There was a landmark event and tipping point last week in the battle over climate change – kinda….
It was a shareholder meeting with rare high drama (See Forbes' 'The Vote' (A Play in Three Acts by ExxonMobil Productions) ….the ExxonMobil executive team lost a high profile proxy fight to a small investment fund, Engine No. 1 to place new members on its board.
Eco-evangelists will be anxious to declare victory ….but the issue was as much business performance as it was lack of confidence in the company’s ability to adapt to the emergent but accelerating shift to a low carbon economy. It is highly unlikely new directors would have been elected if performance had been even just average…..
But this historic event marks the first time major investors have sent a sharp rebuke to a management team for inadequate climate change plans. It won’t be the last time…..
The first significant skirmish between XOM management and shareholders/owners on climate change came 4 years ago when shareholders overrode management with a non-binding resolution for greater disclosure on climate change.
Last week’s brawl was at a completely new level. Engine No. 1 is a lightweight investment fund ($250M Assets) with a miniscule shareholding in heavyweight XOM ( $260B marketcap).
On the surface it was a true David vs Goliath moment. In reality Engine No. 1 brought heavyweight friends to the fight…. Vanguard ($7.1 Trillion Assets), Blackrock ($8.7 Tr), and State Street ($3.1Tr) joined the fight with Engine No.1 …. ever feisty Calpers ($444B) was an early and vocal supporter
XOM’s unusually poor performance over the last 10 years was the core of their vulnerability ….Engine No. 1 produced a very thorough analysis of ExxonMobil’s performance - see Reenergize XOM ….
It is damning: in 10 years XOM went from the largest company in the world to being dropped from the DJIA…. debt skyrocketed from $7B to $63B…. and even more dramatically debt to cash flow ballooned from 0.15 to 4.0. XOM has been borrowing to pay dividends – that’s like using one credit card to pay off another….
Engine No 1 argued that if ExxonMobil destroyed $174B in enterprise value in a decade of strong oil demand, how could they possibly navigate a future of uncertain and potentially declining demand…..and a majority of the owners of XOM agreed.
Blackrock and Vanguard both issued in depth analysis and explanations why they voted against management – see the Blackrock analysis and Vanguard analysis.
XOM makes an easy villain, in addition to poor performance, they are the largest oil company they have been slow to fully acknowledge climate change challenges …. and XOM executives have rarely been accused of excess modesty……
Eco-evangelists pronouncing the demise of XOM will be mistaken…. Founded in 1870 by John D Rockefeller, they have 70,000 employees and extraordinary operating expertise and strong technology roots. Their Energy and Carbon Summary demonstrates clear understanding of the challenges… and they have made real changes - but their owners judged this as too little too late…..
In 2000 Verizon and AT&T were seen as old dinosaur telcos that would never adapt to the digital age… that proved to be very wrong….
In those early days of the internet we could not imagine how every facet of our lives and every sector would be transformed…. Senior banking execs declared the internet would never be safe enough for online banking…. Entertainment executives declared movies could never be streamed because there would never be sufficient bandwidth….
The transition of the global economy to low carbon will be the same – we are in the very early days of massive changes we cannot imagine. Bill Gates elegantly describes in his new book the key dimensions and scale of change required to reach a zero carbon economy. He outlines some technology options that may help solve each area. It’s definitely worth a read.
The world’s largest investors have finally demonstrated that they are now more than just talk about climate change… and they will become bolder and more active with time.
Boards and management teams should take notice that investors have high expectations for tangible near term progress for managing climate change risks to the business….
Hopefully the business press will take notice as well …..Wall Street Journal readers deserve far better than Holman Jenkins' embarrassing and childish editorial that whines on about the XOM dress down…. it’s time the WSJ consider some board changes of its own.
Just some thoughts…..
Walt
I can't stand Holman Jenkins!