Taming the Tiger in Your Tank
By Charles Elson
Charles Elson

The recent shareholder revolt at ExxonMobil has captured popular attention and interest in a significant way. It was a shock to the entire corporate community when three insurgent directors, nominated by a small activist fund over strenuous management objection, were elected to the board of such an iconic global company. Many have heralded the note as a sign that the public and the investment community are firmly supporting a progressive climate agenda.

While I certainly believe that environmental concerns had a big impact on the voting, particularly on the part of several large institutional investors, it would be an overreach to suggest that a widely shared climate agenda was the primary reason for the slate’s success. There are a number of lessons for directors, more significant than carbon fury, that may be gleaned from Exxon’s experience.

To start, Exxon has traditionally had a mixed relationship with many of its shareholders on some significant structural governance issues. For a number of years, a shareholder proposal calling for the separation of the chair and CEO roles at the company appeared on the Exxon ballot, sponsored by noted shareholder rights advocate Robert Monks. Notwithstanding the significant support that the proposal received (a concept widely embraced by the institutional investor community), the company’s board continually opposed this approach and declined to split the leadership. This refusal to make a governance change that was welcomed and supported by many investors, and had been adopted successfully by a number of large corporations, cast the company in a less than favorable light for those who ultimately would decide the more significant proxy fight this year.

Secondly, Exxon is not known for its engagement efforts with its largest shareholders. I have found over the years that an active effort to build sound relationships with the institutional shareholder community will pay large dividends when a disagreement over strategy and direction arises. If the views of the larger shareholders are actively solicited over the long term and a constructive dialogue with them has long existed, they are much more likely to support management’s approach to a particular issue. When someone seeks your counsel only when in a pinch, you are much less likely to be sympathetic than when you have been regularly consulted. This may partially explain what occurred in the Exxon saga and is a good lesson for the entire director community.

Thirdly, the qualifications and energy industry experience of the members of the dissident slate gave much respectability to their efforts. Years ago, some such slates consisted of individuals with little industry expertise but wide name recognition for past financial or political efforts. Former U.S. Rep. Pat Schroeder’s nomination to the Texaco board in 1996 immediately comes to mind. Directors are generally elected not for a specific view on a particular issue but for their general knowledge, expertise and judgment relevant to their roles at specific companies. The slate proposed in the Exxon fight fits neatly into this paradigm. The credibility of the nominees for corporate board service is a key element in any proxy contest’s chance for success. This helps explain why the Exxon dissident slate was particularly difficult for management to challenge.

Finally, Exxon, one of the few public companies with a large retail shareholder base, may have, oddly enough, become a victim of that base. Traditionally, retail investors tend to support management in most proxy contests. Challenges at such companies are made much more difficult because of this fact. Activist funds are keenly aware of this and tend to limit their activities to companies with significant institutional investor concentrations. In this case, however, because of Exxon’s significant erosion in share price over the past year (based more on the significant decline in the price of oil than managerial actions), the retail base, heavy with long-term holders, more likely voted on their disappointment in the substantial decrease in valuation than on some heartfelt concern for carbon-based environmental risk.

In sum, while climate concerns were certainly a factor in the Exxon loss, other general governance and performance issues present here provide a much more comprehensive explanation for the result. Climate sensitivity is certainly important for company boards today, but close attention to the other factors that I have outlined should be the real lesson to be garnered for the dispute’s outcome. Careful with the tiger in your tank.

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