I see the bad moon a-rising
I see trouble on the way
I see earthquakes and lightnin’
I see bad times today
Don’t go around tonight
Well it’s bound to take your life
There’s a bad moon on the rise
Creedence Clearwater Revival, 1969
Last month I wrote about how ExxonMobil had kindly invited its investors on a Magical Mystery Tour! Since I don’t own any shares in the company there was no room on the bus for me. Turns out that could be just as well. Events since then have raised some questions about where this tour is going to end up. Writing today I see a Bad Moon Rising for ExxonMobil’s management and board.
Just to quickly refresh. The activist hedge fund Engine No. 1 has proposed an alternative slate of directors that includes four new, highly experienced people to join the ExxonMobil board. The fund sees this as necessary in order to correct years of financial underperformance by the company as it has obstinately resisted the necessary changes in its business model given the energy transition necessary to achieve the Paris Agreement of keeping global warming below 2.0°C (ideally 1.5°C). On May 6 The Coalition United for a Responsible Exxon (CURE), a group of institutional and private investors with a collective $2.5 trillion in assets under management, published a report analyzing the company’s poor performance which supports Engine No. 1’s analysis.
In the language of the proxy voting world, Engine No. 1 has proposed a White Proxy Card of eight existing directors and four new directors nominated by Engine No. 1. ExxonMobil is offering up its Blue Proxy Card consisting, not surprisingly, of its existing 12 director board.
The Exxon Magical Mystery Tour was in for nasty weather from the start as four pension funds—CalSTRS, CalPERS, the Church of England, and New York State Common Retirement Fund—had already indicated their support for the White Card before the Tour began. Furthermore, on May 10 CALPERS, the largest U.S. pension fund with $450 billion in assets under management and owner of 9.6 million shares in ExxonMobil filed a “Notice of Exempt Solicitation” with the SEC. This means it can now engage with all 575 investors in Climate Action 100+ who collectively hold $54 trillion in AUM. As the Climate Action 100+ co-lead on ExxonMobil (which scores miserably in the “Net-Zero Company Benchmark”), CalPERS knows this company well and has been urging it get its things together. In its notice, CalPERS announces its support of all four candidates on the White Card. It also expresses its support for a proposal by BNP Paribas Asset Management, the co-lead with CalPERS on the Climate Action 100+ engagement with ExxonMobil, requesting improved transparency of climate lobbying objectives. Anne Simpson, Managing Investment Director, Board Governance & Sustainability, noted that “It’s carpe diem for investors. As fiduciaries we need not only to request but require that companies in the cohort of systemically important carbon emitters drive emissions to net zero in order to manage risk and create value. Where boards are unwilling or unable to make this happen, it’s time for change. That is how capitalism is intended to work.”
More evidence of capitalism at work was the earthquakes and lightnin’ that appeared the next day on May 11 when Legal & General Investment Management (LGIM), one of the largest asset managers in the world with around $1.6 trillion in assets under management pre-declared its vote in the ExxonMobil proxy contest. It is supporting all four of Engine No. 1’s new nominees (Gregory Goff, Kaisa Hietala, Alexander Karsner, and Anders Runevad). It will be voting against Lead Director Kenneth Frazier (Chairman and CEO of Merck) and CEO Darren Woods. It will also be voting for the shareholder proposal to require a separation of the Chairman and CEO role (one of CURE’s recommendations). LGIM’s vote rationale represents “Escalation of our engagement due to persistent climate and governance concerns with the company.” This escalation builds on removing the company from selected investment strategies in 2019 and opposing the re-election of CEO Woods. While “LGIM acknowledges steps taken by the company around carbon disclosure and targets” it remains “concerned with the strength of the Exxon’s sustainability and capital-allocation strategy, as the risk of the energy transition become increasingly apparent.” Providing further insights into LGIM’s decision, John Hoeppner, Head of U.S. Stewardship and Sustainable Investments commented that, “We don’t believe there has been a change in the board’s longer-term thinking – fresh and independent board views are essential.” It is understandable if ExxonMobil is beginning to fear rivers overflowing.
On May 14 the proxy advisor Institutional Shareholder Services (ISS) issued their much-anticipated recommendation to their 3,100 clients, which include some of the largest investors in the world. ISS kindly made their report available to me for research purposes. In a well-researched report, after careful analysis of the views of both Engine No. 1 and ExxonMobil, ISS expresses its support for Goff (“has decades of energy industry experience in a variety of positions at public oil and gas companies in the United States and abroad”)and Hietala (“also has extensive industry experience, and played a leading role in developing and executing a major public oil and gas company’s energy transition strategy”). The report states that “it is also unclear how committed XOM” is to the energy transition and notes that “XOM’s energy transition strategy appears to rely heavily on carbon capture, the feasibility of which appears to be based in significant part on future government support.” For this reason is also supports Karsner (“For shareholders who think that the energy transition is a critical consideration for the board, the addition of dissident nominee Karsner is prudent”). ISS concludes that for both reasons of operational performance and the ability of the board to assess the energy transition, “support for Goff, Hietala, and Karsner is warranted on the dissident (WHITE) card.” There is no discussion of candidate Anders Runevad in the report, the former CEO of Vesta Wind Systems, who was named by Harvard Business Review as one of the “Best-Performing CEOs in the World” in 2016, 2017, and 2019. On the day that ISS issued its voting recommendations, the company may have heard hurricanes a-blowing.
Glass Lewis, the other major proxy advisor with some 1,200 clients, followed with its own recommendations on May 17. Reuters journalist Jessica Rinaldi summarized the key points of their report. She noted that Glass Lewis has recommended two of Engine No. 1’s candidates (Greg Goff and Alexander Karsner). Rinaldi also notes that in choosing the White Proxy card Glass Lewis leaves out four current ExxonMobil directors: Kandarian, former Caterpillar CEO Douglas Oberhelman, former IBM CEO Samuel Palmisano, and former Petronas CEO Wan Zulkiflee. Quoting from the report: “Electing even a portion of Engine 1’s slate would send a clear message of shareholder dissatisfaction with Exxon’s recent direction and strategy.” More locally, the Houston Chronicle published an article by Scott Deveau of Bloomberg which provides more insight into the Glass Lewis report. Quoting from the report, Deveau notes that ExxonMobil’s leadership position in the industry is “slipping” and “we believe the board remains lacking in critical areas, such as energy and cyclical business experience, scientific and technological research expertise and regulatory experience.” At this point it would be understandable if ExxonMobil’s board and management is hearing the voice of rage and ruin.
Aeisha Mastagni, Portfolio Manager at CalSTRS, the first investor to endorse Engine No. 1’s four board candidates, welcomed the recommendations by ISS and Glass Lewis. “CalSTRS is pleased that both ISS and Glass Lewis agree that the ExxonMobil board needs to be strengthened, and we continue to believe all four candidates bring the valuable expertise ExxonMobil needs to promote investor confidence in the board and its ability to provide effective oversight and drive long-term shareholder value.”
Investors vary in the extent to which they completely follow their proxy advisory firm’s recommendations or use them as input and perhaps vote differently. To date, LGIM is the only large asset manager to pre-declare prior to the company’s annual shareholder meeting on May 26. While the support of these asset owners, LGIM, and the proxy advisory firms are certainly a big boost to Engine No. 1, the ultimate outcome will depend on total shareholder vote. Activist campaigns are very difficult, with about one-third leading to success or settlement with management. Proxy voting contests for board directors are difficult, contentious, and expensive. In the proxy battle with P&G, under CEO Nelson Peltz Trian Partners spent around $25 million, while deep-pocketed P&G spent $100 million. Engine No. 1 certainly knew it was in for an expensive fight when it launched its campaign.
It now comes down to the company’s largest institutional investors and its substantial retail investor base. The top 10 shareholders own around 25.8 percent of the shares with the top three Vanguard (8.25), State Street Global Advisors (5.85), and BlackRock Institutional Trust (4.81) owning a total of 18.9 percent. How they vote will make a huge difference in the outcome and I’m certainly not making any predictions about this.
However, I can note some of the public commitments these three have made about climate change and the need for companies to adapt their climate strategies if they are going to be sustainable long-term investments for their shareholders.
· In January of this year, BlackRock issued its new proxy voting guidelines in which it states “ BlackRock believes that climate change has become a defining factor in companies’ long-term prospects. We expect every company to help their investors understand how the company may be impacted by climate-related risks and opportunities, and how they are considered within the company’s strategy.”
· The equivalent document for SSGA does not explicitly address climate change, but in November 2020 it became the most recent signatory to Climate Action 100+ and the third of the top 20 asset managers to sign on recently (after BlackRock and Invesco).
· In its 2020 stewardship report, Vanguard states that “Vanguard views climate change as a material risk to long-term investors. We advocate for climate-related disclosures that help investors assess whether boards have in place sound practices for risk oversight and mitigation.”
I also don’t know if any of these three will pre-declare their voting decisions before the annual meeting, although Norges Bank Investment Management has stated its intention to pre-declare five days before the shareholder meeting, along with an explanation if it decides to vote against management.
I am certainly no soothsayer, but I see trouble on the way for ExxonMobil’s board and management. Ladies and gentlemen, I hope you got your things together since there’s a bad moon on the rise, all right. But as day follows night, if Engine No. 1 is successful, as I certainly hope it will be, the bad moon will set, and the good sun will rise to the benefit of the company’s shareholders—and all of the rest of us.