Swords were drawn, shield collapsed: a dramatic boardroom battle happened on Wednesday at ExxonMobil. And the oil giant lost to a tiny hedge fund, which successfully placed two new ESG candidates on Exxon’s board.
Key takeaways on the new election for ExxonMobil’s board of directors
- Activist shareholders have spent decades trying to convince ExxonMobil to cut their carbon emissions.
- Engine No. 1, a proxy company mandated to vote for shareholders, won an unprecedented victory by placing two sustainability-focused individuals on the board.
- The fact that this happened with Exxon, once the world’s most influential company, makes the victory even more satisfying.
- Exxon CEO Darren Woods, who also sit at his own board, said: "we look forward to working with them constructively and collectively on behalf of all shareholders."
- This event could reverberate and send a clear message in the name of sustainability throughout the oil industry.
How does the board of a public company usually work?
As you can imagine, the CEO of a company is no dictator. Public companies have a board of directors which is responsible both for supervising the CEO and establish the company’s corporate strategy. On a legal basis, the members of this board are elected by shareholders. However, it is often taken as given that voting is nothing but a formality, as the company usually knows who will be the best fitted for the position.
What happened differently with the last ExxonMobil elections?
However, there are also times where shareholders are not happy with the board’s composition. They will then take the initiative to oppose new rivals, and this is precisely what happened with Exxon.
Another specificity with this story is that the four candidates were presented by the proxy firm Engine No. 1. A proxy firm provides services to shareholders to vote their shares at shareholders meetings for quoted companies, usually also offering an agenda translation, company research, and of course different services regarding voting itself, including execution.
Formed just last year for the sole purpose of challenging Exxon’s not-green-enough corporate strategy, they nominated 4 candidates with a decent expertise in renewable energy production, 2 of which were elected on the board of directors.
Engine No. 1 kept pointing to Exxon’s relatively poor performance relative to its peers, as well as heavily criticizing them for not laying out a viable plan to be profitable in a world switching rapidly away from oil and gas consumption.
The matter becomes even worse as large European oil and gas companies pledged to cut their emissions, while Exxon simply rejected this strategy, betting everything on carbon capture technology. According to BlackRock, which voted in favour of three out of the 4 candidates, "Exxon's energy transition strategy falls short of what is necessary."
What are the potential impacts on the stock and oil prices?
What investors may now wonder about is the impact of this decisions on different asset classes, such as the oil commodity or the company stock price. Here is what might happen:
Effect of oil
In the short term, it is likely that the price of the barrel will increase: after all, mining restrictions will make the black gold more expensive. However, in the longer term, we could expect a decline, as companies will increasingly be forced to turn towards more sustainable energy sources.
Effect on the stock
Exxon shares rose by 1% to $58.94 following the votes results on Wednesday.
Engine No. 1’s goal is to maximize the dividend, which would be diminished if Exxon decided to focus on developing activities where it has no major expertise. Exxon is an oil company; this is what they do best. On a short-term financial basis, they have no interest in pursuing activities in which they have no expertise or infrastructure. Therefore, BoA believes that this change in management should not impact their price target of $90 a share.
The stock price grew 40% this year, outperforming rivals, though some analyst attribute this to activist’s engagement.
BlackRock’s CEO Larry Fink has warned CEOs of these companies that those who refuse to make the switch to cleaner fuels “will see their businesses and valuations suffer”. If Exxon does not successfully adapt to new environmental expectations, the stock price may suffer in the medium to long term.
Could this event have a major impact on the oil industry?
No major oil company is left aside: they are all challenged to come up with solutions to cut their carbon emissions. Companies like Shell, Conoco, BP and Chevron are all facing criticism in the way they handle their carbon footprint. The result of the vote incidentally came out right after a Dutch court urge Royal Dutch Shell to double their emission cut efforts and while investors of Chevron defied management on a major climate vote imposing additional emission cuts objectives.
Bear in mind that disinvesting in those companies is not the solution either: they will need money to invest in alternative energy production. However, it is a corporate strategy fix that will be needed. Those who fail to make such as switch will do it at their own risks.
Anne Simpson, head of board governance and sustainability at Caspers, a US pension fund backing the activists, believes that this event “will reverberate” and that “Winds of change are blowing through companies that are reluctant, fearful or unsure about how to take action [on climate].”
“It’s a historic vote that represents a tipping point for companies that are unprepared for the global energy transition,” said Aeisha Mastagni, a portfolio manager at the California State Teachers’ Retirement System, one of the country’s largest pension funds. “The ExxonMobil board election is the first for large US companies focusing on the global energy transition, it certainly will not be the last.”
A major step for the environment? Hard to tell, but in any case, it is an additional step bringing us closer to a more responsible energy production.