Union Pacific announces a search for a new CEO, amid investor pressure

A change is coming at the top for Omaha, Neb.-based Class I railroad carrier Union Pacific (UP), with the company today providing an update “on the status and timing of the Board of Directors’ active leadership succession planning process.

Current UP, Chairman, and President CEO Lance Fritz has been in his position since February 2015. UP officials heralded Fritz’s myriad accomplishments over that time, including UP achieving a 52% increase in net income, a 27% increase in operating income and a 3.7 point increase in return on invested capital since 2017, amid what the company described as a volatile pandemic-driven operating environment, as well as global supply chain disruption, labor negotiations, and service and labor challenges, and also instilling an exclusive and accountable organization with an industry leading sustainability program.

UP officials said that in March 2022 the Board engaged a leading outside consultant and then established a task force of directors composed of each of the Board committee chairs in the following November. They explained that the Board “is seeking a CEO with a strong track record of success and expertise across safety, operational excellence, enhancing and driving customer service, innovation, employee culture and sustainability” and expects to name a successor who will assume the position in 2023.

“It is my honor and privilege to serve this great company. I am proud of our team and all we have built together,” said Fritz in a statement. “I’ve always said that our fundamentals for long-term success are powered by our people—our best-in-class employees and the passion they have for our customers and communities. Union Pacific has embarked on a transformative journey that will result in stronger, more consistent service for our customers, with enhanced earnings growth and value creation for our shareholders. Union Pacific has been my home for 22 years and I am confident that now is the right time for Union Pacific’s next leader to take the helm. I look forward to working with the Board as we identify our next CEO to lead the Company into the future.”

UP also said that the company has considered shareholder input as part of its succession planning process, which will continue, and also has been engaging with Soroban Capital Partners going back to 2017. It explained that Soroban said it “intends to move discussions to a public level,” with the UP board deciding it is in its shareholders best interests to provide a public update on the succession process and its expected timing as well.

Morgan Stanley analyst Ravi Shanker wrote in a research note that this future CEO transition will not come as a big surprise, as there has been discussions about succession planning at the company in recent years, with the UP Board and Fritz having been actively planning for it.

Calling Soroban an activist investor, the analyst said that its “only ask” from UP was a CEO change, with the caveat that “it is unclear if this means the activist will reach a standstill agreement with the Board or if the unclear timeline on the transition and lack of stated commitment by the Board to select the activist’s preferred CEO candidate means more agitation ahead.”

In a letter to the UP Board, which was linked to in a Wall Street Journal report, Soroban explained it has been consistent in privately expressing its displeasure with years of persistent operating underperformance at UNP, adding that it maintains a “long-held view that current management is not capable of driving strong operating performance. This most recently includes our August 2022 Board-level discussion where we highlighted the gravity of today’s challenges. Regrettably, acute operating issues at UNP have continued, and we see a heightened risk of permanent damage to the franchise if left unaddressed. While it is highly atypical for Soroban to publicly disclose our communication with a board of directors, given the Board’s prolonged inaction despite years of underperformance, we feel it is critical for the Company’s future that we highlight the need for Mr. Fritz to be replaced with best-in-class leadership.”

Soroban also said that UNP has repeatedly and significantly failed to reach its potential under Mr. Fritz’s leadership.

“UNP has ranked the worst in safety, volume growth, revenue growth, cost management, EBIT growth, and total shareholder return,” it wrote. “These are highly underwhelming results despite UNP having the premier railroad franchise in North America. We assume you share our disappointment, given that Mr. Fritz has consistently failed to meet the annual incentive compensation targets set by the Board.”

The WSJ report also observed that UP’s fourth quarter profit and revenue did not meet Wall Street expectations, amid various challenges, including labor shortages, inflation, and harsh winter weather. And it also received a fair amount of pressure from the Surface Transportation Board, regarding its increasing use of embargoes, or restrictions rail operators place on the amount of cargo that can be transported, the report said.