Union Pacific CEO to step down after pressure from activist shareholder

Chris Isidore, CNN

Shares of Union Pacific jumped 10% in pre-market trading on Monday after the railroad company announced that CEO Lance Fritz will leave the company by the end of the year after an activist hedge fund called for him to be fired.

Union Pacific just posted record earnings for the second year in a row. But hedge fund Soroban Capital Partners released a statement saying Fritz had lost the trust of “shareholders, employees, customers and regulators.”

“UNP’s total shareholder return was the worst in the industry,” Soroban said in a letter to the board. “Among all companies, the S&P 500 UNP is rated by employees as the worst place to work and has the lowest CEO approval rating (#500 out of 500 on both occasions),” the letter said. And it said that the Surface Transportation Board, one of the regulators of freight railroads, had rated Union Pacific as the worst service provider among major railroads.

Soroban owns only about 1% of Union Pacific.

“I am honored and privileged to serve this great company. I am proud of our team and everything we have built together,” Fritz said in a statement. “Union Pacific has been my home for 22 years and I’m sure now is the perfect time for the next Union Pacific leader to take over.”

Union Pacific said the search process for a new CEO has been ongoing for a year now and that it has decided to make a public announcement in light of Soroban’s public call for change.

“The Board of Directors is grateful to Lance for his unwavering leadership, dedication and oversight of our company’s development over the past eight years as CEO. Lance has created an environment that has enabled Union Pacific to have a meaningful impact on our customers, communities and employees,” said Michael McCarthy, Lead Independent Director of the Board of Directors. “He skillfully led our company during a time of great trial and change.”

But overall, service levels and on-time performance in the freight rail industry have been declining for years as railroads have tried to cut costs and headcount.

Despite the industry’s record earnings, major freight rail stocks have lagged other sectors. Shares of Union Pacific fell about 20% in the last 12 months to Friday’s close, even with a recovery in stock prices in 2023. This is worse than the fall in share prices of other major railroads such as Norfolk Southern and CSX.

When it comes to employee relations, Union Pacific was seen as leading the freight railroad in contentious labor negotiations last year that would have led to an economic-destroying strike if Congress hadn’t stepped in and imposed an unpopular contract. The contract gave employees an immediate 14% raise, including back wages, but denied them the paid sick days they were seeking.

Union Pacific and other railroads argued during negotiations that they could not afford to meet the unions’ demands for paid sick leave, although the unions calculated that it would cost the entire industry $321 million a year while each railroad was making billions of dollars. . dollars of profit.

Union Pacific earned a net profit of $7 billion last year, up about $500 million, or 7%, from the previous earnings record posted in 2021. Total employee compensation for the year was $4.6 billion, much less than the $6.3 billion Union Pacific spent on share buybacks during that period.

Last week, Union Pacific reached an agreement with two of its smaller unions giving members up to four sick days per year, as well as more flexibility to use three personal days as sick days without prior notice or approval.

“We will continue to work with other unions to resolve the issue of sick pay,” the company said in a sick pay statement last week. The move comes after another major railroad, CSX, entered into sick leave agreements with six of its unions. UP was indeed active before a third railroad, Norfolk Southern, struck a deal with one of its unions for sick days following a major train derailment in East Palestine, Ohio that dumped toxic materials into the area.

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