The Journal. - Rail Unions Normally Hate CEOs. Now They Are Trying to Save One.

Episode Date: March 12, 2024

About a year after a major train derailment in East Palestine, Ohio, an activist investor is trying to oust Norfolk Southern’s CEO, Alan Shaw. But as WSJ’s Esther Fung explains, the CEO has some unlikely allies in his corner. Further Reading: -Railroad Workers Were Ready to Strike. Now They’re Fighting to Save Their CEO.  Further Listening: -What Caused a Train to Derail in East Palestine, Ohio?  Learn more about your ad choices. Visit megaphone.fm/adchoices

I'm Esther Fang. I'm a reporter at the Wall Street Journal covering the freight railroads and parcel carriers. And how do you like that beat? I sometimes tell people I write about plumbing, plumbing in the U.S. economy. You don't read about plumbing unless you have to, right? Yeah, plumbing is one of those things you don't want to think about unless it's broken.

When Esther started covering railroads about two years ago, she noticed that something was broken. The relationship between the industry's CEOs and its union workers. She remembers listening to multiple government hearings where union officials ripped into corporate management. My entire railroad career, I've listened to the railroads portray a message and image of safety first. But I have never witnessed or experienced that truth

one single day on the property. They have very, very harsh words for the CEOs who they say have decimated the workforce. They would criticize CEOs as being short-sighted, not investing enough in the infrastructure, not investing enough in the workforce. They would criticize CEOs as being short-sighted, not investing enough in the infrastructure, not investing enough in the workforce, endangering their lives. Inspections were being performed by the craft designated to do them.

And the industry goal was always take the safest course. Fast forward to today, and that has all now been sacrificed by the railroad's insatiable appetite and longing to perform for Wall Street. I remember thinking, oh my gosh, they really hate the CEOs. I'm like, oh my goodness, how does a company run when your employees hate you so much? But over the past year, at one railroad giant, this dynamic has flipped on its head. Over the past year, at one railroad giant, this dynamic has flipped on its head. And the unions have come out to support their chief executive, who's at risk of losing his job.

So now we have railroad unions coming out to defend a CEO. That's quite a U-turn. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson. It's Tuesday, March 12th. Coming up on the show, the unlikely alliance between a CEO and the unions. At Air Miles, we help you collect more moments. So instead of scrolling through photos of friends on social media, you can spend more time

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Collect more moments with more ways to earn. Air Mile. Air Mile. Air Mile. Unions are a big part of the railroad industry. The railroads have to deal with 12 or 13 unions. There are so many different crafts, so many different occupations, people with different skills that go into making sure a railroad runs smoothly.

Many of these unions are really old. You know, they're more than 100 years old. They represent people who live in very rural areas. These unions are now throwing their way behind Alan Shaw. He's the CEO of Norfolk Southern. He took over the job in May of 2022. Have you met him before? What's he like? He's very affable, accessible. The first time I met him was in a rail yard in Bellevue, Ohio. And, you know, we were talking about railroad operations. And you could tell that he was

proud of his team. He introduced and let his team talk about the operations. The story of how Shah's relationship with the unions went from enemies to allies begins with a disaster. Fifty of the cars in this massive train derailed Friday, 20 of them carrying hazardous materials. We are following breaking news as we come on the air this morning. A train derailment forces hundreds from their home in Ohio. Last year, a Norfolk Southern train derailed in East Palestine, Ohio. The crash caused a huge spill, sending dangerous chemicals close to people's homes. It cost the company more than a billion dollars to clean up. Rail unions came out swinging

and said the disaster was a result of corporate policies that had sacrificed safety in order to boost profits. In the aftermath of the derailment, Allenshaw and Norfolk Southern didn't more aggressively control the narrative and the labor unions took advantage of it and got a lot more attention for their own plight. In one statement, union leaders said that for years, workers had sounded

the alarm about dangerous conditions and that, quote, rail companies have maintained their fundamental disregard for public safety. This derailment did not have to happen and it makes it so much more frustrating for us to know that it was very predictable. And yet our warnings and cries for help over the last seven years have fallen on deaf ears and the outcome was exactly as we feared. The National Transportation Safety Board is still investigating the crash, but a preliminary report said the derailment was caused by an overheated wheel bearing. The company said it would stay in East Palestine

as long as it took to clean up the mess. So initially, some people criticized Norfolk Southern's response to it. I think it's been a while since a railroad had to deal with a catastrophe of this nature. And afterward, when there was so much more scrutiny, and also from Congress, they really had to step up. Good morning, Chairman Carper. I appreciate the opportunity to testify before you today.

Shah told lawmakers the company was going to change. Shaw told lawmakers the company was going to change. And I am committed to making Norfolk Southern Safety Culture the best in the industry. Well, you're not having a good month. You're not having a good month. But I'll tell you this, Mr. Shaw. Overconfidence breeds complacency, and complacency breeds disaster. And that disaster has hit East Palestine. Lawmakers seem to side with the unions. If Norfolk Southern had paid a little more attention to safety and a little less attention to its profits,

it cared a little more about the Ohioans along its tracks and a little less about its executives and shareholders, these accidents would not have been as bad or maybe not happened at all. Obviously, Norfolk Southern and Shaw were very, very focused on cleaning up East Palestine, but I think they also realized they needed to repair the relationship they had with the labor unions.

When they saw how the labor unions just took control of the narrative after the derailment, they were like, okay, we've got to fix this too. So how did Shah try to fix it? After the derailment, there was more urgency to appease the labour unions and to also appease regulators that, okay, we really need to put in more effort in hiring, more effort in retention. to put in more effort in hiring, more effort in retention. He engaged outside consultants to come in to see what could be done to help boost morale within the employee base.

These workers work with big, hulking equipment. Safety is something you cannot ever compromise on. And one of the recommendations was to move away from a discipline punishment approach towards a more coaching mentality when it comes to compliance in safety. Shaw held town hall meetings with union leaders and unwound some efficiency measures that workers said made their jobs more difficult.

For instance, Shaw started adding back interchange points, known as humpyards, something investors had been pressuring rail companies to get rid of. Shaw also said he was willing to join a nationwide system where employees could confidentially report near misses, or accidents that almost happen but don't. near misses, or accidents that almost happen but don't. I mean, for years, the railroad CEOs have fought against this. They refused to join this system. So for Ellen to say, we want to join this, we want to find a way to participate in this was definitely a big shock. By the end of 2023, when Shaw had been in the job for about a year and a half,

tension between Norfolk Southern's management and its unions was starting to thaw. But another group was less excited about what was going on. Investors. That's next. Seth and Riley's Garage Hard Lemonade. A delicious classic with a vibrant taste of fresh lemons. The perfect balance of sweet and sour with a crisp, zesty edge. Welcome to The Garage, the place of refreshing hard lemonade.

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The company's stock fell more than any other major railroad company last year. And some of the shareholders, they feel like they've given Shaw and Norfolk Southern some time and maybe they've gotten impatient and they want to see more urgency in terms of efficiency. And one big investor that had concerns was a hedge fund called Ancora Holdings. So Ancora is a Cleveland, Ohio-based hedge fund that has proposed changes in other freight companies before.

So they're no strangers to the business of transportation. What they said is that they feel that Norfolk Southern needs new leadership. What they said is that they feel that Norfolk Southern needs new leadership. They point out that Norfolk Southern missed financial targets and that shareholders are getting impatient with Norfolk Southern. Earlier this year, ANCORA put forward a proposal. It said Norfolk Southern should cut costs and return to using a controversial system known as Precision Scheduled Railroading, or PSR. PSR is a system that's supposed to make railroads carry more goods more quickly,

but that usually results in major layoffs. And there was one more thing. Ancora said the company should fire Alan Shaw. Why do they want to get rid of Alan Shaw? They feel that Alan isn't qualified enough to run Norfolk Southern. They feel that Alan isn't prioritizing efficiency as much as he should. Yeah, they feel that he lacks urgency in this portion. They say that there are so many stakeholders in a railroad.

There are workers, there's the community, there are shareholders, there are customers, and Ellen has not balanced all of the interests of all these stakeholders. Norfolk Southern says Ancora's proposal is short-sighted, and that a change in the company's leadership would be, quote, highly disruptive to our operations, our workers, and the North American supply chain. Ancora owns less than 2% of Norfolk Southern, so it has to convince other shareholders to support its proposal. Ancora says it's committed to safety. But Shaw now has an unlikely ally.

The unions. So the unions said that Shaw is doing the right thing. And that he should be given more time to reshape the railroad. And so they feel that if Ankora gets its way and replaces Shaw with another person and bringing the cost-cutting measures that they so feared, it would erase all the gains that they had seen under Shaw's leadership. And so they're like, no, we don't want that. Basically, the things that this activist investor is pushing for

are things that unions have been fighting against for a long time. That's right. That's right. They say, we don't want this happening at Norfolk Southern. So we're definitely making our voices heard. Again, it's the shareholders who have to vote. So it's not like the labor unions can effect any change, but they still want the shareholders to know that they're observing all of this and they have views that they want the shareholders to know. One union said in a statement

that if Norfolk Southern adopts ANCORA's proposals, it will make the railroad safety problems worse. While, quote, a small select few laugh all the way to the bank. Is it possible that these railroad unions could go on strike just to oppose this activist investor? At this point, no. The railroad workers are governed under something called the Railway Labor Act, they're not allowed to strike unless very specific conditions regarding a national contract are met. So I don't believe they would be allowed to strike

in defense of their CEO in this current activist fight. The unions aren't allowed to go on strike just to keep the CEO, but there is a new contract negotiation set to begin next year. And Esther says that if Ancora wins and starts putting its proposals into place, it could set the stage for a tense negotiation. The last time they negotiated a national contract, It was so protracted that President Biden had to step in and intervene. And there was a threat of a national railroad strike. I don't think the railroads want that to happen again. How big of a fork in the tracks is this moment for Norfolk Southern?

It is quite dramatic. I think it is a big fork. Do you want to stand up against investors who want you to focus on running a tight ship like you used to? Or are you able to prove or have time to prove to these investors that, hey, I'm taking this strategy. Give me some time. I'll show you that it's right. Any management change is a big change for the workers. It can be a rough transition. I guess for the workers, they want to stick with the devil they know.

Shah's fate will likely be decided in May when Norfolk Southern is expected to hold its annual meeting and shareholders will vote on Ancora's proposal. This episode has been updated to correct the pronunciation of Norfolk Southern. Norfolk Southern. That's all for today. Tuesday, March 12th. The Journal is a co-production of Spotify and The Wall Street Journal.

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