What does the recent Engine No. 1 proxy battle at Exxon Mobil have in common with the insane trade in GameStop and AMC common stock that has occurred during the pandemic? The answer is that they all got media attention but accomplished nothing.
Engine No. 1, a small hedge fund with less than $40 million from Exxon Mobil XOM,
common stock in hand, was surprisingly successful in getting three of its four nominee directors elected to Exxon’s board. Unfortunately, Engine No. 1’s hedge fund activism, seeking to improve shareholder value, reduce Exxon’s carbon emissions, and make it a global leader in cost-effective clean energy generation, has failed. was unable to provide specific recommendations on how Exxon Mobil was to accomplish these goals.
For example, what specific profitable clean energy opportunities would Engine No. 1 like to see Exxon Mobil invest in? Engine #1 did not provide a response.
In sum, a lack of clarity indicated that she was not fully informed about Exxon Mobil’s operations or how to manage its long-term future.
Read: Here are the oil and gas companies whose methane emissions intensity is 6 times the national average (hint: these aren’t the majors)
The lack of associated upward movement in Exxon’s stock price confirms that Engine No. 1’s activism was not meant to have a positive impact on Exxon Mobil. As Hemang Desai, Shiva Rajgopal and Sorabh Tomar observed in June, any increase in the stock since the activism of Engine No. 1 went public can be attributed to a rise in oil prices which has benefited all oil and gas companies.
However, even without specific recommendations or a positive market price reaction, the #1 engine still managed to win its proxy battle. How could he do this?
No doubt the time had come. Exxon Mobil was financially floundering due to high debt levels, pandemic-induced reduced demand for its products, and low oil and gas prices. Yet by the time Engine No. 1 began its proxy fight in earnest on March 15, Exxon was still a $250 billion company and recognized as one of those most successful small companies, based on decades of experience. capital appreciation and dividend payments, which have allowed the stock market to significantly outperform US Treasuries over time.
“Exxon Mobil was financially floundering due to high debt, pandemic-induced reduced demand for its products, and low oil and gas prices”
Engine #1 was successful as it focused on gaining support from the “big 3” investment advisers for index and ESG funds – BlackRock BLK,
Vanguard and State Street Global Advisors. The Big 3 own about 21% of Exxon Mobil’s voting stock. However, this percentage significantly underestimates their voting power, as they are likely to vote for all of their stocks, unlike individual investors – those who are most likely to vote with management.
To gain support from the Big 3, Engine No. 1 appealed to their desire to be seen as investment advisers who are making a difference in mitigating climate change. Such a perception is necessary to attract “millennial” investors, the segment of investors who will soon be the dominant type of investor in mutual funds and exchange-traded funds.
Thus, the Big 3 were under great pressure to support the efforts of the No. 1 engine, otherwise they would be seen as not holding the reins of climate change. Based on their vote, it appears the marketing implications outweighed the need to implement value-creating changes at Exxon Mobil. BlackRock ended up backing three candidates for directorship of the No. 1 engine, while Vanguard and State Street Global Investors each backed two.
An obstacle to the fight against climate change
Perhaps most importantly, Engine No. 1’s hedge fund activism may be a hindrance to the world’s ability to deal with climate change. As Tariq Fancy, former BlackRock chief investment officer for sustainable investing, observed, “One of the lessons that COVID-19 has hammered home is that systemic issues, such as a global pandemic or climate change, require systemic solutions. Only governments have the extensive powers, resources and responsibilities that must be brought to bear to solve the problem.
If so, the No. 1 driver’s successful proxy struggle may have caused significant harm to climate change mitigation efforts. “by creating a societal placebo that delayed overdue government reforms”, he added. In other words, the sustained focus on the proxy struggle and the perception that the victory of the No. 1 engine represents a victory in the fight against climate change may have reduced our sense of urgency to advocate for strong government actions. that will have a real impact on climate mitigation. cash. Fancy, the former executive of BlackRock, refers to it as a “deadly distraction”.
The activism of the No. 1 driver has led Exxon to spend significant resources unnecessarily defending its director nominees and has thus diverted Exxon Mobil from committing to its current strategy of focusing on oil production and gas, a strategy that the #1 engine could not adequately refute as the correct one.
Yes, Exxon’s current strategy may result in the company’s oil and gas assets stranding or losing its independent existence if the decarbonization path accelerates, but until proven otherwise, maybe ‘Another more knowledgeable hedge fund activist will serve this role, his strategy cannot be said to be one that will maximize the value of the company’s shares.
Henry N. Butler is executive director of the Law & Economics Center at the Antonin Scalia Law School at George Mason University. Bernard Sharfman is a research fellow at the Law & Economics Center and a senior fellow in corporate governance at the RealClearFoundation.
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