A Tiny Fund Has Scored A Historic Win Against ExxonMobil Over The Future Of Oil

May 26, 2021
Originally published on May 28, 2021 5:00 pm

Updated at 7:15 p.m. ET

In a dramatic boardroom battle on Wednesday, a tiny hedge fund fought with the energy giant ExxonMobil over the future of the oil and gas industry — and won.

The brand-new activist hedge fund, Engine No. 1, successfully placed at least two new candidates on the company's board of directors in hopes that they can use that position to push Exxon to take climate change more seriously. For two more seats on the board, the vote was too close to call.

Winning a seat for any directors at all is an unprecedented achievement by activist shareholders, who have spent decades trying to persuade companies to cut their carbon emissions. To do it at ExxonMobil, once the world's most influential oil company, makes the feat all the more astonishing.

During Wednesday's shareholder meeting, Charlie Penner of Engine No. 1 described his fund's campaign as a "long shot." Seemingly braced for defeat, he lambasted the investment community for accepting "the idea that humanity will inevitably drive itself off the cliff" as "hard-headed realism or sound business practice."

But then the votes were tallied. The long shot, it turns out, was a success. And instead of accepting the inevitability of climate change, the mainstream investment community sent a signal that it was embracing the possibility that the world will shift away from using oil and gas.

Exxon CEO Darren Woods, who is also the chair of his own board, welcomed the new board members, saying "we look forward to working with them constructively and collectively on behalf of all shareholders."

Public companies have a board of directors that's responsible for oversight of the CEO and overall corporate strategy. The members of the board are technically elected by shareholders, but normally those elections are uncontested and voting is just a formality.

Sometimes, though, unhappy investors decide to make it a real race by putting forward rival candidates. That's exactly what happened at Exxon.

Engine No. 1 was formed just last year with the express purpose of challenging Exxon's corporate strategy. It nominated four new candidates to the board. The two elected, Kaisa Hietala and Gregory Goff, have backgrounds in oil and gas (Hietala focused on renewable products within a refining company.) Two other candidates had experience in wind energy and new clean technologies.

The company and the upstart fund have been vying for shareholders' votes through slideshows, letters and public statements.

The fund pointed to Exxon's poor performance, relative to its peers, during the years leading up to the pandemic. It also forcefully argued that the company has not laid out a viable plan to be profitable if the world makes a rapid transition away from oil and gas to ward off the worst effects of climate change.

Large European oil and gas companies are investing in renewable energy and pledging to slash their emissions to zero, but Exxon has consistently rejected that strategy. The company says its core strengths are in oil and gas, and it argues that the world simply will not pivot away from those energy sources very quickly.

Instead of branching into new industries where it doesn't have a competitive advantage, it argues that it can invest in carbon capture technology — capturing greenhouse gases in the atmosphere — and continue to make money off oil and gas in a "lower-carbon" future.

This vision of the future is increasingly at odds with the goals espoused by world governments and the pathways laid out by organizations like the International Energy Agency.

Exxon regards those goals and pathways as unrealistic, skeptically noting that some plans for fighting climate change would require people to immediately adjust their home thermostats and take significantly fewer flights. Those are behavioral changes the company does not believe likely enough to factor in to its business planning.

The vote to defy management and add at least two dissident members to the board represents a repudiation of that philosophy.

"Investors are no longer standing on the sidelines," said Anne Simpson, the chair of the steering committee of climate investor group Climate Action 100+. "This is a day of reckoning."

Engine No. 1 holds a tiny fraction of Exxon shares — just 0.02%, according to the proxy advisory firm ISS. By itself, it had no chance to sway the company.

But it spent months building support for its case. CalSTRS, the California teachers pension, was an early backer, citing frustration with Exxon's lack of response to previous shareholder proposals and direct appeals from investors.

"When Engine No. 1 brought this idea to us around replacing some of the incumbent directors, we were very intrigued — because we had tried everything else," says Aeisha Mastagni, a portfolio manager with CalSTRS' sustainable investment and stewardship strategies unit.

The influential proxy advisory firms ISS and Glass Lewis, which issue recommendations on how investors should vote in shareholder meetings, also partially endorsed Engine No. 1's nominations.

Their reports provide a striking glimpse into how arguments that were initially made by climate activists are becoming increasingly mainstream in the investor community.

Both firms used the word "inevitable" to describe the energy transition, or the world's shift away from relying on fossil fuels, and agreed that Exxon has inadequately prepared for this future.

Heading into Wednesday's meeting, all eyes were on the three companies with the biggest sway in this vote: BlackRock, Vanguard and State Street Global Advisors.

Those companies manage huge funds — including many people's retirement accounts — and their votes are weighted accordingly, giving them tremendous power in these kinds of proxy votes.

All three have pledged support for investor initiatives focused on fighting climate change.

BlackRock voted in favor of three of Engine No. 1's candidates, explaining that it believes "Exxon's energy transition strategy falls short of what is necessary."

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ARI SHAPIRO, HOST:

A tiny hedge fund just won a historic battle with the oil and gas giant Exxon. Their dispute was about nothing less than the future of the oil industry. Exxon Mobil's current leadership believes the world will keep burning oil and gas for decades. The hedge fund thinks the world might actually stop using fossil fuels quite quickly. NPR's Camila Domonoske is here to explain.

Hi, Camila.

CAMILA DOMONOSKE, BYLINE: Hi, Ari.

SHAPIRO: So what actually happened today?

DOMONOSKE: Well, shareholders got new blood on Exxon's board, and they did it over the objections - the strong objections - of Exxon's management. Boards of directors at public companies are elected, but those elections are usually pretty boring. The result is predetermined. That wasn't what happened in this case. There was a brand-new investment firm called Engine No. 1 that was founded last year with the sole purpose of trying to get new directors on Exxon's board in order to push the company away from focusing exclusively on oil and gas.

Now, this is a small firm. They controlled a tiny, tiny fraction of Exxon's shares. So to actually make this happen, they had to drum up support from bigger investors - a lot of them. And so they had this whole campaign, and it actually worked. They got at least two candidates on the board, and there are more seats that are too close to call.

SHAPIRO: What was the campaign like? How did they persuade people to vote in favor of this? Was it just, like, it'll be good for the planet?

DOMONOSKE: No. I mean, these are investors talking to other investors. So the case here was about the bottom line. It was about shareholder value. You know, I think it's important context that there are some other big oil and gas companies that are preparing to pivot into solar and wind power, you know? They're accepting that demand for oil and gas will go down eventually, and they want another plan. Exxon has not been doing that. Exxon says, look. Oil and gas is what we're good at. That's what we do. And they fundamentally don't think, as a company, that the world is going to make a switch away from oil and gas quickly in any way.

The fund says first - they told Exxon, you're not that great at oil and gas. They said that returns have been disappointing. But bigger picture here, they said, if the world does make a rapid transition here, if electric vehicles really take off when we build a bunch of renewables, you need to have a backup plan. Right now, you don't. And that could lose shareholders' money.

This is an argument that you might be familiar with from environmental activists. They talk about stranded assets. But what's really remarkable here is that this vote shows it's caught on with the mainstream investor community.

SHAPIRO: So now that they've placed these people on the board, what happens next?

DOMONOSKE: Well, they definitely said - investors who are pushing this - they say this is a first step. There's not going to be an immediate U-turn in terms of what Exxon does. First of all, the people elected to the board are oil and gas executives. They might be more open to change than the current board, but they're not radical activists. And they're also two people out of 12. But the idea here is that with new board members, there might be an opening to actually get Exxon to shift its strategy.

I spoke to Aeisha Mastagni. She's with CalSTRS. That's the California teachers' pension fund. They were a very early supporter of this Engine No. 1 effort. And she said changing the board is really just the start.

AEISHA MASTAGNI: We still have a responsibility as investors to hold them accountable because this isn't something that's going to happen overnight, and it's going to be a cultural shift inside the company.

SHAPIRO: Just briefly, why Exxon Mobil? There are so many oil and gas companies. Why is this one getting this scrutiny?

DOMONOSKE: Yeah, well, it's an iconic company. It's a huge, huge company. It was once the biggest in the world, incredibly powerful back in the day - a little less so now, but it still has that history behind it. It also spent years infamously sowing doubt about climate change. So now when it says it supports the Paris accord, a lot of shareholders just don't believe it. So it does get particular scrutiny, but this broader shift is something that the entire oil and gas industry is feeling.

SHAPIRO: NPR's Camila Domonoske, thank you.

DOMONOSKE: Thanks, Ari. Transcript provided by NPR, Copyright NPR.