• ESG-focused investors and union pension plans should back Norfolk Southern activist Ancora and its CEO pick Jim Barber, Institutional Shareholder Services said on Thursday.
• The vote of support, different from the earlier ISS and Glass Lewis endorsements, carries particular weight in a heavily unionized industry and at a railroad dealing with the aftermath of a derailment that unleashed toxic chemicals last year.
• Norfolk Southern shareholders will decide whether they're backing activist Ancora or incumbent management ahead of the railroad's May 9 annual meeting.

Norfolk Southern-invested unions and pension funds should back activist Ancora's full seven-director slate at the railroad's shareholder meeting later this month, two different Institutional Shareholder Services proxy advisory services said.

ISS' Taft-Hartley Advisory Services and Social Advisory Services, which focus their recommendations on regulated unions and socially responsible investors, respectively said in their reports, which were both viewed by CNBC, that an Ancora majority would help address "negligence" by the current board and address its "serious concerns with accountability."

"The proxy contest is centered on a debate over which management team is best suited" to lead the company forward," both reports said. "It is therefore important to provide the dissident with a voice that is loud enough to have its case for management change appropriately considered."

The recommendations also voiced their support for Ancora's CEO pick Jim Barber as a "credible" director and chief executive, undercutting criticisms that his lack of railway experience was a liability. The former UPS executive appears "to be a capable candidate with experience and skills that should be transferable to the railroad industry," the reports said.

ISS' main advisory arm and Glass Lewis, the two proxy giants, had already said that shareholders should support most of Ancora's nominees at Norfolk Southern's May 9 meeting. Glass Lewis endorsed six of Ancora's director picks, including Barber.

ISS earlier endorsed five of Ancora's nominees, withholding support for the activist investor's proposed CEO Barber, but noting that he would likely be a capable executive as well.

Thursday's news "represents an important message to union retirement plans and firms prioritizing both socially responsible investments and enhanced value," Ancora said in a statement to CNBC. The statement added that Ancora's three-year precision-scheduled railroading strategy "differs greatly from Norfolk Southern's resilience railroading model" and has worked well at the other four publicly traded Class I railroads.

A Norfolk Southern spokesperson said that the ISS team behind the Taft-Hartley report did not engage with the railroad's management, unlike the main ISS research team, which "concluded that shareholders should support a majority of Norfolk Southern's director nominees."

"That 'benchmark' ISS recommendation is a clear endorsement of Alan Shaw's leadership and the company's balanced strategy," the spokesperson said in a statement.

Still, the proxy advisor endorsements thus far have backed a clear mandate for change at the troubled railroad, which has underperformed its peers in the stock market and is still grappling with the fallout from a derailment in East Palestine, Ohio.

ISS' two more tailored recommendations carry particular weight in light of the derailment, which caused more than 100,000 gallons of toxic chemicals to be released into the environment.

The company had contributed more than $105 million to the region, not including the $600 million class-action settlement, the spokesperson said.

"From the beginning, we promised to safely and thoroughly remediate the derailment site and to make it right in East Palestine," the spokesperson said. "We have kept that promise."

The recommendations also carry heft because of the outsize influence that unions have in the railroad industry.

Union support has been divided between management and the activist investor. Two different Teamsters unions are backing the activist, around 42% of NSC's unionized workforce. Another coalition of unions is backing management.

Union support is unusual for activist campaigns at railroads, which are typically focused on reducing costs and headcount to improve operating ratio, a key financial metric for rails.

But Ancora has managed to secure those union endorsements and backing from several shareholders. Neuberger Berman said earlier that it would support Ancora's case for change at Norfolk Southern, while Canadian asset manager EdgePoint also reaffirmed on Thursday that it would be voting its shares with the activist. (EdgePoint was initially partnered with Ancora's campaign at Norfolk Southern but dissolved that arrangement months earlier.)

Top institutional shareholders include Vanguard, BlackRock, State Street and Dodge & Cox, as well as California's pension funds, CalPERS and CalSTRS, and Colorado's public pension fund.