Exxon vs activists: can disenchanted investors force change?

Twelve months ago ExxonMobil chief executive Darren Woods said his company was ready to “lean into” a softening market, spending big when rivals would not.

“We invest countercyclically,” he said as he laid out an aggressive oil production growth plan and the hefty capital expenditure it would require.

His message as he updates investors again on Wednesday will be very different — reflecting Exxon’s worst-ever performance last year, when it recorded four consecutive quarterly losses and was ejected from the Dow Jones Industrial Average.

But it will also address the threat posed to Woods and his management team by an activist investor campaign seeking a board-level upheaval and strategic redirection of the company.

Eschewing volume growth, Woods will pitch Exxon’s “flexible” capital expenditure programme, narrower focus on its best assets, capital discipline and new low-carbon business.

“The company continues to be very committed to growing long-term shareholder value,” Woods told the Financial Times. “So we’re not going to see the same kind of growth in volume that we had originally anticipated.”

The market has put a recent tailwind behind Exxon’s new approach. After its stock price savaging during coronavirus-stricken 2020, the company’s shares are up almost 40 per cent since the start of this year, outperforming the S&P 500 and the company’s supermajor rivals.

Yet shareholders are restless. As corporate America’s “proxy season” of annual meetings approaches, the activist campaign launched in December by Engine No 1 is tapping a deep well of investor disenchantment.

“We have performance issues with the company,” said Simiso Nzima, investment director and head of corporate governance at California Public Employees’ Retirement System, the largest US public pension fund.

Exxon had carried out “many years of destruction of corporate value”, he said, including the recent writedown of about $20bn worth of assets it now deemed non-strategic.

“It’s not surprising that you’re seeing an activist investor,” he added. “What makes it surprising is the size of the company — it’s Exxon.”

The message is similar from several other big investors. Resentment at Exxon’s perceived offhand treatment of shareholders and hostility to change, coupled with the impression that it is not taking climate change risks as seriously as investors do, is breeding discontent.

“They haven’t played the environmental game very well, and ticked off that crowd,” said an executive at an asset manager with a large position in the company. “And their returns are terrible. They’ve kind of spun cash away and pissed off the pure-play financial investors.”

Resentment at Exxon’s perceived offhand treatment of shareholders and the impression that it is not taking climate risks as seriously as investors is breeding discontent
Resentment at Exxon’s perceived offhand treatment of shareholders and the impression that it is not taking climate risks as seriously as investors is breeding discontent © Ken Jack/Getty

Engine has nominated four new directors to Exxon’s board and called for more capital discipline, an overhaul of management compensation and a new strategy for a transition to cleaner energy. It says Exxon must also adopt “a path to net-zero total emissions by 2050”.

The fund’s selection of people with significant energy experience — including Gregory Goff, a former chief executive of refiner Andeavor — could prove significant.

“The investment community is on board,” said Sam Margolin, managing director of Wolfe Research. “The board nominees have a really good chance of getting elected . . . they all have very strong repute, they have track records in the industry, and some of them cross over into low-carbon fields.”

Exxon is fighting back — making some concessions, but also marking out its red lines.

Its proxy statement on Monday stated that “none of the Engine director candidates meet the standards or needs” of the company’s board. Woods said the company had already screened and rejected some of Engine’s nominees before the fund nominated them.

The company instead moved this week to appoint three new directors of its own: Wan Zulkiflee, former head of Malaysia’s state oil company Petronas, and Michael Angelakis and Jeff Ubben, two private investors.

ExxonMobil has come under fire for its capital allocation

Woods said the trio would add international vision, as well as experience of capital allocation and business transition.

The appointments of Angelakis and Ubben were enough to satisfy DE Shaw, another hedge fund that had taken an activist position in December with similar demands to Engine’s. It will vote for the company’s slate of directors at May’s annual meeting, according to people familiar with its thinking.

The company has made other changes sought by shareholders, reporting since January so-called Scope 3 emissions from the products it sells.

Exxon says other developments, including the capex cuts announced in November and low-carbon business unveiled in February, were in the works long before the activists appeared, even if the outcomes tally with the aims of many shareholders.

The appointments of Michael Angelakis, pictured in 2015, and Jeff Ubben were enough to satisfy hedge fund DE Shaw, which took an activist position in December © Scott Olson/Getty

Some investors say they are now willing to give the new board appointees a chance to work to effect the change they seek.

“Relative to where they were six months ago, Exxon is starting to turn the supertanker around,” said one asset manager. “It takes time to do that.”

But others say the proxy fight is far from over. Bess Joffe, head of responsible investment at the Church Commissioners for England, an Exxon shareholder that backs the Engine campaign, dismissed the company’s recent moves as “whack-a-mole” offers to activists.

“It really needs to be a much more wholesale kind of change,” she said. On the energy transition, Exxon was trailing its peers, she added, “and I don’t think that’s something that investors large or small will continue to ignore”.

While rivals in Europe have begun pivoting to cleaner energy and announced net-zero targets, Exxon believes its carbon-capture business and other technologies offer a more tangible emissions solution.

Despite Wall Street’s growing climate focus — including among big Exxon-owning asset managers such as BlackRock — Woods continues to rule out a net-zero target. The “solutions aren’t available to us today” that would allow the company to explain how it could reach such a goal, he said.

Column chart of Net income ($bn) showing ExxonMobil records its first annual loss

And Exxon does not plan to follow BP and other oil operators into clean electricity. “We’re not in the power generation business,” he said. “What can we bring to those opportunities other than a cheque book?”

This approach and the recent board changes have not reassured other sceptical investors, including the California State Teachers’ Retirement System, an important backer of Engine’s campaign.

“All our traditional engagement tools have failed,” said Aeisha Mastagni, a portfolio manager at the fund. “What we need here is a whole new strategy, a whole new culture, a whole new way of thinking inside that boardroom.”

In the absence of some other compromise struck with Engine during proxy season, the activist’s nominees will go to a shareholder vote at the AGM. It is a risk for Woods, say some analysts, because this will be seen as a referendum on Exxon’s management.

Nzima said that while Calpers would wait to hear all arguments during proxy season before deciding how to vote, the agitation among investors could spring a surprise.

“People think, you know, voting against directors and getting people off the board is such a nuclear option . . . But that’s actually the only way that you can get change,” he said.

That makes Woods’ strategy presentation to Exxon’s shareholders and analysts on Wednesday all the more significant.

A rising share price and expectations of an earnings upswing as the global economy recovers have eased some pressure on him.

And the proxy battle has forced the supermajor to articulate its position more clearly — on everything from capex priorities to the energy transition and the business risks posed by climate change.

Woods says his company is listening to shareholders and changing in response. And so he will reiterate that Exxon is on a post-pandemic recovery path that will repair the balance sheet, cut costs and deliver industry-leading returns, all while cutting emissions and building a new low-carbon business.

But the outcome of the proxy battle will also reveal whether Exxon’s bigger investors — especially the passive funds that have talked up their own climate commitments — believe that a famously rigid supermajor can truly bend in line with shareholders’ new priorities around the energy transition and emissions.

“We want this company to be more resilient and strategic,” said Mastagni, “because the low-carbon transition is coming, the world is changing, and Exxon needs to change with it”.

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