Proxy adviser backs activist board nominees in blow to Norfolk Southern

An influential shareholder adviser said it is recommending five activist investor nominees to serve on Norfolk Southern's board, in a report that ratchets up the pressure on the railway company's leaders.

Why it matters: Ohio-based activist investor Ancora has seized on the company's underperformance and its handling of the East Palestine derailment last year to gain ground in its effort to replace the CEO and a slate of board directors.

Zoom in: Institutional Shareholder Services, the largest of proxy advisers that recommend how investors should vote at annual meetings, said on Tuesday it recommended five of Ancora's seven board nominees.

• The proxy adviser backed eight of the company's director nominees, including CEO Alan Shaw. In addition to pushing for majority control of the board, Ancora has openly called for removing the company's chief executive.
• ISS acknowledged the company's poor performance and bad communication with investors, but stopped short of backing Ancora's full slate.
• "We find that questions about the management and direction of the company would be best answered by a reconfigured board with more extensive and balanced industry expertise and the benefit of access to all available information," ISS said.
• Norfolk Southern nominee Heidi Heitkamp, the former U.S. senator from North Dakota, did not receive ISS' backing, but former Ohio Governor John Kasich did.

Between the lines: Ancora has received support from labor unions, shareholders, and steel producer Cleveland-Cliffs, a Norfolk Southern customer.

• Shares of the company are down by more than 20% since the start of 2022, and Norfolk Southern has grappled with the Ohio derailment and massive spill in East Palestine last February.

• Glass Lewis, a smaller proxy adviser, recommended six of Ancora's nominees and backed the CEO candidate that Ancora wants to replace Shaw.

Yes, but: ISS did not advocate for a management team change at the $52 billion company, which trades under the "NSC" stock ticker on the New York Stock Exchange.

• "NSC is not a broken company, and operational performance does not reflect a situation so dire as to suggest that a change in board control and an accompanying overhaul of strategy and leadership is immediately required. The prevailing strategy appears to be logical...," ISS wrote.

What's next: If the two sides don't strike an agreement, shareholders will vote on who ultimately leads the company at the May 9 annual meeting.