary in his magazine. “It’s all about money, making a quick buck and walking away—period. NS shareholders have already profited from that single [Feb. 1] Wall Street Journal article.”

Indeed. As of this writing, the activist group so far is $70 million richer.

“Is this an investor whose goal it is to reinstate the bad old days when the marching orders to the C-suite were to cut, cut, cut? That would be bad,” Surface Transportation Board Chair Martin Oberman told Trains magazine when the news broke. “We’re just trying to rebuild the system and it’s been a long, slow process to get there.”

In my view, Shaw has been chipping away incrementally at a Class I railroad operating culture that has been putting profits above people, and doing his best within the limits of his influence to make sure that Norfolk Southern is at least starting to do the right things. It’s tentative, halting, and maddeningly slow, but it’s also noticeable enough that we’ve all started to see some benefits to the new vision he unveiled for the company a little more than a year ago.

In December of 2022, Shaw committed the ultimate act of heresy for a Class I railroad CEO in the U.S. – he declared that the railroad would begin to shift away from the single-minded focus on operating ratio that comes from the quasi-religious embrace of precision-scheduled railroading, or PSR. Instead of cutting costs to the bone and beyond into the marrow to ride out low points in the business cycle, Shaw declared they would be willing to accept short-term deterioration in operating ratio. He regards keeping train and engine crews in place, rather than furloughing, as an “investment in resilience” that will pay off in the long run by giving the company the ability to capture and retain more business.

Shaw is also making investments in reputation, the sorts of things we like to see and which seem to have Wall Street types especially annoyed.

On East Palestine, Shaw has committed many millions of dollars to the town for cleanup, remediation, and continued support of the town’s long-term needs. Under Shaw, N-S has become the first Class I to jump in on the Federal Railroad Administration’s next-generation version of a confidential reporting system for employees (Full Disclosure: I sit on an FRA Rail Safety Advisory Committee working group that has been trying to get a rule to implement close-call reporting ever since the East Palestine derailment. Our working group includes freight-rail representatives whom I regard as for the most part lukewarm and obstructionist).

Shaw’s Norfolk Southern also did the right thing when it came to those ghastly news videos of children crawling over and under his stopped trains in Hammond, Indiana, making good on promises to local officials to stop trains short of these crossings and to split them if it looked as if delays would extend for a long time. Shaw also spoke directly to the Mayor of Hammond on the day that news reports came out about these incidents, pledging not only these operational changes but investments to grade-separate a pedestrian crossing at that spot.

Under Shaw Norfolk Southern has become much more cooperative about restoring some passenger service on the Gulf Coast between New Orleans and Mobile, offering an aggressive deal – admittedly, under the bright glare of a public adversarial proceeding before the Surface Transportation Board – to clear the way for service wiped away nearly two decades ago by Hurricane Katrina.

And from a strictly passenger point of view, Shaw’s Norfolk Southern has been making improvements in freight-train interference with Amtrak trains and trying to improve on-time performance for Amtrak trains on its territory. I took a look at December’s numbers – the most recent I have – and delay minutes per 10,000 miles were down 19 percent from the 12-month average. For the 13 Amtrak trains operating on Norfolk Southern territory, ten saw real improvements in delay-minutes. Among the most impressive were the Pere Marquette, which saw a 53 percent reduction in delay minutes from the 12-month average, the Blue Water, which enjoyed a 36 percent reduction, and the Wolverine, which improved 31 percent.

In the Trains magazine piece, STB Chair Oberman criticized the obsessive focus on operating ratio that was evident from analysts and reporters on Norfolk Southern’s fourth-quarter financial results conference call.

“Not one analyst said, ‘How long is it going to take you to grow your revenue with your long-term plans, and what will that mean to the profits for shareholders two years from now or three years from now?’ The question never came up,” Oberman said, adding that it would be a “serious concern” if the Ancora Holdings-led group has the same short-term focus.

Alan Shaw appears to be taking a smart, sober, long-term view in doing what he thinks is right for the railroad, for its customers, for the communities in which it operates, and for the industry as a whole. The financial community sees these steps as bugs and not features, and if they succeed in sending Shaw packing what message would that send to other Class I CEOs who have started to be more constructive at CSX and CPKC, for example?

We continue to have a lot of concerns as an Association about how the Class Is behave. We’re dismayed by their reluctance as a group to modernize, their often bad-faith negotiating tactics, and their collective shrug at the need for real changes in safety rules. We’re angry at their allergy to co-existing with a Federally subsidized passenger rail program in which taxpayers generously relieve them every year of their common-carrier obligations to get people where they need to go. Many, many other issues also remain thorns.

But when Class I executive leaders at least begin to move in the direction we all want and need, we should reward that behavior and support those steps. This is not just because it’s in the long-term interest of passengers, but because passenger-rail expansion depends on a robust and healthy Class I ecosystem. We all need a strong freight railroad sector, both as consumers who need the goods that move around the country on rail, and as passengers on the freight networks on which Amtrak operates. I’ll continue to keep an eye on how well Norfolk Southern keeps its promises, but right now I’d like to add my voice to Chair Oberman’s (and others) in defense of Alan Shaw.