Here comes the sun do, do, do
Here comes the sun
And I say it’s all right
The Beatles, 1969
The months before ExxonMobil’s May 26, 2021 Annual Shareholder Meeting were very exciting. There was the Magical Mystery Tour the company kindly put on for its investors. Not long after, we saw a Bad Moon Rising for the company. This was quickly followed by an adroit publication of the company inspired by Aesop’s Fables just before the meeting when the board and executive management began to wonder who’ll stop the rain.
Yet the company and its Chairman and CEO bravely rose to the occasion by putting on a brilliant and inspiring three-act play, “The Vote,” which was met with great critical acclaim by Shareholder Meeting Broadway Reviews. Director and lead actor Mr. Woods slyly ended the play on an inconclusive note, much to the consternation of its shareholders who were saying to themselves throughout the play:
Little darling, it’s been a long cold lonely winter (for shareholder returns)
Little darling, it seems like years since it’s (good governance) been here
But now we know the results of the rather extended voting for board directors and seven shareholder proposals, thanks to ExxonMobil’s June 2, 2021 filing of Form 8-K, and investors are saying: “Here comes the sun!” Although dawn is barely breaking, there are reasons to be hopeful that a 10-year long and cold lonely winter of deteriorating financial performance and dwindling industry significance is coming to an end.
Central to this optimism is that Engine No. 1 had three of the four proposed director nominees on its white card slate elected to the board: Kaisa Hietala, Gregory Goff, and Alexander Karsner. An excellent 75 percent success rate. In contrast, on the company’s blue card slate only nine of the 12 incumbents were elected, or two-thirds. Gone for sure are Samuel Palmisano, former Chairman and CEO of IBM, and the recently appointed (four months ago) Wan Zulkiflee, former President and Group CEO of the Malaysian national oil company Petronas. As I write, Douglas Oberhelman (former Chairman and CEO of Caterpillar) and Steven Kandarian (former Chairman and CEO of MetLife) are going nose-to-nose down to the wire at the finishing line.
The other two of the company’s new board members from this year, Michael Angelakis (Chairman and CEO of Atairos Group) and Jeffrey Ubben (Founder, Portfolio Manager and Managing Partner of Inclusive Capital Partners) were elected. They received the largest number of votes, 2,795,977,247 and 2,788,399,718, respectively, with a relatively small number of votes withheld. Following them in the vote tally, in order, were Ursula Burns (Former Chairman and CEO of VEON), Joseph Hooley (Former Chairman and CEO of State Street), Susan Avery (President Emerita, Woods Hole Oceanographic Institution), Angela Braly (former Chairman and CEO of Anthem), Kenneth Frazier (Chairman and CEO of Merck), and Mr. Woods.
In other words, Lead Independent Director Mr. Frazier and Mr. Woods got fewer votes than all of the other existing directors except for those fighting for the final slot. The silver lining for Messrs. Frazier and Woods is that only 22.1 percent voted for an independent Chairman so both will keep their jobs.
I note the somewhat curious vote of the gigantic Norwegian oil-based sovereign wealth fund, Norges Bank Investment Management (NBIM), the largest Sovereign Wealth Fund in the world with around $1.3 trillion in assets under management. It is the company’s seventh largest shareholder. The bad news for Mr. Woods is that it voted in favor of separating the roles of Chairman and CEO. The good news for him is that NBIM supported every director on the company’s blue proxy card.
There were two other heartening votes at the shareholder meeting with. A majority (55.6 percent) supported Proposal 9 for a “Report on Lobbying” and there was even stronger support (63.8 percent) for Proposal 10 for a “Report on Climate Lobbying.” The former asks for a report on the company’s policies and procedures; payments for direct, indirect, and grassroots lobbying; and the oversight and decision-making process by management and the board. The latter asks for a report “describing if, and how, ExxonMobil’s lobbying activities (direct and through trade associations) align with the goal of limiting average global warming to well below 2 degrees Celsius (the Paris Climate Agreement’s goal).” Proposal 6 for a “Report on Scenario Analysis” narrowly lost a close vote by about one percent. This proposal requested “an audited report on how a significant reduction in fossil fuel demand, envisioned in the IEA Net Zero scenario, would affects its financial position and underlying assumptions.”
The IEA report, “Net Zero by 2050: A Roadmap for the Global Energy Sector,” was issued on May 17, 2021. It notes that, “Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required” to meet global energy demands consistent with the Paris Agreement. The pre-Exxon annual meeting timing of this report bolstered Engine No. 1’s case for board and strategy change. ExxonMobil currently plans oil and gas fields development related capital investments of $20-25 billion per year through 2025. Little darling, it seems like years it’s been clear that this level of spending is unwarranted.
Chevron held their annual shareholder meeting the same day as ExxonMobil’s. It was not facing a proxy contest and all of its directors were re-elected, although it’s worth noting that Chairman and CEO Michael Wirth got the least number of votes (admittedly above 90 percent). It is also worth noting more support from its shareholders to separate the Chairman and CEO roles, with 30 percent in favor of this. A proposal for a report on the impact of Net Zero by 2020 received 47.8 percent support. The most dramatic result of the meeting was that 60.7 percent of shareholders supported a proposal regarding the reduction of Scope 3 emissions.
That same and fateful day for the industry, The District Court in The Hague ruled that Royal Dutch Shell, Europe’s largest oil company, must reduce the carbon emissions of its activities by 45 percent by 2030. The lawsuit was brought by Milieudefensie, the Dutch wing of the Friends of the Earth who was joined by other activists.
Much has been written about how that day was a pivotal one for making clear that shareholders, and even the courts, are taking climate change very seriously. This momentous day built on other pivotal annual shareholder meeting votes that supported climate change mitigation action in the US energy sector. Eighty percent of shareholders supported a Phillips 66 shareholder proposal that it “set and publish emissions reduction targets covering the greenhouse gas (GHG) emissions of the Company’s operations and energy products.” Sixty percent of shareholders supported a similar GHG reduction targets shareholder proposal at ConocoPhillips. And there was the apparent 60 percent of non-insider shareholders that supported an annual climate-related reporting shareholder proposal at Berkshire Hathaway. Notably, General Electric’s board supported a shareholder proposal for the company to report on its progress towards achieving a target of net zero greenhouse gas emissions by 2050, and this received 98% shareholder support. (In a future article, I will report on the rising sun of boards starting to support, rather than automatically oppose, shareholder proposals.)
Combined, all of these actions send a resounding message to energy companies from the broad majority of mainstream shareholders. They should be working much harder than they are today to both mitigate climate change and position themselves for the low-carbon energy transition. The ice is (not so) slowly melting and these companies not taking climate change seriously has to stop.
The path to achieve both is clear. It seems like years since it’s been here. Climate Action 100+, an investor coalition of 575 members representing $54 trillion in assets under management, has developed a “Net Zero Company Benchmark” which “assesses the world’s largest corporate greenhouse gas emitters on their progress in the transition to the net zero future.” Each company is evaluated according to 10 criteria using a score of ❌ (NO, DOES NOT MEET ANY CRITERIA), 🟨 (PARTIAL, MEETS SOME CRITERIA), ✅ (YES, MEETS ALL CRITERIA) or 🔘 (indicator still in development). Here are ExxonMobil’s ratings:
· ❌ (1) Net-zero GHG emissions by 2050 (or sooner) ambition
· ❌ (2) Long-term (2036-2050) GHG reduction targets
· ❌ (3) Medium-term (2026-2035) GHG reduction targets
· 🟨 (4) Short-term (up to 2025) GHG reduction targets
· ❌ (5) Decarbonisation strategy
· ❌ (6) Capital allocation alignment
· 🟨 (7) Climate policy engagement
· 🟨 (8) Climate governance
· 🔘 (9) Just Transition
· 🟨 (10) TCFD Disclosure
The company clearly has the most work to do in establishing a net-zero by 2050 commitment, medium- and long-term GHG reduction targets, a decarbonization strategy, and capital allocation alignment. The new board needs to make sure the sun keeps rising higher by addressing all of these issues in a new strategic plan to be prepared by Mr. Woods and his executive team. It should be discussed with the board, revised as necessary, and then approved by the board. The board should ensure that this plan is in line with the Paris Agreement and the recommendations of the IEA report cited above. This approach closely matches Engine No. 1’s recommendations in its campaign to “Reenergize Exxon.”
Executive compensation should be tied to these elements of the strategy and not just on some simple measures of short-term financial results. The company should then proactively put its targets up for a shareholder vote at its 2022 annual shareholder meeting. The ExxonMobil board should follow GE’s lead and support reasonable shareholder proposals regarding climate change and recommend that investors vote for them – instead of opposing these precatory shareholder proposals.
ExxonMobil could also work with its customers in high emitting industries like cement, manufacturing, steel, transport, and utilities to help them with their needed business transformation away from oil. These industries are the source of most of the company’s Scope 3 emissions for which the company must take responsibility. Shell, for example, is making customers a big focus of its Powering Progress program to achieve a net-zero emissions business. ExxonMobil could partner with the Climate Action 100+ investor coalition in the engagement this investor group is having with the company’s high GHG emitter customers.
Taking these bold but necessary actions will help Mr. Woods reestablish the company’s leadership position in both climate public policy engagement and climate-related corporate governance. He could follow these efforts up with far better company Task Force on Climate-related Financial Disclosures reporting. If Mr. Woods and the ExxonMobil board take these steps, they can show leadership for the energy transition to a low carbon economy, not just for the U.S. but for the whole energy sector globally.
This would bring smiles returning to the faces of ExxonMobil’s shareholders. And I say it’s all right.
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