Shareholders Take the Tiller at Exxon

An array of major money managers and smaller activist funds pulled off a partial coup at Exxon Mobil this week, ousting at least two board members in an effort to change the supermajor's approach. Such a scenario would have been unthinkable just a year ago. All were driven by some combination of factors, including poor returns, a slow approach to the challenges of the energy transition and a board that seemed equally slow to respond to their concerns (OD May25'21). Energy Intelligence looks at what happened, why and what it means. What Happened? According to preliminary results, shareholders voted to replace at least two of Exxon’s 12 board members with candidates nominated by Engine No. 1 (see table). Institutional investors backing Engine No. 1’s Greg Goff and Kaisa Hietala praised their oil and gas experience and their track record of success in creating value for shareholders. One nominee, Anders Runevald, was eliminated. Eight of Exxon’s existing board members won re-election, including CEO Darren Woods and independent Chairman Director Kenneth Frazier. But the supermajor paused its meeting for more than an hour during the voting process, citing a late outpouring of ballots. At the end, Exxon only released results for these candidates, saying some races were “too close to call.” That leaves the fate of five Exxon nominees, four of whom were challenged by Engine No. 1, undecided along with challenger Alexander Karsner. More than a day later, Exxon continues to tally votes. Why Did This Happen at Exxon? The shareholder revolt at Exxon has roots stretching back years (WEO Apr.29'21). Once the largest and most profitable international oil company, Exxon has stumbled over the past decade. Large acquisitions, particularly in US natural gas and the Canadian oil sands, eroded returns. Instead of paring back its sprawling operations as peers did, it doubled down on scale and technology. At the same time, it continued to ratchet up its dividend even as the cash flows used to fuel it diminished. The most recent pandemic-driven downturn left Exxon layering on debt to cover its dividend payments while still promising shareholders growth. Further, its past successes left the company confident of its approach and less responsive to shareholders. Fund giants like BlackRock and Vanguard responded to a mix of concerns about Exxon’s governance and strategy and how perceived deficiencies led to missteps that hurt the value of the company. Both voted for Goff and Hietala, while BlackRock also supported Karsner. “We continue to be concerned about Exxon’s strategic direction and the anticipated impact on its long-term financial performance and competitiveness,” BlackRock said. Both also indicated that they had lost patience with more conventional engagement that had not brought about change. BlackRock had previously voted against Exxon directors when it was unhappy about the level of engagement it had with the company. “Over the years, we have shared with Exxon our concerns about the lack of energy sector expertise in its boardroom and questions about board independence,” Vanguard said. “And for years, we did not witness sufficient progress on either front.” Exxon’s approach to the energy transition also played a role, with BlackRock in particular singling out its need to "further assess the company’s strategy and board expertise against the possibility that demand for fossil fuels may decline rapidly in the coming decades.” Why Is This Significant? The Exxon vote represents a pivot point for the US oil industry. The changes were brought about by a union of activist shareholders with relatively little financial power and large money managers who are now acting on their pledges to align investments with Paris goals. That union is playing out to lesser effect across the annual meetings of energy firms globally but most notably in shareholder votes for more aggressive emissions policies at giants Chevron, ConocoPhillips and Phillips 66 (OD May26'21). Companies have been reluctant to address emissions from the use of their products (Scope 3). They are now being asked by their largest investors to not only make a plan to reduce those emissions but figure out a way to be viable, profitable businesses while doing it. “For energy companies that do not reduce emissions, this creates a potentially challenging backdrop to compete for capital,” analysts at Morgan Stanley warned. But “a shift is under way -- one that includes commitments to emission reductions, along with more investment in scaling solutions to reduce emissions." Noah Brenner, London Alternative Members Engine No. 1 Has Endorsed Name Credentials Other Endorsements Gregory Goff Former CEO, Andeavor Glass Lewis; ISS; PIRC; Calstrs;