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."
Comments
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"?
Footnote
1 A summary of the updates to the Malaysian Code of Corporate Governance is available here.
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