Less than a week after a still-unknown person or persons at Norfolk Southern contacted CNBC and other media outlets alleging that President and CEO Alan H. Shaw was engaging in an “inappropriate workplace relationship” with another employee—setting off an internal investigation—the NS Board of Directors fired him and the company’s Executive Vice President Corporate Affairs, Chief Legal Officer and Corporate Secretary Nabanita C. Nag. By unanimous vote, Executive Vice President and Chief Financial Officer Mark R. George was named President and CEO, effective immediately; he also joins the NS Board. Jason A. Zampi will serve as acting CFO. Jason M. Morris will serve as acting Corporate Secretary. Susquehanna Financial Group’s Bascome Majors provides commentary and analysis, below.
“George’s appointment follows the Norfolk Southern Board’s unanimous decision to terminate Alan H. Shaw for cause, effective immediately,” the company said in a statement released after trading closed on Wall Street. ”This change in leadership comes in connection with preliminary findings from an ongoing investigation that determined Shaw violated company policies by engaging in a consensual relationship with the company’s Chief Legal Officer. Shaw’s departure is unrelated to the company’s performance, financial reporting and results of operations … Nag has been terminated … effective immediately, in connection with the preliminary findings of the Board’s ongoing investigation.”
“The Board has full confidence in Mark and his ability to continue delivering on our commitments to shareholders and other stakeholders,” said NS Board Chair Claude Mongeau. “Mark has played an integral role in our recent progress and brings decades of financial experience and strong operational expertise. He embodies our corporate values and is a champion of our safety culture. In close partnership with our accomplished [Executive Vice President and Chief Operating Officer] John Orr, they will continue to improve NS’s operating performance and close the margin gap with peers.”
“I am honored to take on this role and lead Norfolk Southern,” said George. ”I look forward to my continued partnership with John and the entire Thoroughbred team as we further our progress on optimizing operations and serving our customers, while creating a safe and satisfying workplace and delivering enhanced value for our employees, customers, shareholders, and communities.”
NS describes George as “a seasoned executive with more than 35 years of professional experience spanning multiple global industries. He most recently served as EVP and CFO of Norfolk Southern since 2019. In this capacity, George oversaw the company’s Finance, Investor Relations, Sourcing, and Corporate Strategy teams. During his time at Norfolk Southern, Mark brought a strategic and business partnership mindset to the CFO office. He has used his expertise across multiple industrial segments to help shape the company’s strategy and drive value for our shareholders. Prior to joining Norfolk Southern, he held successive roles of responsibility across multiple commercial and business segments of United Technologies Corporation and its subsidiaries, including six years in Asia as the regional CFO for the Otis Elevator Company. He held roles of increasing responsibility and ultimately served as the Global CFO for both the Otis Elevator Company and the Carrier Corporation from 2008 to 2019. George is also on the Board of Directors for Trane Technologies plc, where he serves on the Finance and Audit Committees. He also serves on the Board of Directors for Junior Achievement of Georgia. He holds a Bachelor of Science in finance from Connecticut State University and a Master of Business Administration from Rensselaer Polytechnic Institute.”
Norfolk Southern also reaffirmed its full-year 2024 guidance provided on July 25, 2024, in conjunction with its second quarter 2024 financial results.
COMMENTARY AND ANALYSIS
By Bascome Majors, Susquehanna Financial Group
Mark George Should Stabilize Leadership, But Board Governance Questions Linger
The NSC board’s immediate promotion of Mark George to permanent CEO in the face of another controversy should lead to management-level stability, as long as COO John Orr continues to operate a smooth railroad. Still, questions linger about what the directors knew and how long they knew it, and those answers could lead to a push for more board-level change this fall (nomination window 10/21 to 11/20).
Alan Shaw’s termination as CEO wasn’t a surprise after the news this week, but the promotion of CFO Mark George to permanent CEO (sans the “interim” tag) was incremental, and in our view the best option for NSC’s board to immediately restore stability. That said, this path to CEO change raises yet another set of governance questions for NSC’s board of directors (what did they know, how long did they know it, why didn’t they take action earlier?), and depending on the outcome of the ongoing third-party investigation we still see some chance of a push for more change at the board level when the nomination window re-opens this October (10/21 to 11/20).
Still, we believe any further push for change is about the board’s governance, not Mark George’s qualifications for the CEO role, and note that the employment terms detailed in this morning’s 8-K (download below) and offer letter suggest a firm but not ironclad commitment to him as NSC’s leader: 1) more generous than typical severance terms for three years if not fired for cause, and 2) an absolute compensation level reflective of a large-cap rail CEO (annual base $1.0MM + target cash bonus $2.25MM, promotion equity grant $4.0MM, target 2025 LT incentive grant $10.0MM). We’re hopeful that the board’s decisive action on permanent leadership and six-month COO John Orr’s continued steady operating hand will help restore confidence of all stakeholders in NSC over the next 12-18 months (customers, labor, regulators, politicians and investors).
NSC Reaffirms 2024 Financial Guidance, Despite the Noise: In Norfolk Southern’s press release detailing change in management, the company re-affirmed guidance provided with 2Q24’s earning release on July 25. This includes FY24 revenue growth in the range of +1% to +3% (current consensus +1%), and a FY24 operating ratio of ~66% (in-line with consensus). SFG will update our NSC estimates with the rest of rail peers in our typical rail preview ahead of 3Q24 earnings season.
Background
Various news reports, beginning with CNBC on Sept. 9, said that the NS Board of Directors had hired outside legal counsel to investigate the matter; the railroad confirmed that the same day. The Wall Street Journal on Sept. 10 reported that Alan Shaw would step down from his role amid the investigation into allegations of potential misconduct—“an inappropriate workplace relationship.” On Sept. 11, CNBC reported that Shaw’s relationship was with Nag. Reportedly, their affair had been going on for at least two years. Neither has commented.
“Norfolk Southern Corporation acknowledges that its Board of Directors has opened an investigation into allegations of potential conduct by CEO Alan Shaw that is inconsistent with the company’s Code of Ethics and company policy,” NS said in a Sept. 9 statement after the CNBC story broke. “Norfolk Southern holds all its team members to the highest standards. In line with the company’s Code of Conduct and company policy, allegations of misconduct are thoroughly investigated. The code also includes resources for employees to anonymously report concerns, including through the Ethics & Compliance Hotline. The Board of Directors’ Audit Committee has retained a law firm to conduct an independent investigation of the allegations and is committed to a complete and reliable examination of all pertinent facts. To ensure a fair investigation, the company and the Board cannot comment further until the investigation is complete.”
Shaw, 55, and his wife Tiffany have four children ranging in age from 13 to 21. His total compensation rose from $9.8 million in 2022 to $13.4 million in 2023, according to a proxy filing with the Securities and Exchange Commission. A 29-year employee of the Class I and its CEO since 2022, he and Norfolk Southern had gone through a tumultuous period in the past 18 months, beginning with the East Palestine derailment in February 2023, lasting through activist investor Ancora Holdings’ attempted hostile takeover earlier this year, and concluding with his termination. Ancora sought to oust Shaw over his handling of the East Palestine derailment, Norfolk Southern’s lagging stock performance and what Ancora described as a flawed operating strategy. Ancora did not manage to fire Shaw, but shareholders elected three of its candidates—Gil Lamphere, Sameh Fahmy and William Clyburn Jr.—to the board. Roughly 36% of shareholders voted against Shaw’s reelection. His alleged affair with Nag, a source told Railway Age, provided the ammunition Ancora needed to oust him.
Nag was appointed CLO in 2022 and EVP Corporate Affairs in 2023. She joined Norfolk Southern in 2020 as General Counsel Corporate. Before NS, she served as Vice President & Corporate Counsel in the Financial Management Law Group at Prudential Financial. Prior to that, she was Vice President & Associate General Counsel in the Finance & Corporate Legal Group at Goldman Sachs. She began her career as an associate at law firm Shearman & Sterling LLP. Nag earned a bachelor’s degree in Government and English from Georgetown University, and a J.D. from New York University School of Law. She was named an Atlanta Business Chronicle 2024 Corporate Counsel Award Honoree, selected “based on her outstanding work as a general counsel leading a large legal department as it helped Norfolk Southern navigate a complex corporate crisis and emerge a stronger company.”
According to news reports, the two likeliest internal candidates to replace Shaw on an interim basis were Executive Vice President and Chief Operating Officer John Orr or EVP and CFO Mark George, who wound up getting the appointment. Orr joined NS in the midst of the proxy battle following a long and distinguished career at CN, Kansas City Southern and CPKC. NS could have also tapped Fahmy, whom Orr worked for and was most recently in charge of the former Kansas City Southern’s PSR program.
