For the first time in modern history, America's largest oil company is facing a credible challenge from an activist investor. Upset with Exxon's financial performance and its foot-dragging on the climate, hedge fund Engine No. 1 is seeking to oust four directors at the company's annual shareholder meeting.
The stakes couldn't be higher.
If successful, the campaign could force Exxon (XOM) to shift its strategy by diversifying into renewable energy and pulling back on oil production. And it would send a loud message to other fossil fuel companies at a time when the International Energy Agency has warned the world needs to immediately stop drilling for oil and gas to prevent a climate catastrophe.
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.
The world's most valuable company as recently as 2013, Exxon has lost nearly $200 billion in market capitalization since its peak. It had enjoyed an unbroken run as a member of the Dow Jones Industrial Average from 1928 until it was kicked out of the exclusive index last summer.
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.
'Questionable strategy'
Engine No. 1 argues the climate crisis poses an existential threat to Exxon — one the company hasn't taken seriously enough. Unlike BP, Royal Dutch Shell and other European oil majors, Exxon has doubled down on oil and gas despite growing concern about the climate crisis.
"A refusal to accept that fossil fuel demand may decline in decades to come has led to a failure to take even initial steps towards evolution, and to obfuscating rather than addressing long-term business risk," Engine No. 1 wrote in its investor presentation.
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).
But like most proxy fights, the war will likely be won by which side gets the support of the Big Three asset managers. BlackRock, State Street (STT) and Vanguard collectively owned nearly 19% of Exxon's shares as of the end of March, according to Refinitiv.
That's why it's a very big deal that Reuters reported BlackRock has voted for three of Engine No. 1's four candidates to join the Exxon board. A BlackRock spokesperson declined to comment on the report.
BlackRock, the world's largest asset manager, is under fire itself from activists demanding it live up to its own climate promises. The campaign is being led by BlackRock's Big Problem, a coalition that includes the Sierra Club, Rainforest Action network and Friends of the Earth.
"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.
"We believe success in developing these technologies will be critical to both advancing society's ambitions for a lower-carbon future and in delivering long-term shareholder value," Exxon CEO Darren Woods and lead director Ken Frazier wrote in a letter to shareholders on Monday.
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.
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