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Disruption on the Board

As we reported back in April, climate would be a significant theme in this year’s proxy season. Since then, Exxon now has three new board members nominated by activist hedge fund, Engine No.1 (initially, two board seats were announced but a third is anticipated).

BlackRock, historically criticized for a lack of alignment between its outward ESG marketing messages and its proxy votes, supported three of the Engine No.1 nominees, and Vanguard voted for two. In fact, “many of Exxon’s top institutional investors voted in favor of Engine No. 1’s candidates, while retail shareholders tended to favor the company’s nominees.”[1]

Proxy advisor, ISS, had recommended that shareholders elect three of the nominees stating that Engine No.1 “made a compelling case that additional board change is needed to provide shareholders with sufficient confidence in the sustainability of (Exxon’s) business.”[2]

The proxy fight has cost Exxon and Engine No.1 $35 million and $30 million, respectively, making it one of the most expensive ever. While Exxon is a huge multinational corporation, Engine No.1 is a only six months old and has just $250 million in assets with a holding of just 0.02% in Exxon.

Engine No.1’s May presentation regarding its campaign stated that “a lack of successful and transformative energy experience on the Board has left ExxonMobil unprepared and threatens continued long-term value destruction.”[3] It also accused Exxon of refusing to reassess its strategy in light of decarbonization pressures and instead avoiding the subject or dismissing its importance.

The economic thesis underpinning the campaign is what helped Engine No.1 achieve this victory. The hedge fund highlighted Exxon’s financial underperformance and made a bet “on a confluence of events, including longstanding investor dissatisfaction with Exxon’s corporate governance and a growing appreciation on Wall Street for G.”[4]

Clearly, this is a big development, but it remains to be seen what will unfold at Exxon as a result. However, as Charlie Penner of Engine No.1 stated, “If you can get Exxon to change, everybody else in the industry has to listen…There probably could have been easier targets…. But it’s about getting the most impact…”[5]