• Norfolk Southern shareholders elected three of Ancora's seven director nominees but fell short of ousting incumbent CEO Alan Shaw.
• The partial victory for Ancora caps off a campaign that saw union leaders, investors and advisors voice their support for the activist.
• While the victory provides a mandate for change, it falls short of how proxy advisors had recommended shareholders vote.

Norfolk Southern shareholders on Thursday voted to elect three of dissident Ancora's director nominees but fell short of ousting incumbent CEO Alan Shaw, capping a remarkable proxy fight at one of America's largest railroads.

Shareholders elected Ancora candidates William Clyburn, Sameh Fahmy and Gilbert Lamphere. The three seats are short of the full seven that the activist had been seeking but still a clear indication of shareholders' desire for change at a railroad plagued by underperformance. Current board chair Amy Miles did not win reelection, nor did incumbent directors Jennifer Scanlon and John Thompson.

Norfolk Southern shares fell more than 5% on the news in Thursday morning trading.

The railroad's board had fought hard to stave off Ancora's biggest demand: firing Shaw. Ancora had rebuffed past settlement offers that didn't include his ouster. Shareholders didn't elect Ancora's CEO pick, Jim Barber, but the activist made clear during the annual meeting and in a statement afterward that it would continue to push for a leadership change.

The boardroom victory is a milestone for Ancora, a $10 billion Ohio investment firm that launched an activism practice just 10 years ago and scored a series of smaller wins leading up to the election at Norfolk Southern. It caps an impressive campaign that saw the activist win unexpected support from unions, customers, and, perhaps most importantly, Glass Lewis and ISS, the influential proxy advisory firms.

Ancora's Jim Chadwick and Frederick DiSanto said in a statement that the results showed the activist had driven "significant change" at the railroad. The statement also noted that they believe Shaw was handed a "resounding vote of no confidence based on preliminary voting results."

"We will work constructively and collaboratively on behalf of our shareholders unlocking the full potential of our powerful franchise," Norfolk Southern said in a statement, adding it welcomed the arrival of three new directors.

While Shaw's ouster was Ancora's most pressing demand, the activist firm laid out broader accusations of failed governance and asserted that the company's proposed operating approach was unproductive.

The activist had argued that Norfolk Southern should adopt a model known as precision-scheduled railroading, or PSR, which has delivered impressive shareholder returns at other railroads. However, critics have said the model leaves railroads ill-equipped to handle surges in demand.

Norfolk Southern had first argued against PSR in favor of its proposed resiliency model, which would keep rail crews and cars on standby to handle those cyclical surges in demand.

But the company abruptly changed tack during the fight, hiring a well-known PSR operator as chief operating officer and implementing some of those precision principles. 

Government officials, who had previously voiced their support for Norfolk over Ancora, were momentarily silenced by the reversal. Labor groups accounting for some 40% of Norfolk's union employees shifted their support to Ancora, and major customer Cleveland Cliffs endorsed Ancora's proposed picks and plan.

The dissident also won support from proxy advisors Glass Lewis and ISS. ISS recommended that shareholders support five of Ancora's seven picks but did not recommend electing Ancora's CEO pick to the board. Glass Lewis endorsed six of Ancora's nominees. Both said change was needed at the railroad.

"Given that we have no standstill agreement and a clear mandate from a critical mass of shareholders, we will continue to hold Mr. Shaw to account and push for the appointment of a qualified operator who can actually drive shareholder value," Ancora's Chadwick and DiSanto said in the statement.