Activist Imperils Norfolk Southern’s Revolutionary Strategy

Activist investor Ancora Holdings Group is seeking to take over the board of Norfolk Southern Corp. and its top management to make sure the railroad focuses squarely on maximizing operating profit margins above everything else, including customer service. Investors will no doubt be rewarded if Ancora succeeds. But the boardroom takeover would dash the desires of rail customers and workers who hoped that a change in Norfolk Southern’s strategy would improve service and increase freight volume — something the industry hasn’t done in more than a decade.

Norfolk Southern Chief Executive Officer Alan Shaw laid out this ambitious growth plan during a December 2022 investor day meeting with analysts. The company would prioritize service instead of focusing maniacally on operating profit margins as usual. The resilient, reliable service would enable the railroad to win more cargo from the trucking industry, Shaw said. Norfolk Southern would break with the tradition of furloughing workers quickly during a demand slump and would be able to maintain service when volumes rebounded. The additional volume the railroad would win by persuading shippers to switch more cargo to rail would make up for the extra costs, he said.

This was revolutionary thinking for an industry that takes full advantage of its captive customers. Normally in a free market, companies would be doomed if they offered unreliable service. But if a steel mill or chemical plant is situated next to a railroad’s tracks, those customers have few or no alternatives. Trucks, especially for bulky goods, can be 10% to 15% more expensive.