The outcome of the election of directors at ExxonMobil's annual general meeting held in the United States on 26 May 2021 gave much food for thought for the incumbent management of listed corporations, in particular, those that are involved in businesses that are perceived as being harmful to the environment. 
Engine No. 1, who's that?
Engine No. 1 LLC ("Engine No. 1") is a hedge fund. It was founded by Chris James, a technology investor turned climate activist investor. By US standards, Engine No. 1 is a small hedge fund with USD250 million of assets under management. It is a shareholder of the storied oil major, ExxonMobil Corporation ("ExxonMobil"), whose shares are listed on the New York Stock Exchange. Engine No. 1 held approximately USD50 million worth of shares amounting to a 0.02% stake in ExxonMobil. 
The seeds of discord
In comparison to its glorious past, ExxonMobil had floundered in recent times. It no longer ranks among the ten most valuable companies in the world, after having been a fixture on that list less than a decade ago. In August 2020, it suffered the ignominy of being removed from the Dow Jones Industrial Average (an index of the stock performance of 30 large companies listed on the stock exchanges in the United States) for the first time since 1928.
More significantly, institutional investors who invariably worship at the altar of returns on investment were growing frustrated with ExxonMobil. Its share price had slipped from USD93.84 on 22 July 2016 to USD58.23 on 25 May 2021 (after recovering from a one-year low of USD31.11 in 2020). It also suffered a USD22.44 billion loss in financial year 2020. Equally worrying for investors was that ExxonMobil's total debt had increased by about USD20 billion in the previous financial year.
Also of concern to long term investors was that unlike other oil majors, ExxonMobil appeared to be investing in initiatives to boost its fossil fuel output rather than in renewable energy.
It would seem that the seeds of discord had been sown ...
The battle lines are drawn
On 27 January 2021, Engine No. 1 announced that it had formally nominated four "highly qualified" candidates for election as independent directors of ExxonMobil, namely Gregory J Goff, Kaisa Hietala, Alexander Karsner and Anders Runevad, each of whom had experience in the energy sector.
According to Engine No. 1, one of the primary motives for its actions was to enable ExxonMobil to "[i]mplement a strategic plan for sustainable value creation in a changing world by fully exploring growth areas, including more significant investment in clean energy, to help the Company profitably diversify and ensure it can commit to emission reduction targets ..."
In other words, Engine No. 1 wanted ExxonMobil to develop a clear and meaningful strategy in the adoption of clean energy.
Whilst conceding that "ExxonMobil has recently taken incremental steps in the face of financial and shareholder pressure", Engine No. 1 added that "a reactive short-term approach is no substitute for a proactive long-term strategy that addresses the threats and opportunities facing the Company in a changing world."
To add fuel to the fire, Engine No. 1 stated that it believed that "the lack of directors with successful transformative energy industry experience ... played a large part in the value destruction at ExxonMobil over the last decade."  
The hedge fund added that the candidates that it proposed have the necessary skill sets to assist the ExxonMobil board in the transformative process.
ExxonMobil reacted by issuing a letter to its shareholders on 16 March 2021, in which it said:
"Engine No. 1, a small, three-month-old hedge fund with about an 0.02 percent ownership in ExxonMobil, wants to make big changes to our company. They have made false statements about our plans and strategy. And they are proposing initiatives that would jeopardize our ability to generate the earnings and cash flow that we need to pay our dividend, invest in future growth and work on technologies that will be important to help tackle climate change."
"Your Board and management are fully committed to growing shareholder value by meeting the world's energy demands today and pursuing a technology-driven strategy to succeed through the energy transition."
ExxonMobil criticised Engine No. 1's approach as one that "ignores the role of oil and gas in the energy system of the future and the leadership role that ExxonMobil intends to play in reducing emissions through development and deployment of new lower-carbon technologies."
To justify its continued investment in fossil fuel, ExxonMobil added that:
"Virtually all independent experts, including the United Nations Intergovernmental Panel on Climate Change and the International Energy Agency, agree that oil and gas will continue to be part of the world's energy mix for many years to come – through 2050 and beyond even in low carbon scenarios. This is because it is well understood that oil and gas have unique properties and benefits that, for some sectors of society, there are no current viable alternatives."
"Without continuing near-term investment in oil and gas, the world won't have enough energy to produce food, enable transportation and provide power to homes and industries that modernize communities and improve living standards around the world."
The board urged the shareholders to reject the four candidates that Engine No. 1 nominated "to carry out their value-destructive agenda." ExxonMobil then concluded:
"To put it bluntly, we have a plan that will grow earnings and cash flow, pay and grow the dividend, fund future growth and position the company to have a meaningful role in the energy transition. Engine No. 1 does not. They've made false statements about our strategy. They don't have a plan. And their candidates for the Board do not have the experience or knowledge to help lead your company through one of the most complex and challenging transitions the world has ever faced."
With the battlelines drawn, both sides waged an intense proxy fight to win support for their candidates from ExxonMobil's shareholders, in particular the three largest, namely Vanguard (8.2%), Blackrock (6.7%) and State Street Corporation (5.7%), whose support could determine the outcome of the battle for board seats.
A virtual high noon
On 26 May 2021, shareholders of ExxonMobil logged onto the internet to attend the virtual annual general meeting of ExxonMobil. Votes were then cast on, among others, the resolutions for appointment of directors.
By day's end, ExxonMobil issued a press release stating "that based on preliminary vote estimates ... shareholders have elected eight of ExxonMobil nominees to the board of directors and two of Engine No. 1 nominees. Vote results for five nominees were too close to call."
The press release confirmed that Engine No. 1's two successful nominees were Gregory J Goff and Kaisa Hietala, and that Engine No. 1's third candidate, Alexander Karsner, was among the five candidates whose appointment has yet to be determined. Engine No. 1's fourth candidate, Anders Runevad, was not elected.  
Subsequently, ExxonMobil issued another press release on 2 June 2021 confirming that the counting of the votes for the remaining five candidates had been completed and three of ExxonMobil's representatives and Engine No. 1's candidate, Alexander Karsner, had been elected to its board of directors, subject to certification by the independent inspector of election.
With that, the 12-member board of directors of ExxonMobil would comprise nine directors nominated by ExxonMobil and three directors proposed by Engine No. 1.
The dust has now settled on this battle for seats on the board of directors of ExxonMobil. It remains to be seen whether the reconstituted board will be able to work cohesively to set ExxonMobil on an accelerated trajectory in its transition to clean energy.
Why they rooted for the underdog
The key to Engine No. 1's success was the support of investment funds and pension funds that held significant stakes in ExxonMobil. Vanguard, the largest shareholder of ExxonMobil, confirmed in a post-election statement that it had voted for Goff and Hietala, but not Karsner and Runevad.  Separately, Blackrock confirmed that it had cast its 6.7% shareholding in support of Goff, Hietala and Karsner.
The Wall Street Journal reported on 28 May 2021 that State Street Corporation, New York State Common Retirement Fund, T. Rowe Price Group Inc, and several Fidelity Funds supported two or more of Engine No. 1's candidates. Significantly, California Public Employees' Retirement System ("CalPERS') and California State Teachers' Retirement System, respectively the largest and second largest public pension funds in the United States, also supported Engine No. 1's cause.
According to Vanguard, there is an increasing need for ExxonMobil to better align its climate strategy with target setting in line with global peers and its public policy efforts related to climate risks. It added that it had "[o]ver the years ... shared with Exxon our concerns about the lack of energy sector expertise in its boardroom and questions about board independence" and "did not witness sufficient progress on either front".
Vanguard concluded that in its assessment, Goff and Hietala "appeared well-positioned to add both conventional oil and gas industry and transformational energy perspectives to Exxon's board. We determined that these perspectives would enhance the board's overall mix of skills and experience and benefit the company's efforts to assess strategic options and mitigate risks connected to the energy transition."
Explaining its rationale for supporting three of Engine No. 1's candidates, Blackrock said:
"We continue to be concerned about Exxon's strategic direction ... In our view, the Board would benefit from the addition of diverse energy experience to augment existing skillsets. As a result, (we) supported three of the four directors nominated by Engine No. 1. We believe that they ... bring the fresh perspectives and relevant transformative energy experience to the Board that will help the company position itself competitively in addressing the risks and opportunities presented by the energy transition."
"... we believe that three of the four directors nominated by Engine No. 1 bring relevant private sector experience including independent U.S. energy production (Mr. Goff); renewable products, including wind energy (Ms. Heitala); and energy infrastructure, legislation and new energy technology (Mr. Karsner). Hence, we believe that this suite of directors will complement the skills and experience of the remaining incumbent directors, bringing fresh perspectives as well as successful track records of value creation for shareholders."
Similar sentiments were expressed by CalPERS. In expressing its support for all four candidates proposed by Engine No. 1, the Fund stated in a filing with the US Securities Exchange Commission shortly before the general meeting that:
"We believe that additional board refreshment is necessary due to the long-term financial underperformance at ExxonMobil and the need for a greater depth of skill sets and experience on the board to address the significant challenges the company faces. In order to effectively oversee the transition to a low-carbon economy, we believe the board would benefit from additional expertise in both its core business and in renewable energy technologies."
The success of Engine No. 1's efforts to freshen ExxonMobil's board of directors is a significant victory and will serve as a catalyst for activist investors to adopt more aggressive measures to bring about changes in the boards of directors of their investee companies that have underperformed in some way or other. In the case of ExxonMobil, perhaps the time was ripe for a board shake-up due to the perception of its major shareholders that the energy giant was not taking sufficient steps to transition to clean energy, which was necessary for its long-term survival, and that the incumbent board lacked sufficient expertise to lead such an initiative.
Malaysia has had, and will continue to have, its fair share of corporate disputes involving the boards of directors of listed companies as well as private companies that control listed entities. Most of these battles involve attempts by substantial shareholders or feuding family members to wrest control of the entire board, rather than, as in Engine No. 1's case, to introduce minority representation to agitate for changes in the direction and strategies of the board.
Engine No. 1's success also represents a victory for advocates of sustainable development in light of the imminent challenges posed by climate change. It is a clear signal that large institutional investors place great emphasis on the environmental, social and governance (ESG) aspects of their investee companies' businesses. It serves as a warning that companies involved in businesses that are detrimental to the environment must take steps expeditiously to reduce the destructive elements that their business entails.
It is somewhat coincidental that the Securities Commission of Malaysia recently released its updated Malaysian Code of Corporate Governance. The most significant updates concerned the requirement for the board and management of a company to take into account sustainability considerations in the conduct of the company's business and for the directors to understand and stay abreast of sustainability issues relevant to the company and its business, including climate-related risks and opportunities.1
The American folktale, "The Little Engine That Could" tells a story of a little engine that succeeds in pulling a long train, whose engine had broken down, over a high mountain after larger engines had declined to help. The success by Engine No. 1, a mere 0.02% shareholder in ExxonMobil, in rallying shareholders like Vanguard, Blackrock, T Rowe and CalPERS to support its cause in the battle with ExxonMobil, is perhaps a corporate version of "The Little Engine That Could"?


1 A summary of the updates to the Malaysian Code of Corporate Governance is available here.

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