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.”