Exxon Investors Signal Growing Ill Will
Shareholder dissent over “governance failure” expected to intensify, after dip in director support at AGM.
ExxonMobil breathed a sigh of relief on 29 May when its nominated directors were re-elected, but shareholder dissatisfaction will continue to be felt.
The oil and gas major’s annual general meeting (AGM) was widely anticipated, with several shareholders pre-declaring their intention to vote against the appointment of company directors, in protest of Exxon’s ongoing legal challenge against investment manager Arjuna Capital.
Although all nominees were re-elected, the company disclosed an overall drop in support, with directors receiving a range of roughly 87-98% of the vote compared to last year’s 91-99%. Companies listed on the S&P 500 very rarely see director support fall below 90%.
Activist group Follow This estimated that up to 13% of shareholders voted against at least one board member.
“The intention of creating transparency or putting a spotlight on [Exxon’s] litigation action wasn’t really to unseat the board,” said Marcie Frost, CEO of the California Public Employees’ Retirement System (CalPERS). “It was more a very clear communication that we saw this as an absolute failure in governance, and governance is the responsibility of the entire board.”
While investors who voted against the directors saw this lull in support as evidence of effective escalation in action, Exxon CEO Darren Woods also claimed victory. He said in a statement that the outcome of the company’s AGM showed that rules and value creation matter most.
Earlier, Woods called out CalPERS for its opposition, claiming that climate activist shareholders wanted to “financially hurt” the company. Exxon then lashed out at proxy giant Glass Lewis.
The firm also took aim at sustainability-focused shareholders in its 2024 proxy statement, claiming that the shareholder process was being hijacked.
“We would much rather see the time and attention Exxon is devoting to attacking its shareholders being spent actually working through how the company can remain relevant in a decarbonising economy,” Danielle Fugere, President and Chief Counsel at US shareholder advocacy group As You Sow (AYS), told ESG Investor.
Mary Minette, Senior Director of Shareholder Advocacy at Mercy Investment Services, called on Exxon to focus on the long-term risks to value of climate change.
“In response to Woods’ intemperate remarks, I would say that Mercy is a very real investor, one that is looking for returns on our investments to support [our beneficiaries],” Minette noted. “But, as a long-term investor, we also believe that Exxon and the other companies we own must take seriously the risk that climate change poses to business and to the overall health of markets over the long term.”
Exxon is required to disclose the full breakdown of votes at the AGM within four business days.
Reputations at risk
Investor rebellion was sparked when Exxon filed a lawsuit against Arjuna Capital and Follow This earlier this year in response to a shareholder proposal requesting medium-term decarbonisation targets for Scopes 1-3 emissions.
To avoid legal action, Arjuna Capital and Follow This rescinded the proposal, but Exxon chose to pursue the lawsuit. The Texas District Court has since dismissed Follow This from proceedings, citing that a Dutch association was not a proper party to the case due to lack of personal jurisdiction.
The case will now proceed against Arjuna Capital only, even though the firm has since promised to never file such a proposal at the company again.
Following Exxon’s inflammatory 2024 proxy statement, two proxy exempt solicitations were filed by investors – one highlighted that climate change is a systemic risk that investors must pay attention to and the other called for shareholders to vote against the election of Woods and Joseph Hooley, the company’s Governance Chair.
In response to Exxon’s pursuit of legal action, more investors chose to voice their concern in the lead up to the AGM.
A selection of the world’s biggest global investors, such as CalPERS and Norges Bank Investment Management, publicly announced their intention to vote against director appointments.
Some of Exxon’s biggest shareholders – State Street, Vanguard and BlackRock – have not disclosed their votes at the oil and gas major.
“Winning the vote isn’t going to deal with the fundamental problem that Exxon’s board faces – their failure to address emissions,” said Catherine Howarth, CEO of UK NGO ShareAction. “Dissent will only intensify from unsatisfied investors and other stakeholders, and the company’s reputation will not recover until its leadership puts forward a business plan that aligns with the public interest.”
Disrupting the order of things
Some investors and other observers have argued that Exxon’s decision to pursue legal action undermines the authority of the US Securities and Exchange Commission (SEC).
Typically, when a US-based company wants to challenge a shareholder proposal, it can choose to file a no-action request with the agency within 14 days of a resolution being filed, if a case can be made as to false or misleading statements, relevance, ordinary business, duplication, and substantial implementation.
Even in instances where a challenged proposal still makes it to the ballot, these are generally non-binding, meaning companies are under no legal obligation to implement them – regardless of shareholder support.
A group of asset owners representing more than US$5 trillion in assets recently called on the SEC to continue acting as the primary arbiter in shareholder disputes, rather than allowing companies like Exxon to go to the courts.
“We believe that it will be to the detriment of long-term investors if the current system of shareholder advocacy in the US is undermined, and an increasing number of companies defer to the court system to settle disagreements on shareholders proposals,” the group said. “It is our view that the SEC is best placed to lead discussions between companies and investors, including on how to improve the proposal process.”
Signatories of the letter include Railpen, AP7 and Nordea Asset Management.
As You Sow’s Fugere said other US companies are unlikely to choose to follow Exxon’s example of seeking to settle disagreements with shareholders via the courts.
“There are very few companies who want to take on their shareholders in that way,” she said, pointing to the negative press surrounding Exxon in the lead-up to the AGM. “I don’t think this is benefitting the company – perhaps Exxon feels it’s big enough to withstand reputational damage, but I don’t see the upside that would convince other companies to follow suit.”
End of the road?
A stronger possibility is that more investors choose to divest from Exxon, following continued examples of climate denial and obfuscating.
A study published last year found that 63-83% of Exxon scientists’ climate models and peer-reviewed studies published between 1977 and 2014 accurately projected global warming. The company subsequently underwent a lengthy campaign to downplay and discredit the climate crisis.
“This is going to be a decision that every investor will have to make on their own,” said Fugere.
A spokesperson from BNP Paribas Asset Management – one of the co-leads of engagements with Exxon via the Climate Action 100+ initiative – told ESG Investor that Exxon remains a systemically important company to engage with to address climate change and the energy transition.
The asset manager voted against Exxon’s board and supported other shareholder proposals calling for reports on median gender and racial pay gaps, how reduced plastics demand may impact the company’s financial assumptions, and the social impact of plant closures due to the energy transition, the spokesperson confirmed.
Minette said investor engagement remains a powerful tool, noting that many of the actions Exxon is currently taking to reduce its emissions and manage the effects of climate change had been requested by shareholders over the years. “I doubt that the company would have moved even as far as it has without that pressure from shareholders, both large and small,” she said.
According to a recent report from think tank Carbon Tracker, Exxon’s exploration plans – which include a recently commenced drilling operation in the North Atlantic – are strongly misaligned with the goals of the Paris Agreement. It awarded Exxon a ‘G’ grade based on a scorecard assessing firms’ Paris alignment through their investment options, project sanctions, production plans, emission targets, and executive remuneration.
“In the end, the lawsuit will likely be rejected by the court, and Exxon will have gained nothing from it except ill will from its shareholders,” said Fugere.
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