It would be considered a triumph of David over Goliath—if Goliath weren’t over the hill and David didn’t seem to have Goliaths of his own in his corner.
We’re speaking, of course, of the proxy battle between
Mobil (ticker: XOM) and activist investor Engine No. 1. Engine No. 1 pushed to add four new members to Exxon’s board. An early tally of the vote has given the activists at least two of those directors on the board.
Once upon a time, that would have been unimaginable. Less than a decade ago, Exxon was on top of the world—literally—notching the top spot as the world’s largest company in 2013. Its size alone made it appear impenetrable, not to mention that its long history of hefty profits and steadily increasing dividends were more than enough to keep climate activists, shareholders, and other critics at bay.
No longer. With a market cap of roughly $250 billion, Exxon, whose stock is up 0.8% on Wednesday, is a shadow of its former self. Burdened by a large debt load, a dividend that might be too big for its cash flow, and continued spending on projects, the company has left itself vulnerable to both activists pushing for a “net-zero” future and investors unhappy about how the company is run.
Even if the activists weren’t successful, the fact that the battle made it to a vote—with both sides spending tens of millions to woo shareholders —shows that Exxon had already lost its luster. And if Exxon is feeling the pressure, no oil company will be able to resist the global shift toward a carbon-free future.
That much was evident early in Exxon’s shareholder meeting Wednesday in which preliminary results showed it lost two seats on its board to Engine No. 1 with a third seat still being determined.
“We have…learned that change can happen anywhere,” Charlie Penner of Engine No.1 said in remarks at the beginning of Wednesday’s meeting. “It will always be a long shot, but it will always be worth it.”
The meeting was packed with drama not typical in most shareholder gatherings. In addition to the board challenge, the debate over climate change weighed heavily in early remarks from shareholders, with some pushing for Exxon to do more to move to a net-zero world and others referring to such measures as greenwashing.
Then, curiously, Exxon halted the meeting for an hour—a move that promptly raised suspicions from Engine No. 1. “Shareholders should not be fooled by ExxonMobil’s last-ditch attempt to stave off much-needed board change in response to significant shareholder pressure and the prospect of losing a proxy contest,” Engine No. 1 said in a statement released during the recess. “Shareholders have spoken. ExxonMobil should accept the result, take the vote and move forward.”
The meeting resumed at 12:15pm ET—with a 55 minute question-and-answer session—before the results of the vote were announced. Engine No. 1 nominees Gregory Goff and Kaisa Hietala would be joining the board. It was still unclear if Alexander Karsner won enough votes to join.
For Engine No. 1, a true upstart, it’s hard to imagine a better outcome than Wednesday’s, short of decisively winning all of the four seats it sought.
Launched with roughly $250 million late last year, it is focused on impact investing and finding the spot where shareholder and stakeholder interests align. In Exxon, Engine No. 1 sees a company in need of independent voices on the board to focus on the problems posed by climate change. It has also called on Exxon to cut capital expenditures on low-yielding projects and re-evaluate management incentives.
Such an ambitious call for action by a small investor normally might not have garnered much attention, but several factors worked in Engine No. 1’s favor. First, it brought along friends, namely the California State Teachers’ Retirement System (Calstrs), one of the largest pensions in the country. Soon thereafter, the Church of England also voiced support for the activists, as did California Public Employees’ Retirement System, and the New York State Common Retirement Fund.
These powerful allies helped, as did an investing community that has been increasingly eager to push companies to transition to a lower-carbon economy. Earlier this year,
which owns 6.7% of Exxon shares, reiterated its plans to push companies to move to a net-zero world.
(STT) and Vanguard—which with BlackRock make up the so-called “Big Three” investors—have also spoken about aligning their investments with a more sustainable world. The three firms hold roughly 20% of Exxon’s shares.
Exxon might have been able to push back, except for the fact that it is in pretty lousy shape. Oil prices have traded below $100 a barrel for the last seven years, but Exxon has acted as if it might get back there any day now. The company accumulated $67.6 billion in total debt at the end of 2020, up from $37.8 billion in 2018, built up to maintain its dividend and fund exploration amid an unprecedented slump in demand due to the pandemic. Its stock has returned just 0.6% including reinvested dividends over the past 10 years, well below the
14% return over the same period. As a further sign of its diminishing importance, Exxon was removed from the
Dow Jones Industrial Average
While the company has rebounded from pandemic lows, some of its recent outperformance could be attributed to signs its embracing the types of changes Engine No. 1 is pushing for.
“Exxon and the energy sector have moved from resisting the energy transition to embracing the transition,” says Rob Thummel, portfolio manager at Tortoise Capital Advisors. “The next step is participating in the global energy transition.”
For years Exxon did its best to ignore the changing demands from investors, who wanted energy companies to begin looking to a future without oil. Europe’s oil giants have already started to do just that, and even those efforts haven’t been enough for some. As investors voted on Exxon’s board in the U.S., a Dutch court ordered
Royal Dutch Shell
(RDS.A) to slash carbon emissions by net 45% by 2030, potentially setting a precedent for other oil companies to face similar challenges.
Exxon seems to have realized the seriousness of the situation, but only belatedly—as was further evidenced by Wednesday’s unusual shareholder meeting.
Over the last few months, Exxon spoke about cutting spending on investments, announced that it was creating a new low-carbon business, and added Jeff Ubben, the founder of impact-focused Inclusive Capital, to its board. Just this week, Exxon said in a letter to shareholders that it plans to add two new directors to its board over the next year—one with energy expertise and one with experience in the effort to combat climate change.
But the Engine No. 1 team and others deemed those actions as insufficient or reactive. Others agreed. Earlier this month, proxy advisory firm
Institutional Shareholder Services
(ISS) recommended that investors vote for three of Engine No. 1’s nominees: Goff, former chief executive of Andeavor; Hietala, former executive vice president of renewable products at Neste; and former U.S. Assistant Secretary of Energy Karsner. Glass Lewis followed with its support for Goff and Karsner. Reports suggest BlackRock would vote for three of Engine No. 1’s nominees as well.
Even before votes were tallied, there was little question that the world has changed for Exxon and the rest of the world’s oil companies. Now, there’s no going back.
Write to Carleton English at email@example.com