This week’s nomination of new director candidates at oil supermajor Exxon Mobil shows just how far activist investing has evolved in the three years since its first steps towards embracing environmental and social impact.
Engine No. 1's Activist Campaign
Engine No. 1, a newly formed investment fund that includes activism and investments in private businesses among its strategies, argues that shareholders should get a vote on Exxon’s commitment to heavy investment in fossil fuel extraction. Describing the strategy as a "failure to be adequately discerning in chasing growth," Engine No. 1 says dialing back existing capital spending plans and instead exploring renewables could help investors value the company at a higher multiple.
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The value vs. growth debate is one of the oldest arguments of the investment world. Value investors generally believe they have the right strategy, and until the financial crisis, the returns appeared to justify this conclusion. Q3 2020 hedge fund letters, conferences and more However, growth investors have ruled since 2009. And before that, growth Read More
"It is thus prudent for ExxonMobil, as a means of shareholder capital preservation, to seriously explore opportunities to profitably diversify and signal to long-term investors that its terminal value could be more than zero in a decarbonizing world, and doing so will require directors with notable track records of agile and adaptative innovation in energy," the activist said in a lengthy letter to the board.
Back in January 2018, the combination of activist and impact investing was just getting off the ground. That month saw the launch of ValueAct Capital Partners’ Spring Fund and the joint campaign between Jana Partners and the California State Teachers’ Retirement System (CalSTRS) urging Apple to install parental controls on its mobile devices, a call that was quickly answered. It also saw Exxon CEO Darren Woods, a year into the top job, launch a major spending binge that has bedeviled his leadership ever since.
Fast forward three years and technology companies are not the focus of investors’ ire (although antitrust regulators are catching up). Climate strikes last September put the environment high up on the shareholder agenda and it might have been a defining feature of the 2020 proxy season, had it not been for COVID-19. Instead, the likes of BlackRock, State Street Global Advisors, and Invesco quietly joined campaigning group Climate Action 100+ this year, while toughening their stances on shareholder proposals and management resolutions. Institutional Shareholder Services has explicitly included inaction on climate risk as a serious failing that could lead to votes against directors. Support for environmental shareholder proposals has increased on average, data from Proxy Insight show, but few have passed.
The growing conviction that shareholders should be active in promoting environmental concerns to the board level, combined with the increasing interest of activist investors, is part of what one adviser to companies described to me recently as an adequate, if not perfect storm. It was only a matter of time before someone launched a proxy fight over climate change, he reasoned.
Environmental And Governance Tailwinds
Engine No. 1 certainly has environmental and governance tailwinds but this is not quite that hypothetical campaign. For a purer form of environmental activism, see The Children’s Investment Fund’s "say on climate" proposals.
Instead, Engine No. 1’s demands – a second look at renewables, board members with industry-relevant experience, compensation practices that incentivize sustainable returns, and higher return targets for capital expenditures – are patently economic. The uniqueness of the campaign is that it identifies a narrative that unites doing good, doing no harm, and improving returns all the way up from specific operations to the stock price.
Thus, these demands are part of a coalition-building strategy that appeals to return-minded active managers (D.E. Shaw was reported by Bloomberg to have also sent a letter to Exxon Mobil’s board urging spending cuts this week), retail investors focused on the dividend, and index and pension funds like CalSTRS, which has endorsed Engine No. 1’s slate, that want to highlight long-term risks. They also reflect the background of Engine No. 1’s seven-person founding team, which includes impact investors, a founder of BlackRock’s iShares business, and Charlie Penner, the then-partner at Jana that worked with CalSTRS on the Apple campaign.
Volatile oil prices had already conspired to put energy companies on activists’ screens. In the April issue of Activist Insight Monthly, we highlighted bloated capital budgets and poor compensation practices as major shareholder concerns. Both feature prominently in Engine No. 1’s critique of Exxon, as well as in a series of white papers produced by industry specialist Kimmeridge Energy Management, which took three activist positions in the past quarter.
Exxon has undoubtedly dealt itself a bad hand by courting investor opprobrium over its environmental disclosure. Yet it has not lost a vote on a shareholder proposal since 2017 and shareholder pressure on director re-elections has not built in a consistent way.
Furthermore, although Engine No. 1’s point that none of the independent directors have energy industry expertise is well-made and its candidates look well-qualified on their own, targeting the incumbents that received the biggest rebellions over the last two seasons would mean going head-to-head with diverse and well-respected individuals such as Kenneth Frazier or Ursula Burns. That would be no walkover.
Launching a campaign with a slate of nominees and an endorsement from the second-largest American pension fund shows that Engine No. 1 is ready for the fight. Building and maintaining its coalition will be a formidable challenge but if marrying environmental impact and profitability proves to be a winning strategy, the next few years will see that convergence continue.
Quote Of The Week
"We believe Starboard is only one of a growing number of activists becoming involved."