Activist investor Norfolk Southern highlights the rough behavior of the new COO as the proxy battle heats up

Norfolk Southern is nearly two months into a battle with activist investor Ancora, which is attempting to shake up the railroad company’s board and oust CEO Alan Shaw.

Now, the company is directing its criticism at Norfolk Southern’s new Chief Operating Officer, John Orr, over what activists call an “excessive” buyout package and a career tainted by allegations of racial and sexual discrimination.

Last month, Norfolk Southern recruited Orr from its competitor, CPKC, paying tens of millions of dollars to buy him out of his contract. The move was widely seen as a response to Ancora’s operational criticisms and received praise from several Wall Street analysts.

In a letter to Norfolk Southern shareholders on Friday, Ancora highlighted Orr’s past misconduct, which raises questions about his recruitment, even though the executive has overseen improvements in the railroad’s operations in the past three weeks.

Ancora documented both alleged and proven workplace misconduct by Orr, dating back to his time as a mid-level executive at Canadian National. An appointee of the Canadian Arbitration Board confirmed allegations that Orr used abusive language towards a female employee in the early 2000s.

Employees and other witnesses informed the employment tribunal at the time that Orr frequently cursed and yelled at the employee, referring to her as a “f—— b—-” and an “f—— idiot.” One witness told the arbitrator that Orr once told the employee she “was so f—— stupid it was embarrassing.”

The arbitrator found the claims credible.

Ancora also highlighted a lawsuit filed in 2019 by a Black executive, who described Orr’s treatment of employees and subordinates as “abysmal.” The lawsuit was filed against Canadian National, alleging racial discrimination.

Orr’s behavior was allegedly “so bad” that Canadian National was compelled to provide executive coaching for him, according to a 2020 filing in the lawsuit. Orr’s deposition is sealed, and the case was settled in 2022.

Before announcing Orr’s recruitment, Ancora drew attention to claims about his behavior in emails to two Norfolk Southern board members obtained by CNBC.

Ancora stated in its Friday statement that Orr’s recruitment was a costly proposition that harms shareholders. As part of the agreement, Norfolk Southern stated it would pay Orr’s former employer $25 million in cash and provide additional unspecified concessions for a key rail station and route in the southern US. Norfolk Southern values that particular portion of the route at around 1% of its revenues.

When announcing Orr’s recruitment, Norfolk Southern did not disclose the initial impact of the concessions or the estimated ongoing effects in the years to come.

‘Flawed premise’ Norfolk Southern told CNBC in a statement that Ancora’s analysis of the value of the route – the Meridian Speedway agreement – “is completely inaccurate and based on a flawed premise,” as it assumes Norfolk Southern is forgoing more revenue than it actually is.

“As we previously stated, this revised agreement is by no means a consequential concession,” the company said.

Ancora seeks to oust Norfolk Southern’s Shaw along with Orr in favor of former UPS CEO Jim Barber and former CSX Executive Vice President Jamie Boychuk, respectively. The activist has claimed that Norfolk Southern is significantly underperforming its peers and has placed the blame on Shaw and the board.

Regarding Orr, Norfolk Southern stated that he has a “track record of improving performance while operating safely and with integrity.”

“Ancora’s attempt to tarnish John by dredging up claims against his former employer, one of which is from over 20 years ago, is nothing more than an attempt to distract from the facts about their deeply flawed COO candidate, Jamie Boychuk,” a company spokesperson told CNBC. “Mr. Orr and Mr. Boychuk’s track records and industry reputations are simply not comparable.”

In February 2023, a Norfolk Southern freight train derailed in East Palestine, Ohio, releasing toxic chemicals into the environment and sparking a political battle over railroad safety. Since then, its stock has remained roughly flat while the S&P 500 has risen by 26%.

Norfolk Southern’s shareholders’ meeting is scheduled for May 9.

Ancora has gained the support of other stakeholders in its battle with the company. Neuberger Berman, which holds a small position in Norfolk Southern, stated on Friday that it would support Ancora’s slate, citing a “history of poor governance that has long preceded” the railroad’s transformation efforts.

A settlement between the two sides appears unlikely, Gordon Haskett analyst Don Bilson said in a Friday note to clients. Shaw previously told CNBC that the company offered Ancora “a couple” of board seats in a settlement offer.

Ancora told CNBC that it has made repeated attempts to settle with the company, both directly and through advisors. Any settlement, from Ancora’s perspective, would be contingent on a board refresh and Shaw’s ouster. The board has repeatedly expressed confidence in Shaw and has stated it is not interested in a settlement that would lead to his departure.