Shareholder Activist Firm Secures Hard-Fought Seats on Exxon’s Board, Capitalizing on Renewed Calls for Climate Action

An emerging trend among corporate investors is the use of shareholder activism to effectuate some change to a corporation, with a focus on a company’s environmental and social justice performance. (Mary Ann Cloyd, Harvard Law School Forum on Corporate Governance). Activism methods include supporting hedge funds in their effort to win board seats, urging fellow shareholders to withhold their vote on a nominated board candidate, and supporting a formal shareholder proposal. Id. In a major win for investors seeking action by large oil and gas companies to substantially reduce their carbon footprint around the world, activist investment firm Engine No. 1 (“Engine”) succeeded in gaining three seats on the board of directors of Exxon Mobil (“Exxon”) through a shareholder vote in late May 2021. (Pippa Stevens, CNBC). By securing three seats on Exxon’s board, Engine is now able to induce significant carbon-cutting action by the company, and other multinational energy and gas firms may soon be pressured by similar activist firms to follow suit.

Engine was not appeased by Exxon’s planned addition of directors with environmental expertise and its allocation of $3 billion towards carbon-cutting research and development. (Pippa Stevens, CNBC). The firm argued that Exxon needed directors with proven experience in transformative energy projects who would create long-term business plans to address climate risks. As evidenced by its aggressive campaign to seize board seats, the firm appears confident in their appointed directors to do exactly this. Id. However, all of Exxon’s major investors partially supported Engine’s nominees, which undoubtably helped the firm win the three board seats. (Scott Deveau, Bloomberg Law News). Perhaps most surprisingly, Engine spent less than half of its budget to secure the three seats through grassroots advocacy. (Svea Herbst-Bayliss, Reuters). The firm likely benefited from travel restrictions and the ease of video calls caused by the COVID-19 pandemic, which reduced the costs needed to convince Exxon investors to vote in favor of Engine’s director nominees and the proposed direction for the company. Id. Nonetheless, the firm’s victory is a strong indicator of strengthening shareholder activism, partly due to the rising call for significant climate change and social justice action by corporations around the world.

Around the same time as the Engine victory against Exxon, Chevron shareholders approved a resolution requiring the company to cut emissions generated by its products. (Shariq Khan, Reuters). Companies across the oil and gas industry are seeking legal advice in response to this recent uptick in successful climate action advocacy by shareholders, including on the risks associated with Environmental, Social, and Corporate Governance (“ESG”) issues. (Nushin Huq, Bloomberg Law News). ESG metrics are factors that evaluate whether a company is a good corporate citizen, including on issues such as energy efficiency, waste management, diversity and inclusion, and data protection. (CFA Institute). Shareholders can also investigate how a company is responding to climate change and the extent of their corporate lobbying efforts and political contributions through corporate disclosures. Id.

Law firms have specifically advised energy, oil, and gas companies that they should not treat ESG efforts as a “check-the-box activity” but as a commitment from company leadership to improve the company’s  social performance in the global environment. (Nushin Huq, Bloomberg Law News). Companies have been advised to use calls for improved ESG performance to review the overall sustainability of their business model and seek continuous improvement instead of simply pushing for more corporate disclosures in the hope of shareholder appeasement. Id. Law firms have responded to the ESG push by establishing task forces and practice areas to help companies identify and close gaps in corporate responsibility disclosures to minimize the chance of strong shareholder activism efforts. Id.

Shareholders do not have the right to engage in any day-to-day operations of the company nor create corporate policy or set compensation. (Stephen Marks, The Separation of Ownership and Control). However, shareholders can engage in the voting process, but the typical shareholder will not hold enough stock to justify familiarization with the voting rules and participation in the vote, either by themselves or through a proxy. Id. This does not mean that shareholders collectively cannot significantly influence a company’s vision and strategy or hold the company to its own sustainability goals through diligent scrutiny of its corporate reports. Activist investors are increasingly observing how boards of directors oversee the environmental and social performance of the company and whether a particular board has sufficient expertise in ESG issues. (Kai H.E. Liekefett et al., Westlaw Practitioner Insights Commentaries). Overall, activist investors are expecting boards to ensure that ESG is a component of strategic decision making and identify key ESG risks and opportunities at their companies. Id.

The best way for companies to mitigate aggressive shareholder activism is to implement and execute a comprehensive ESG strategy as well as continuously reflect on and improve the company’s sustainability efforts. Id. Investors will be less inclined to urge aggressive climate or social justice action by a company when it performs well across the ESG metrics. Id. As evidenced by Engine No. 1’s acquisition of three seats on Exxon’s board, shareholder activism is on a steady rise, and there is no indication that the scrutiny by investors on the environmental and social performance of companies will wane in the years to come. Therefore, companies should consider sincerely pursuing ESG-based improvements or prepare for an onslaught of activist actions against the board, which is not limited to a takeover of board of director’s seats.