(Bloomberg) – An unprecedented fight over who should sit on the board of Exxon Mobil Corp. turns into a referendum on CEO Darren Woods as a decades-long struggle by climate activists comes to a head.
Activist investor Engine No. 1 LLC wants to replace a third of Exxon’s board of directors in a bid to force the Western world’s largest oil explorer to transition away from fossil fuels and end a decade of what he calls âdestruction of valueâ. Shareholders are expected to meet – virtually – for their annual meeting on May 26.
The stakes are high. According to Exxon’s bylaws, a victory for any dissenting director would mean that an incumbent must resign, which is tantamount to a zero-sum proxy contest: of 16 candidates, only 12 will win. Any dilution of Woods’ influence on the board could derail his long-term plans and force strategic and tactical changes he previously rejected.
While Engine No.1 has not targeted Woods for his elimination, even a partial victory for the activist would be a serious, and possibly fatal, blow to his leadership, according to Ceres, a coalition of environmentally active investors. managing $ 37 trillion.
âI don’t see how Darren Woods remains CEO if one of the dissidents, let alone the four, is elected,â said Andrew Logan, director of oil and gas at Ceres. âIt would be such a sign of fundamental dissatisfaction with the status quo that something would have to change. And it starts with the CEO.
Exxon’s engagement with environmental activists was once characterized by a sense of bewilderment – under former CEO Lee Raymond, Greenpeace protesters outside of its annual meetings were offered donuts. But as concerns about climate change have become widespread in the investment world, the clash has turned into a boardroom showdown.
In other parts of the commodities sector, shareholders have already this year shown their frustration at the reluctance of executives to adopt tough environmental targets. DuPont de Nemours Inc. suffered an 81% vote against management on plastic pollution disclosures, while ConocoPhillips lost a contest on adopting more stringent emissions targets.
Exxon’s meeting this year threatens to be one of the stormiest on the U.S. corporate calendar, all the more remarkable since it was initiated by a newly formed fund that only has a stake of $ 54 million. dollars, or 0.02%, in the oil giant.
Much of the investor dissatisfaction with the company centers around two increasingly interrelated issues: climate change and profits. The oil giant sees a profitable, long-term future for fossil fuels, but sees no point in investing in traditional renewable energy companies. It also refuses to commit to a net zero emissions target, unlike its European rivals.
Climate concerns resonate more deeply with investors as Exxon’s status as a financial powerhouse collapses after multiple corporate missteps, some of which preceded Woods’ rise to CEO in 2017. Returns on invested capital are only a fraction of what they were in Exxon’s heyday a decade ago and debt soared 40% last year as Covid-19 crippled savings and energy demand in the world.
Under mounting pressure and concerns over Exxon’s ability to pay the third-biggest dividend of the S&P 500, the CEO slashed an ambitious $ 200 billion expansion program by the end of the year by a third last. It was a relief to some investors who had questioned both the cost and the need for such projects at a time when policymakers – and even rivals like BP Plc and Royal Dutch Shell Plc – contemplate the twilight of the oil era.
Still, Engine # 1 says Exxon needs better managers, willing to challenge management. Exxon missed major industry trends such as the shale revolution, âthe shift to focus on project returns rather than continued production growth and the need to prepare gradually rather than ignore energy transition, âaccording to the San Francisco-based activist.
After quickly gaining support from the state’s major pension funds, Engine No. 1’s campaign gained momentum this month as two prominent shareholder advisory firms, Institutional Shareholder Services Inc. and Glass Lewis & Co., gave partial support to the activist’s efforts. ISS wrote a scathing rebuke of Exxon’s climate strategy, saying the company had only taken “incremental steps to prepare for the inevitable.”
The top 20 shareholders of Legal & General Investment Management, a former Exxon critic, also support Engine No. 1 and have pledged to vote against Woods. However, the voting intentions of some other large investors, such as Vanguard Group, BlackRock Inc. and State Street Corp. are unclear – all three declined to comment when contacted by Bloomberg News. The giant Norwegian sovereign wealth fund said late last week that it would support the re-election of most Exxon directors, but not Woods, as part of its long-standing efforts to separate the roles of CEO and president of Exxon.
With such animosity, the usual course of action would be for Exxon’s board of directors to meet with the activists and find a compromise. But that hasn’t happened yet, and both sides seem to be well established.
Exxon said in a May 14 letter to shareholders that its board “listens and responds to shareholder feedback,” but the No.1 engine, founded only a few months ago, was unwilling to engage and “Trying to replace four of our world.” -class administrators with unqualified candidates. The company added that the activist fund’s plans “would derail our progress and jeopardize your dividend.”
In another letter to shareholders on Sunday, Exxon said that over the next 12 months it plans to appoint two new directors, one with the energy industry and the other with climate experience.
For its part, Engine No. 1 said that Exxon had refused to meet its nominees: Gregory Goff, former CEO of refiner Andeavor; environmental scientist Kaisa Hietala; private equity investor Alexander Karsner; and Anders Runevad, former CEO of power producer Vestas Wind Systems A / S.
Exxon spoke to another investor, hedge fund DE Shaw & Co., which has formed a stake in an effort to push for change. These discussions led to the appointment of new directors, including activist investor Jeff Ubben. The oil company also announced new emissions targets, launched a low-carbon company, and supported policies that will help technological innovations such as carbon capture.
In some ways, Exxon is in a better position than it was at the start of 2021. Its stock has rebounded more than 40% as oil prices rebounded and lockdowns are eased. Engine # 1 says its involvement is the turning point, while Exxon says the market rewards the prudent cost reduction and high-return investments made over the past two years. The upcoming vote will help determine which side of the debate other investors are leaning towards.
âThere is a governance challenge at Exxon,â said John Hoeppner, head of US sustainable investments at Legal & General. âTo what extent does the current board challenge the management business model? It is important to add urgency to the debate. “
To contact the author of this story:
Kevin Crowley in Houston at [email protected]
Â© 2021 Bloomberg LP