Union Pacific decided to part ways with its top brass on the same day an activist investor publicly pressed the rail giant to oust the CEO after eight years in the role.
Lance Fritz, who has helmed the CEO role at Union Pacific since February 2015, will leave company by the end of 2023. He’s come under attack in recent month for using service embargoes which effectively slow the movement of goods. Union Pacific moves about 27 percent of U.S. freight shipped by rail.
The Omaha, Neb.-based company said it has been looking for a new chief since March last year, but its board chose to make a public statement after it received a letter from Soroban Capital’s managing partner Eric Mandelblatt.
The letter, addressed to the board’s lead independent director Michael McCarthy, called for leadership to replace Fritz with a “seasoned executive who has a proven track record of railroad operating excellence.”
The board expects to name a successor this year.
Union Pacific says its board wants 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.” But the board may not fully bend the knee to Soroban’s requests, saying it is considering long-term CEO candidates both within the railroad industry and adjacent sectors.
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Investors pleased with the news, sent Union Pacific’s stock up more than 10 percent in Monday trading.
Last March, Union Pacific’s board engaged an outside consultant and subsequently formed a task force of directors composed of each of the board committee chairs in November 2022.
The railroad, which operates in 23 western states, had by many accounts a strong 2022, with company revenues increasing 14 percent to $24.9 billion on record net income of $7 billion. But Soroban was quick to point out that during Fritz’s eight-year tenure, Union Pacific ranked the worst out of the seven “Class I” railroad companies in metrics including safety, volume growth, revenue growth, cost management, EBIT growth and total shareholder return.
In the letter, Mandelblatt cited Soroban’s displeasure with Union Pacific’s “years of persistent operating underperformance”, saying that “current management is not capable of driving strong operating performance.”
Mandeblatt also attacked Fritz’s leadership.
“Among all S&P 500 companies, UNP is rated by employees as the worst place to work and has the lowest employee CEO approval rating (ranked 500th out of 500 in both),” said Mandeblatt. “The company is not delivering on its commitment to customers, and the Surface Transportation Board (an industry regulator) has singled out UNP as providing the worst service among the Class I railroads.”
Mandelblatt said “acute operating issues at UNP have continued,” stressing that the activist investor views “a heightened risk of permanent damage to the franchise if left unaddressed.”
In a press release announcing Fritz’s departure, Union Pacific touted some of the company’s financial accomplishments under Fritz since 2017, noting that it saw a 52 percent increase in net income, a 27 percent increase in operating income and a 3.7-percentage-point increase in return on invested capital.
“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, who also serves as the company’s chairman and president, 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.”
Soroban owned an approximately $1.6 billion stake in Union Pacific at the time of the letter’s publishing on Sunday, or roughly 1 percent of the firm’s shares.
“The board is grateful to Lance for his unwavering leadership, dedication and oversight in driving our company forward over the last eight years as CEO. Lance created an environment that has allowed Union Pacific to make a measurable impact with our customers, communities and employees alike,” said McCarthy in a statement. “He has capably led our company during a time of significant challenge and change, positioning Union Pacific to deliver long-term sustainable value for shareholders and customers. We are immensely grateful to have Lance’s continuing leadership and support and know he will ensure a smooth transition.”
Last week, Union Pacific reached an agreement with two of its smaller unions on a hot button issue: paid sick time. The railroad is giving these union members up to four paid sick days a year, as well as greater flexibility to use three personal days as sick days without prior notice and approval.
The agreements occurred shortly after another major U.S. railroad company, CSX, struck deals with four unions to provide employees with the same benefits.
Paid sick leave and demanding work schedules have been central to the country’s roughly 115,000 rail workers’ plight in their contract dispute with the railway operators. Congress intervened in December 2022 to pass legislation forcing workers to accept the tentative agreements on the five-year contract running through 2024.
Should the new Union Pacific CEO assume the position in 2023, it would be the fourth CEO change among the Class I railroads within a two-year stretch. CN installed oil and gas executive Tracy Robinson last February, while Norfolk Southern elevated former chief marketing officer Alan Shaw to the CEO role last May. CSX named former Ford executive Joe Hinrichs to the lead post last September.