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Exxon Will Lose the Board Battle Even If It Wins. Why the World’s Oil Companies Can’t Fight Change.

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An activist investor is pushing to add four new members to Exxon’s board.

Dean Mouhtaropoulos/Getty Images

It would be considered a battle between David and Goliath—if Goliath weren’t over the hill and David didn’t seem to have Goliaths of his own in his corner.

We’re speaking, of course, of the proxy battle between

Exxon

Mobil (ticker: XOM) and activist investor Engine No. 1. Engine No. 1 is pushing to add four new members to Exxon’s board, and the strange part is that it has a decent chance of winning. Once upon a time, that would have been unimaginable. Less than a decade ago, Exxon was on top of the world—literally—notching the top spot as the world’s largest company in 2013. Its size alone made it appear impenetrable, not to mention that its long history of hefty profits and steadily increasing dividends were more than enough to keep climate activists, shareholders, and other critics at bay.

No longer. With a market cap of roughly $250 billion, Exxon is a shadow of its former self. Burdened by a large debt load, a dividend that might be too big for its cash flow, and continued spending on projects, the company has left itself vulnerable to both activists pushing for a “net-zero” future and investors unhappy about how the company is run. No matter how Wednesday’s vote goes, the very fact that it will be close shows Exxon has already lost the war. And if Exxon can be brought low, no oil company will be able to resist the global shift toward a carbon-free future.

Engine No. 1 really is an upstart. Launched with roughly $250 million late last year, it is focused on impact investing and finding the spot where shareholder and stakeholder interests align. In Exxon, Engine No. 1 sees a company in need of independent voices on the board to focus on the problems posed by climate change. It has also called on Exxon to cut capital expenditures on low-yielding projects and re-evaluate management incentives.

Such an ambitious call for action by a small investor normally might not have garnered much attention, but several factors worked in Engine No. 1’s favor. First, it brought along friends, namely the California State Teachers’ Retirement System (Calstrs), one of the largest pensions in the country. Soon thereafter, the Church of England also voiced support for the activists, as did California Public Employees’ Retirement System, and the New York State Common Retirement Fund.

These powerful allies helped, as did an investing community that has been increasingly eager to push companies to transition to a lower-carbon economy. Earlier this year,

BlackRock (BLK),

which owns 6.7% of Exxon shares, reiterated its plans to push companies to move to a net-zero world.

State Street

(STT) and Vanguard—which with BlackRock make up the so-called “Big Three” investors—have also spoken about aligning their investments with a more sustainable world. The three firms hold roughly 20% of Exxon’s shares.

Exxon might have been able to push back, except for the fact that it is in pretty lousy shape. Oil prices have traded below $100 a barrel for the last seven years, but Exxon has acted as if it might get back there any day now. The company accumulated $67.6 billion in total debt at the end of 2020, up from $37.8 billion in 2018, built up to maintain its dividend and fund exploration amid an unprecedented slump in demand due to the pandemic. Its stock has returned just 0.6% including reinvested dividends over the past 10 years, well below the

S&P 500’s

14% return over the same period. As a further sign of its diminishing importance, Exxon was removed from the

Dow Jones Industrial Average

in August.

Exxon also did its best to ignore the changing demands from investors that energy companies start to look to a future without oil. Europe’s oil giants have already started to do just that, and even those efforts haven’t been enough for some investors. As U.S. investors vote on Exxon’s board, a Dutch court is set to rule on a lawsuit that would force

Shell

to cut spending on oil production.

Exxon seems to have realized the seriousness of the situation, but only belatedly. It spoke about cutting spending on investments, announced that it was creating a new low-carbon business, and added Jeff Ubben, the founder of impact-focused Inclusive Capital, to its board. Just this week, Exxon said in a letter to shareholders that it plans to add two new directors to its board over the next year—one with energy expertise and one with experience in the effort to combat climate change.

But the Engine No. 1 team and others deemed those actions as insufficient or reactive. Others agreed. Earlier this month, proxy advisory firm

Institutional Shareholder Services

(ISS) recommended that investors vote for three of Engine No. 1’s nominees: Gregory Goff, former chief executive of Andeavor; Kaisa Hietala, former executive vice president of renewable products at Neste; and former U.S. Assistant Secretary of Energy, Alexander Karsner. Glass Lewis followed with its support for Goff and Karsner. Reports suggest BlackRock would vote for three of Engine No. 1’s nominees as well.

Exxon’s shareholder meeting begins at 10:30 a.m. ET. But no matter how the vote goes, the world has changed for Exxon and the rest of the world’s oil companies. There’s no going back.

Write to Carleton English at [email protected]

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