Over the summer, you may have read about the environmental activist investor (Christopher James) who took on Exxon with his hedge fund (Engine No.1) and won 3 board seats, all against the strenuous protests of Exxon's CEO and senior management:
"Mr. James, 51 years old, was an unlikely catalyst for change at an energy giant. After making a name for himself during the dot-com boom and bust, he operated an Illinois coal mine and built storage facilities used by the oil-and-gas companies. Away from work, however, he supported conservationist causes. The Exxon campaign offered a chance to align his personal values with an investment thesis—that the giants of the oil industry would drop in value unless they embraced a transition to renewable energy."
What I found interesting about this story, though, was not the victory itself, but the disconnect between the media portrayal of Engine No.1's three director nominees and the arguments James used to secure their election. The media coverage appeared to suggest that these three directors would convert Exxon's board into a bunch of tree huggers. As the article in the url below makes clear, however, in reality the directors were only successfully elected because they made it clear their goal was to create value for Exxon's shareholders. Rather than a bunch of environmental radicals that wants to turn Exxon upside down, Engine No.1 advanced a goal that was centered purely on the firm's business interests:
"In its December note to Exxon's board, Mr. James's fund called on the company to slash expenses on projects that might lose money when oil and gas prices are low, realign management incentives and develop a plan to invest in renewable energy. 'If we're right on getting Exxon to mitigate these impacts, the stock should go up,' Mr. James said in an interview. 'And maybe Exxon does have a future.'"
It was only Exxon's poor economic performance in recent years (in particular, its inefficient allocation of capital) that made it vulnerable even to these benign arguments; not the fact that it is a fossil fuel company that bases its worth almost completely on assets that will have to remain unexploited if we are to have any hope of preserving the integrity of our environment:
"They chose Exxon as their first big target because it had already drawn the ire of a number of other large shareholders for its lackluster performance and refusal to engage. The Engine team also knew that Exxon was a familiar name to investors of all sizes, assuring the campaign would resonate with many of the company's individual shareholders. Some Exxon investors had also questioned why Exxon hadn't added more directors with industry expertise."
In short, the Exxon campaign was not at all about sustainability and all about shareholder value:
"[On] calls with shareholders, [the] pitch was to steer clear of ideological arguments about climate change. Instead, [Engine No.1] said investors should focus on how much value had been lost. The proposed directors on these calls said the company needed to perform better and had allocated capital poorly over a decade."
As the article notes, the performance of Exxon's stock price in the months following the announcement of Engine No.1's campaign reveals the success of the campaign, and the extent to which shareholders have already benefitted:
Time will tell as to whether the environment will do nearly as well.
Take care
David
David Chandler
© Sage Publications, 2020
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The Man Who Battled Exxon – and Won
By Justin Baer and Dawn Lim
June 12-13, 2021
The Wall Street Journal
Late Edition – Final
B1-B2
