Tiny activist investor forces Exxon CEO to chart a greener, more diversified course
HOUSTON (Bloomberg) - Exxon Mobil's CEO Darren Woods was dealt a stunning defeat by shareholders when a tiny activist investment firm snagged at least two board seats and promised to push the energy giant to diversify beyond oil and fight climate change.
For Woods, who had aggressively opposed the insurgents, it was just the latest setback in a rocky 4 1/2-year tenure that has seen what was once the world’s most-valuable company shed more than $125 billion in market value.
The vote was unprecedented in the rarefied world of Big Oil and underscores how vulnerable the industry has suddenly become as governments around the globe demand an acceleration of the shift away from fossil fuels. It’s also a sign that institutional investors are increasingly willing to force corporations to actively participate in that transition.
Tiny activist investor Engine No. 1, with just a 0.02% stake and no history of activism in oil and natural gas, secured two seats on Exxon’s board in Wednesday’s vote. A third seat may yet fall into the firm’s hands when the final results are tallied. That would put Woods in the tricky position of leading a board that’s 25% under the control of outsiders. Last-minute efforts by Woods and his team to appease climate-conscious investors and rebuff Engine No. 1’s assault were to no avail.
“Darren Woods has come from a long line of CEOs that have been very straightforward: it’s our ball, it’s our bat and we’re going to do what we want,” said Mark Stoeckle, chief executive of Adams Express Co., which oversees $2.8 billion in assets. “When you’re the biggest and the baddest you can get away with that. But you have to change with the times. The messaging has been terrible.”
BlackRock Inc., the second largest holder of Exxon with a 6.6% stake, voted for three of the new directors nominated by Engine No. 1, according to a vote bulletin published Wednesday. The firm said it was “concerned about Exxon’s strategic direction” and that the oil giant could benefit from the addition of the new directors who would “bring the fresh perspectives” to the board.
But the investment giant also voted in favor of Frazier and Woods, according to the bulletin -- a move that rankled environmental groups who called for the firm to vote against them.
The result is one the biggest activist upsets in recent years and an embarrassment for Exxon. For Woods, who was listed as 56 years old in the company’s March proxy filing, the defeat is just the latest black mark since his elevation to CEO in 2017. Exxon has underperformed peers for years and in 2020 its shares cratered by 41% for the worst performance in 40 years. Under his leadership, the company also posted its first annual loss in decades and saw oil production slump to the lowest since the Mobil Corp. merger in 1999. Meanwhile, Exxon’s debt load ballooned as it borrowed to pay for dividends and drilling amid shrinking cash flow.
Wednesday’s vote was also striking because of the force with which Exxon battled the activist, which also criticized the company’s financial performance. Exxon refused to meet with the nominees and Woods told shareholders earlier this month that voting for them would “derail our progress and jeopardize your dividend.” The company even went as far as to pledge, just 48 hours before the meeting, that it will add two new directors, including one with “climate experience.”
“This historic vote represents a tipping point for companies unprepared for the global energy transition,” California State Teachers’ Retirement System, also known CalSTRS, which had supported Engine No. 1, said in a statement after the meeting. “While the ExxonMobil board election is the first of a large U.S. company to focus on the global energy transition, it will not be the last.”
In other corners of the commodities sector, shareholders this year have already shown frustration with executives’ reluctance to embrace tough environmental goals. On the same day that Exxon investors met, management at Chevron Corp. were rebuked by their shareholders who voted for a proposal to reduce emissions from the company’s customers. DuPont de Nemours Inc. recently suffered an 81% vote against management on plastic-pollution disclosures, while ConocoPhillips lost a contest on adopting more stringent emission targets.
The Exxon meeting proved to be a nail-biting conclusion to a months-long proxy fight. Exxon halted proceedings at one point to allow more time for vote counting. San Francisco-based Engine No. 1 accused the company of making a “last-ditch attempt to stave off much-needed board change.”
The successful Engine No. 1 nominees were Gregory Goff, former CEO of refiner Andeavor, and environmental scientist Kaisa Hietala. Earlier this month, Exxon described all four dissident nominees as “unqualified.” Eight Exxon nominees were elected and two board seats remain undecided; one or both of them could potentially go to the activist.
Sacrosanct Dividend
The result shows a clear dissatisfaction with Woods’ strategy, despite the stock’s rally this year, up by 43% due to surging oil prices.
Exxon gained 1% after Wednesday’s vote. With most of the shareholder demands focused on long-term strategy and none calling for an immediate breakup of the company, short-term gains are likely to be muted. It will take a decade or more for the oil giant to transition its sprawling global business, Stoeckle said.
Woods, who retained his board seat, should be able to continue improving Exxon’s financial performance as cash flows recover, securing the S&P 500’s third-largest dividend and leaving behind 2020’s record loss. But the bigger question concerns Exxon’s energy-transition strategy, considered by many shareholders to be well behind those of its European peers.
It remains to be seen how Exxon pivots, if at all, but the message from shareholders is clear: The status quo cannot continue.
Exxon’s environmental record and unwillingness to embrace the pivot away from fossil fuels quickly enough was a key criticism in the proxy campaign. Engine No. 1 was scathing in its assessment of Exxon’s long-term financial performance, calling it “a decade of value destruction.”
