Wall Street’s Skirmish With Exxon Is ‘Monumental’

Why a hedge fund’s successful assault on ExxonMobil matters

An Exxon sky lit against a black sky
Jim Young / Reuters

Updated at 12:02 p.m. on Thursday, June 3, 2021.

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Here’s a question that has recently become surprisingly important in the battle against climate change: What is a company?

There’s a legal answer, of course. (A company is an incorporated entity representing an association of persons legal and natural, usually chartered under state law, blah blah blah blah.) But a company can be, and typically is, any of the following: a hierarchical social unit, a nested series of bank accounts, a tightly controlled brand identity, a stock-ticker symbol. A company, to paraphrase an ancient author who knew something about distributed organizations, is not one member, but many.

It can be difficult even to say who controls a company. Most large corporations are led by a chief executive officer, who is hired and managed by a board of directors, who are in turn elected by shareholders. But the separation of powers here is not as clear-cut as it may seem: A board might be very pliant to the CEO, or nobody but management’s picks might run for a board seat. Under United States law, 99 percent of a company’s shareholders can vote against a director candidate, and—if nobody runs against that person—they still will win.

This discussion matters because—as you have likely heard—a hedge fund named Engine No. 1 executed a soft coup last week against one of the country’s most powerful companies, ExxonMobil. Despite controlling .02 percent of Exxon, Engine No. 1 placed two activist investors on the oil company’s board of directors.

The fund argued that Exxon is unprepared for decarbonization and the energy transition, and that it should slowly shift away from its fossil-fuel-dominated business model. Some of the largest institutional investors in the country, as well as a slew of smaller investors, agreed with the fund and voted to throw out a minority of the existing board.

This vote is a landmark. It shows that major institutional investors, who have long goaded oil companies to do more about climate change, are ready to start punishing executives over their failure to act. And for their first target, investors chose ExxonMobil: the country’s largest oil company, the biggest spin-off of John D. Rockefeller’s Standard Oil trust, and the palace at the center of Big Oil’s empire.

“It’s monumental,” Nell Minow, the vice chair of ValueEdge Advisors and a longtime strategist in proxy fights, told me. “There’s never been anything like this … Engine No. 1 is the kid who said the king is not wearing anything.”

Exxon got plenty of warning before the coup, and looking back, we can discern a supertanker’s worth of pride before the fall. When Darren Woods, Exxon’s CEO, met with Engine No. 1 in January, he seemingly brushed off many of its concerns. When Exxon’s favored candidates for the board started to lose last week, Woods paused the shareholder meeting for an hour and made pleading calls to major investors. He lost anyway.

Losing has been something of a habit for Woods lately. If Exxon had been a dynamic, resilient company, if it were printing profits from its investments in Texas shale, then it would not have faced this rebellion. But the entire oil sector is underperforming; Exxon lost $22 billion last year, its worst performance in four decades. Among retail investors, Exxon is especially prized for the dividend it pays out to its shareholders every quarter; last year, for the first time since 1982, the dividend did not increase—and analysts have started to fret that the company may soon cut it, which has never happened before.

What distinguishes dying companies from those that manage a turnaround, Minow said, is their failure to metabolize bad news. Exxon has, in its case, actively tried to suppress bad news; during the 1990s and 2000s, it was one of the largest and deepest supporters of climate denialism. The company’s insistence that oil will win the day reminds Minow of when the managers of Eastman Kodak refused to prepare for the arrival of digital photography.* “They said, ‘People will always want film,’” she told me, astonished. “A lot of companies are like Wile E. Coyote: They run off the cliff and they’re suspended for a bit and they don’t realize nothing is below them.”

The current board—which, again, still consists mostly of management’s favored directors—will decide where the new activist directors serve. The board is divided into committees, including a compensation committee, an audit committee, and a nominating committee. “What committees do they put the new directors on? This is how we’re gonna know whether Exxon has gotten the message or not,” Minow said. If not, next year’s shareholders meeting could be even more eventful.

Engine No. 1 prevailed because it won the votes of two different types of institutional investors: one old, one new. First, it attracted the support of large state-pension funds that try to act in the best interest of the entire market. Second, it won support from newer financial firms such as State Street and BlackRock, which sell large, popular, low-fee index funds that track much of the market. Because those companies sop up so much of professional Americans’ savings, and because they try to buy a little of every company, they own single-digit percentages of Exxon and can push it to act in the long-term interest of the broader market. (BlackRock, which has cast itself as the climate-concerned institutional investor, has also been pressured by activists to align its proxy votes with its green marketing.) Working together, these funds brought Exxon to heel.

Which is a little weird. How many times have activists argued that capitalism is incompatible with solving climate change? Yet last week, Exxon’s shareholders—that is, the owners of capital—acted to rein in Exxon’s managers and insiders. Capital has apparently been recruited into the fight against climate change; Wall Street is, à la Mothra versus Godzilla, battling Big Oil. If that’s surprising, it shows how tangled the politics of decarbonization has become. And it shows the difficult line that the Biden administration has to walk as it tries to make decarbonization an inevitability.

* This article previously misstated that Nell Minow ran a proxy fight against Eastman Kodak.