What happened
Union Pacific (UNP 0.82%) said it plans to replace its CEO in 2023, responding to a call from an activist investor to remove Lance Fritz as chief executive. Investors appear on board with the change; as of 1:17 p.m. ET, shares of Union Pacific were up 9.3%.
So what
Union Pacific is one of the nation's largest railroads, with a sprawling route network across the Western half of the United States and access to some of the country's most important ports. But that powerful network hasn't really paid off for investors lately, with Union Pacific shares down more than 20% over the past year prior to today, and trailing the S&P 500 by nearly 30 percentage points.
Soroban Capital Partners, a hedge fund that owns about $1.6 billion worth of Union Pacific shares, believes a shake-up in order. In a letter to the board released over the weekend, Soroban argued that the railroad has underperformed during the eight-year tenure of Fritz, and said the time has come for a change at the top.
"Soroban's mission is simple: we want UNP to prosper," managing partner Eric Mandelblatt wrote. "Unlike typical shareholder engagements which come with numerous demands, Soroban has only one ask: install new leadership who can get the trains to operate safely and on time."
In response to the letter, Union Pacific announced it plans to name a new CEO this year. The railroad said the board has been in discussions about succession plans since November 2022, but after being notified that Soroban intended to go public with its criticism, "decided it is in the best interests of all shareholders to provide a public update on its ongoing succession process and expected timing."
NYSE: UNP
Key Data Points
Now what
The market's reaction likely has more to do with who Soroban has indicated ought take Fritz's place. The hedge fund has suggested Jim Vena, who served as chief operating officer of Union Pacific from 2019 to 2020, be brought on as CEO.
Vena is a former lieutenant of the late Hunter Harrison, a railroad executive who revolutionized the industry during stints at Canadian National, Canadian Pacific, and CSX by installing what he called "precision scheduling railroading." The strategy helped those companies to reduce costs by scheduling fewer, longer trains and running them on tight schedules.
There's a lot for investors to like about railroads from here even without management overhauls. Inflation tends to hit trucking harder than rail, creating more of a price advantage for rail, and the trend toward nearshoring will mean more goods transported across the U.S.
The idea of putting a cost-focused CEO in charge to extract the best possible margins from that expected surge in demand has shares of Union Pacific gaining speed on Monday.
