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Harlan Tufford

Harlan Tufford

Vice President, MSCI Research

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Exxon Mobil: Drilling Down on the Proxy Vote

  • The historic win of at least two seats on Exxon Mobil Corp.’s board by activist shareholder Engine No. 1 signals a dramatic shift in investors’ thinking about climate change — and in their willingness to vote for climate action.
  • A lack of executive-level oil and gas experience among Exxon directors may have contributed to investor dissatisfaction with the existing Exxon board.
  • Exxon’s reliance on oil production, combined with debt issuance that exceeded dividends and buybacks in 2020, may reflect a loss of confidence in management’s ability to deliver sustainable investment returns.

The election of at least two activist directors to Exxon Mobil Corp.’s board has been lauded as a landmark victory for climate-change action. But a deeper analysis shows that a board short on industry expertise and lacking a long-term, sustainable business strategy — as reflected in new-debt issuance that exceeded the value of dividends and buybacks in 2020 — may have contributed to Exxon’s defeat.

Citing concerns with the company’s strategy on carbon emissions and climate change, upstart hedge fund Engine No. 1 ran four nominees as an alternate board slate. The fund earned support from many of Exxon’s largest and most influential investors, winning at least two and possibly three of the four contested seats at the May 26, 2021, virtual annual meeting.1


Why Did the Dissidents Win?

Both sides pointed to the need for Exxon to be part of the transition to a low-carbon economy. Exxon management argued that an effective strategy was already in place, while Engine called for greater change. Underlying Engine’s points, however, was the view that Exxon’s board lacked directors with the experience necessary to oversee a strategic move away from carbon-intensive energy. In fact, our analysis indicates that Exxon had relatively few directors with executive experience in the oil, gas and consumable-fuels industry.


Relevant Expertise Among Oil and Gas Companies’ Directors

The percentage of board members with executive-level experience in the oil, gas and consumable-fuels industry. Companies include integrated oil and gas constituents of the MSCI ACWI Index. Data as of May 27, 2021, using Exxon’s pre-meeting board composition. Source: MSCI ESG Research LLC


Visions of Exxon’s Future Collide

Under CEO Darren Woods, Exxon’s capital-allocation strategy has continued to focus on carbon-intensive oil and gas production while maintaining a steady dividend payout. Engine argued that this business-as-usual approach was destroying the company’s value. Instead, Engine and its allies focused on the need for a more disciplined capital-allocation strategy geared toward a low-carbon future.

To test these competing views, we looked at Exxon’s capital allocations from 2000 to 2020 and compared them to industry averages.


Exxon Uses New Debt to Finance Capex and Dividends

“Total Payouts” combines dividends and share buybacks; “Investments” combines capital expenditure with research and development spending; and “New Debt” shows net new debt, as reported in the company’s financial statements. All three figures were charted as a percentage of the company’s total assets for that same year, also as reported. Source: Refinitiv, MSCI ESG Research LLC

Since 2018, Exxon has demonstrated growing reliance on new debt to finance both capex and dividends. While low interest rates may have encouraged new-debt issuance, Exxon exceeded the industry average for the past two years. Whether this trend influenced investor votes is unknown, but the fact that new debt exceeded total payouts in 2020 raises questions about the long-term viability of Exxon’s traditional approach to business strategy – one that is focused on protecting and funding dividends.


What Could Happen Next?

Only time will tell whether the dissident victory will lead to strategic change. Exxon’s other directors may be shaken into action by the scale of Engine’s success, they may take an uncompromising stance or there may be an eventual meeting of the minds.

Beyond Exxon, this vote may serve as a warning to other boards that have dismissed shareholder concerns about climate inaction. It may also spark a rethink on what skills directors need to bring to the boardroom. And for shareholders, it may serve as a reminder of what can be achieved through proxy contests — even against a titan like Exxon.


1As of May 31, the full results of the Exxon vote had not yet been released.


Further Reading

Taking Stock: Share Buybacks and Shareholder Value

What Biden’s Climate Plan Means for US Utilities

Managing Climate Risk in Investment Portfolios

Climate Solutions