STB Chair Oberman: NS takeover could be a 'huge detriment' to the rail industry

By Julie Sneider, Senior Editor

Surface Transportation Board Chairman Martin Oberman is concerned about the potential of activist investors succeeding in their effort to replace Norfolk Southern Corp.'s top leadership in favor of a short-term strategy of cost-cutting and workforce reductions to boost profits.

Such a strategy would be "a huge detriment" for the entire rail industry if activist investor Ancora Holdings Group LLC succeeds in its takeover attempt at NS, Oberman said during an interview with Progressive Railroading on Feb. 23. Oberman emphasized he was speaking for himself and not the entire STB.

"At least for the last three years since I've been chairman, the board has been struggling with the effects of the Wall Street pressure move that began 10 or 12 years ago to press railroads into cutting resources substantially. The euphemism given to it was PSR, precision scheduled railroading," he said. 

For the most part, PSR has served as an excuse to cut resources, particularly labor, but also to place railroads under constant pressure to reduce capital expenditures, with Wall Street analyists constantly criticizing them if their operating ratios (OR) were too high, Oberman said.

"There's been a general pressure in the industry to reduce the output of these railroads. And in general, it has really cost the country a great deal in terms of being a depressant on the economy," he added.

The impact of those actions rose to what he characterized as crisis levels in spring 2020 when the pandemic hit, and the major railroads — which already had cut their workforces by 20% under the PSR model — reduced their headcounts by another 10% to adapt to the abrupt slowdown in business.

"That was short-term thinking in my view," said Oberman. "By the middle of 2020, as the economy began to rebound, the railroads found themselves in a place where they couldn't perform. And it became worse over the following year and a half, to the point that the [STB] instituted — on an urgent basis — hearings in the spring of 2022."

At those hearings, STB members heard from major shippers who were upset about a dramatic drop in Class Is' quality of service. Many shippers testified about missed shipments and delayed service that was costing them business. They, along with labor unions, attributed the service problems to a rail-crew shortage, Oberman noted.

The STB responded by requiring the Class Is to regularly submit to the board reports on their service metrics, ongoing hiring efforts and crew training. Since then, the Class Is ramped up their employment ranks and moved to correct service problems. Still, the board has extended the reporting requirements.

"It's been a long-term struggle to try to get these railroads to rebuild. It's a never-ending tension," said Oberman. "Wall Street will always be there — which is fine, it’s part of our capitalist structure. But the activist investors, such as the ones that have surfaced now at Norfolk Southern, have a very short-term goal and it’s not constructive."

While such activist investors are free to practice their approach in other industries, the rail industry is different, he said.

"Railroads are a regulated monopoly, and they have a common carrier obligation to the public interest and to the nation’s economy," said Oberman. "Railroad management and owners are not just free to manipulate the business for short-term gain to drain the resources out of the railroads in the form of enormous stock buybacks and dividends to the determent of the railroads, ... labor, and ultimately to the economy and the consumers."

As the Class Is worked to improve service over the past two years, a number installed new management and shifted to longer-term corporate strategies, the chairman noted. Had the STB not held its hearings in spring 2022, the Class Is might not have changed course, he believes.

"Norfolk Southern had been one of the leaders in shifting gears and building workforce and capital investment for the future. And now it's threatened to be punished for that activity by an activist investor," Oberman said. "If the activist investor succeeds at Norfolk Southern, it will be a huge detriment to the industry. It will have other CEOs looking over their shoulders. And it's just a very bad trend."

In its slide presentation describing why it wants to elect eight new independent directors to NS' board and replace current President and CEO Alan Shaw, Ancora Holdings cites the impact that scheduled railroading can have to lower railroads' ORs. If the group succeeds in its takeover at NS, the STB will be watching to see if troubling trends start to occur at the Class I, Oberman said.

"We're not going to know this overnight," he said. "But it would be foolish for the [STB] to sit back and say, 'Well, maybe [Ancora Holdings] is innocently intended.' They're not. You can see what they're saying: It's all about OR. So, we certainly could do what we did in April 2022."

Also, the STB could consider new rules designed to enhance competition among the railroads. Oberman noted that the STB currently has a proposed rulemaking under consideration that would allow for reciprocal switching arrangements — something that shippers favor but Class Is oppose.

"The board has said it wants to look further into the competitive access area," Oberman added. "We've already said that in our notice-of-proposed-rulemaking on reciprocal switching."

As for keeping watch as to what transpires at NS, Oberman finds it hard to be specific until things happen.

"But we see the danger on the horizon and it's time to at least speak out and alert the industry and Wall Street to what could happen," he said.