How Activist Investors Won Climate Reform From Within: Exxon

Exxon Oil Drilling Plant
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For years, climate talks at the oil majors were “greenwashing.” The reason was as ideological as economic. Exxon Mobil and Chevron don’t operate in a vacuum. They’re situated in a tight network of shipping companies, miners, chemical manufacturers, and airlines. Their close ties are not merely economical—they do more than just business with one another. They meet regularly at industry conferences. They are friends who stick together. They share the same view about the world. They find solace in one another, especially when Greta Thunberg is scolding them.

Calling for change has been hard. It’s not just corporate profits or executive bonuses that are being considered. It’s also personal pride and ego that’s at stake. The mere mention of sustainable shipping can incite deep angst. “Such statements show a lack of respect for the industry,” said Intercargo director Kostas Gkonis during a climate meeting last year. The Earth may be on fire, what Gkonis thought he deserved was respect.

That’s why the forced change of board members at Exxon was exciting. It forces an outsider view into the very heart of an oil major. And it’s a boardroom tactic that that spares no CEOs.

ExxonMobil CEO Darren Woods
ExxonMobil CEO Darren Woods

How This Time Is Different

Business academics like to avoid conflicts, or else they would have become activists instead. So when starry-eyed researchers propose solutions, they tend to be high in aspiration but vague in substance. They call for mindset shifts and more regulations without going after specific corporations.

Academics would like to reimagine capitalism. They see its faults as short-termism. They urge businesses to care more about our environment, or they get enthralled by the B Corp movement. They see the rise of B Corporations—mission-driven organizations—as vital toward a better, more equitable future.

The result has been no change. In 2020, the total investment in green technologies by the world’s 34 largest oil and gas companies together amounted to $12 billion. This is a joke. Microsoft alone spent $20 billion on research development the same year. Exxon’s 2020 revenue was $178 billion—Microsoft’s was $140 billion. Money talks. Oil and gas companies couldn’t care less about climate change.

How a Tiny Activist Fund Unseated the Oil Giant

The replacing of three directors on Exxon’s board has followed the classic playbook of corporate proxy battles. Except in this case, hedge fund Engine No. 1, which led the campaign, holds only a tiny fraction of Exxon shares. It had only 0.02%. This tiny, five-month-old activist hedge fund understood any proxy fight was a “long shot.” But it received the widespread support of other shareholders. Stunningly, BlackRock, Vanguard and State Street, who had been Exxon’s largest shareholder, sided with Engine No. 1. They voted against Exxon’s leadership.

What shareholders want is to “impose greater long-term capital allocation discipline by applying more stringent approval criteria for new capital expenditures.” In plain English: stop drilling for oil. And shareholders want Exxon to “implement a strategic plan for sustainable value creation by fully exploring growth areas, including more significant investment in clean energy.” In other words, spend more time and money on pivoting to clean energy.

The immediate solution Engine No. 1 proposed, is to appoint four new independent directors with outside energy experience. Kaisa Hietala, one of the three new directors who got the board seats for example, had run the renewable business at a Finland oil refinery and grew it into a billion-dollar business. These new directors will be overseer of Exxon’s management.

Kaisa Hietala, a new Exxon board member
Kaisa Hietala, a new Exxon board member

The revolt hardly surprising. Shareholders and fund managers are human. They have children. They worry about their own children’s future. Who said shareholders can’t be long term–oriented? And if Exxon’s share price is going to languish in the coming decades because it can’t pivot its business model, so what? Pension fund can happily divest from Exxon and invest in greener companies that get it right. That’s what the allocation of capital is about. That’s how the capital market supposed to work. Only doing nothing is unacceptable.

It turns out when CEOs complain that short-term shareholders are preventing companies from transforming, it’s not always true. Oil majors don’t want to transform, or at least don’t know how to do it.

What Will Happen Next

All eyes will be on Exxon’s zero-carbon transformation. It’s a daunting task and yet one imposed by the board and investors. But this is not new. We’ve seen digital transformation forced upon newspapers, book publishers, and the music industry. We’ve seen how electrification has been forced upon General Motors and BMW. Zero carbon is another business transformation that Exxon, Shell, and Chevron must reckon with.

For the first time in history, the oil majors need to tell a growth story, but a different one. How they grew in the past is not acceptable. They need to demonstrate a new playbook backed with real milestones on how their low- and zero-carbon offerings are growing exponentially, or at least steadily.

If not, oil majors can’t justify their market capitalization, much like how the tobacco industry saw its plunge. Wall Street can be brutal.

Historical market capitalization of British American Tobacco
Historical market capitalization of British American Tobacco (BAT)– the largest tobacco company in the world based on net sales. Source: Google Finance

Still, one should be hopeful about their transformation. Their sinful past makes their redemption all the more important. Their scale and scope in the global economy remain huge in the near term. All the plastic appliances that you use are derived from petroleum. All the cement found in the buildings we live and work in required fossil fuels to process. And diesel is what we burn to bring container ships so you can actually order stuff from Amazon and Alibaba.

That’s why if only one of oil majors makes it to the other side, it’ll still serve as a blueprint for a zero-carbon society. That template is something the less imaginative companies can then follow, rapidly. I think most of us would be okay with that.

Thanks for reading—and be well.

How Activist Investors Won Climate Reform From Within: Exxon -

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1 comment

  1. Always fascinated by the wide range of business topics, ideas and insights your articles explore. Thanks for sharing!