The stakes couldn’t be higher.
The Engine. No. 1 campaign, which has received support from prominent investors and shareholder advisory firms, is a milestone in Corporate America.
It’s the first proxy battle at a major US company in which the case for change is being “explicitly constructed” around the shift away from fossil fuels, according to Institutional Shareholder Services.
Stumbles opened the door to rebellion
Critically, this fight with activists comes after a period of dismal performance for once-mighty Exxon.
During the five years prior to the pandemic, Exxon’s total return (including dividends) fell by 17.5%, according to Engine No. 1. That was easily last among the five biggest oil companies over that span, with Exxon the only one suffering a loss. The S&P 500 surged nearly 80% during the same time frame.
However, Exxon has rebounded in 2021 as oil prices have climbed. The share price is up 41% this year, nearly quadrupling the S&P 500’s advance. Still, Exxon remains far from the record highs hit in mid-2014.
Institutional Shareholder Services has advised shareholders to vote in favor of three of Engine No. 1’s candidates.
Citing Exxon’s “questionable strategy” for the future and “diminishing returns,” Glass Lewis, another influential advisory firm, urged shareholders to back two of the four candidates.
“We believe Engine No. 1 has presented a compelling case that, without a more concerted response and well-developed strategy … related to the global energy transition, Exxon’s returns, cash flow and dividend, and thus its shareholder value, are increasingly at threat,” Glass Lewis wrote in its report.
Big Three hold the key
Engine No. 1 holds just 0.02% of Exxon’s shares. However, the hedge fund has won backing from major institutional investors, including the New York Common Retirement Fund, the Church of England, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).
“We question whether BlackRock is ready to hold the biggest oil and gas polluters — and their financiers — accountable. Anything less is lipservice — and greenwashing,” Roberta Giordano, one of the organizers, wrote in a memo on Monday.
Beyond the board battle, Exxon also faces multiple climate-related shareholder proposals.
Both Glass Lewis and ISS recommend shareholders back three separate proposals calling for Exxon to issue reports detailing the financial impacts of the IEA’s net zero 2050 scenario, on lobbying payments and policy and on corporate climate lobbying being aligned with the Paris climate agreement.
Exxon promises to keep refreshing its board
Exxon has defended its strategy by pointing to projections for continued demand for oil and natural gas, particularly in emerging markets. The company has also pointed to efforts to reduce emissions and invest in carbon capture and storage as well as hydrogen. Exxon has estimated carbon capture alone could be a $2 trillion market by 2040.
However, Glass Lewis said it doesn’t believe Exxon “has made a compelling case” that carbon capture will become economically viable or grow to the scale required to become the centerpiece of the company’s energy transition strategy.
“We’re left with the feeling Exxon isn’t doing enough in terms of preparing or investing for the future,” Glass Lewis wrote.
In a sign of the pressure facing Exxon, the company also promised to add two new directors over the next 12 months, one with energy industry experience and one with climate experience. That would be on top of the six new directors that have been added since 2017.
For its part, Engine No. 1 urged shareholders not to be swayed by what it called Exxon’s “cynical, last minute maneuvering.”
“This is the same company that for years has refused to take even gradual material steps towards being better positioned for the long-term in a decarbonizing world,” Engine No. 1 said in a statement.