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Activist hedge fund Engine No. 1 has recently succeeded in a David and Goliath battle against U.S. oil giant Exxon Mobil Corp. (NYSE: XOM). Despite owning only 0.02% of Exxon, the tiny hedge fund succeeded in its proxy campaign, winning the support of institutional investors BlackRock and Vanguard, and in the process overturned three board seats out of a total twelve.
While shareholder activism of this nature is by no means a new phenomenon, the class of target companies, the size and type of investors involved, as well as their objectives have evolved in recent times. Shareholder activism is an investment strategy whereby minority shareholders take actions to influence the decisions of senior management and the board, with a view to improve financial performance and maximize shareholder value. The tactics employed may include takeovers, filing proxy proposals, publicizing demands in the media and exerting pressure through the threat of divestment.
Exxon, a company so powerful that it in effect pursues its own foreign policy, and which as recently as 2013 was the world’s largest company, has underperformed over the past decade (Mahanta, 2017). From its peak of almost $104 in 2014, Exxon’s share price has fallen by almost half to $54, lagging the S&P 500’s 150% gain over the same period. Investors have been disappointed by the lack of a convincing clean energy strategy and capital discipline, demanding a greater emphasis on returning operating cash flow to shareholders. This has led to questions about Exxon’s ability to maintain its dividend, which currently has a forward yield of 6.3%, as some in senior management advocate debt financing at the expense of Exxon’s historically strong balance sheet.
Since its foundation in December 2020, Engine No. 1 has been calling to “Re-energize Exxon”, arguing that the decarbonization of the global economy poses an existential threat to the already laggard company. As Exxon’s European counterparts have diversified their businesses into solar, wind and natural gas, Exxon has doubled-down on oil. In fact, in March 2020 Exxon CEO Darren Woods went so far as to describe the efforts of companies such as BP, who have pledged to cut fossil fuels output by 40% by 2030, as nothing more than a “beauty competition” (Crowley, 2020). Engine No. 1 has affirmed that to protect and enhance value for shareholders, a new direction for the company focused on improving long-term capital allocation discipline and using existing resources to invest in clean energy is needed. They believe this can be achieved through installing new independent board members with outside energy experience and overhauling management compensation.
Despite the long-term declining demand for oil, Engine No. 1’s efforts to foster managerial change are noteworthy due to the significant role for oil in the energy market as the global economy shifts towards alternate fuels. Nevertheless, in the medium-to-long term, oil will remain the dominant source of energy for shipping, aviation, trucking and petrochemical products.
Ultimately, although negative screening or doing the “Wall Street Walk” (divesting) can send a powerful message, the priority should not be on excluding companies that require change, but rather on transforming them. In the case of the oil and gas industry, with active ownership these companies have the financial firepower and expertise with supply chains and large capital projects to become leaders in profitable clean-energy production.
