(Bloomberg) -- Norfolk Southern Corp.’s chief executive officer was lambasted by politicians as the epitome of everything wrong with the profit-obsessed railroad industry when a derailment caused a toxic disaster in East Palestine, Ohio, last year. 

Now, an activist investor is waging an increasingly personal battle to fire the CEO — but not because it wants the railroad to spend more on safety initiatives. Instead, Ancora Holdings Group is tagging him as a soft-touch marketing guy who’s overly deferential to workers and customers and unwilling to implement the operational changes necessary to compete in the notoriously cutthroat industry.

Alan Shaw is a lifer at Norfolk, starting out in the finance department in 1994. But he came into the CEO job in 2022 — less than a year before the Ohio disaster — with a message of change.

For more than a decade, the railroad industry has been governed by the gospel of the late executive Hunter Harrison: an efficiency strategy known as precision scheduled railroading that’s resulted in shrunken workforces and longer, more packed trains. Shaw argued railroads had become so focused on costs they had forgotten how to grow and were losing business to truckers — not to mention upsetting existing customers and employees.

Workers love his message, as do regulators and shippers frustrated with years of poor rail service. But Ancora is betting that investors don’t — Norfolk’s shares are down about 7% in the past two years, including a sharp sell-off after the derailment, badly trailing the almost 10% gain for the benchmark S&P Road & Rail index. 

The fund wants to replace Shaw with Jim Barber, a former United Parcel Service Inc. executive, and also install Jamie Boychuk, a protege of Harrison’s who helped oversee CSX Corp.’s adoption of PSR tactics. Both Barber and Boychuk are known as hard-nosed operators with little interest in warm and fuzzy ideas like company culture. Ancora, which owns less than 0.5% of Norfolk shares, is also seeking to replace most of the board. The proxy vote is May 9.

Activist investors have pervaded few industries as much as North American railroads. The method is pretty simple: Kick out the existing CEO and hire Harrison — or someone who worked for him — and then watch profit margins (and the stock price) soar. Bill Ackman’s Pershing Square Capital Management started the trend at Canadian Pacific Railway Ltd., and other funds copied him at CSX and Union Pacific Corp.

“The activist plan is that old playbook of 10 to 15 years ago, about just singular focus on cost cuts,” Shaw said in an interview at Bloomberg’s Boston office. “And we know that with that short-term playbook, shareholders lose.”

He’s committed to ending temporary worker furloughs when demand slumps and backed more generous paid sick leave. He's invested in locomotives, track improvements, warehousing facilities, rail yard infrastructure and technology. He spruced up worker facilities that had become dilapidated. 

In the penny-pinching era, railroads “didn’t want to put money back into the infrastructure, including on-duty facilities,” said Jeremy Ferguson of the International Association of Sheet Metal, Air, Rail and Transportation Workers, Norfolk’s biggest union. But Shaw signed off on fresh paint jobs, new roofs and boiler systems for yard offices. “Safety and morale are improving every day by leaps and bounds,” Ferguson said. If there was a bit of extra slack in the system, so be it. 

At least some shareholders endorse Ancora’s proposed overhaul: EdgePoint Investment Group Inc., which owns Norfolk shares worth about $1 billion, and Neuberger Berman Group, which owns a much smaller stake of less than 0.1%, have both backed the activist slate.

The Brotherhood of Maintenance of Way Employes, a division of the Teamsters union, on Thursday backed Ancora’s push for change, criticizing current management for “non-committal hedging on reasonable, needed changes” that would prevent future rail accidents. The group had previously blasted Ancora as “predatory venture capitalists.” On Friday, another Teamsters affiliate, the Brotherhood of Locomotive Engineers and Trainmen, also announced it was switching its allegiance to Ancora, partly because of Norfolk’s hiring of Orr as COO. Combined, the two groups represent more than 40% of Norfolk’s unionized workforce.

The railroad’s other major unions have backed Norfolk's existing strategy, and with only a few weeks to go until the shareholder vote, Norfolk is holding firm on its support for Shaw in a sign the company thinks it can resist the activist push.

Shaw has acquiesced to making profitability metrics a more explicit part of executives’ compensation math and brought in a Harrison apprentice of his own, John Orr, as chief operating officer. The politicians who lambasted the railroad for prioritizing profits over people in the case of the Ohio derailment — including Transportation Secretary Pete Buttigieg, Ohio senators J.D. Vance and Sherrod Brown and Vermont Senator Bernie Sanders — have gone silent as Ancora pushes for change.

“Every other railroad has gone through what Norfolk is going through right now, which is someone who stepped up to say, ‘Hey guys, you need to start running a precision scheduled railroad,’” Boychuk, 46, said. “And that’s where we come along.”

Under Ancora’s plan, Boychuk would serve as No. 2 to the 63-year-old Barber. There’s “a natural succession plan built in between the two of them,” said James Chadwick, who oversees alternative investments at Cleveland-based Ancora. “It’s a hell of a team to start and they’ll benefit from each other greatly.”

That said, Boychuk’s tenure at CSX wasn’t all smooth sailing. Customers were so frustrated during the rollout of its PSR strategy that the Surface Transportation Board called a special listening session to allow them to air grievances. 

Memories of the tumult still linger: 80% of shippers recently surveyed by analysts at Stephens Inc. said they would shift volume away from Norfolk if Ancora implements its strategy. 

To Boychuk, criticisms of CSX aren't really about PSR itself but a rollout he now acknowledges was rushed. Still, CSX, has adopted some of Shaw’s gentler approach under new CEO Joe Hinrichs, a former Ford Motor Co. executive. This includes a pledge to stop chasing profits at the expense of growth and to rethink the use of furloughs. Boychuk left CSX last August, less than a year into Hinrichs’ tenure.

At its core, PSR aims to produce better results with less work. The thinking goes that less work, particularly around switching and handling trains, means fewer opportunities for injuries or delays. It’s essentially trickle-down economics but for trains: If they run efficiently, safety and service benefits will follow.

But when Shaw pitched his strategy to investors in late 2022, he laid out some striking math: furloughs would typically save Norfolk about $35 million annually during downturns, but when demand recovers, service disruptions from a slower-than-needed network can cost the railroad $40 million a quarter, before factoring in the expense of hiring and training new workers. That’s to say nothing of missed revenue because the company can’t meet customer demand and a longer-term loss of confidence that could drive shippers to choose trucks over rail.

“Every three or four years, rail offers a really lousy service product,” Shaw said. “We’re breaking that cycle.”

Norfolk’s focus last year was on cleaning up the mess it made in East Palestine. The company acknowledges it needs to get more efficient but insists on doing this in a more balanced way.

“We’re going to get to the same place,” said Orr, Norfolk’s new chief operating officer. “But we’ll do it in a way that allows our customers to grow with us.”

(Adds union move in support of activists in 12th paragraph.)

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