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Why Engine No. 1 Is Taking on ExxonMobil in Arguably the Biggest Proxy Battle of the Season

With proxy season underway, ExxonMobil is preparing for battle. The oil and gas giant, with a roughly $233 billion market cap, is facing a challenge from activist investment firm, Engine No. 1. The firm’s mission centers on the idea that “companies that think long-term will perform better over the long term.” And, to Engine No. 1’s Charlie Penner, Exxon is not seizing that opportunity.

“Going into 2020 with a breakeven price of $90 per barrel on your projects compared to the rest of your peers who are at $60 per barrel, that’s bad strategy,” he told JUST Capital CEO Martin Whittaker in a recent LinkedIn Live interview. “Spending tens of billions of dollars on most recently, debt finance, on projects that are returning, on average, 6% of capital employed, that’s bad strategy.”

Engine No. 1 launched its “Reenergize Exxon” campaign in December 2020 after Exxon was removed from the Dow after a 92-year tenure. Earlier this year, the company reported a loss of $22.4 billion over 2020 – its worst performance in 40 years. That said, Exxon is quick to point out the way its stock has recovered from the worst of last year, and how it has continued to grow its dividend for more than 70 years. While the two sides disagree strongly over strategy and capital management, the crux of Engine No. 1’s campaign centers around a slate of four new board candidates, up for vote at the Irving, Texas-based company’s annual shareholders meeting on May 26.

Ahead of that vote, Engine No. 1 has an important ally in its corner: the California state teachers’ pension fund, CalSTRS. CalSTRS, the second largest U.S. pension fund with $291.7 billion under management, plans to vote for Engine No. 1’s slate. For the fund’s Aeisha Mastagni, who was also in the interview, its support comes down to “our responsibility to mitigate risk inside our portfolio and promote investor confidence” for its 975,000 members and beneficiaries.

Since its launch, Engine No. 1 has spent $30 million on the campaign. And Exxon is projecting to spend at least $35 million more than its typical proxy season spending to fight this push. This week, the company also proposed a plan to capture and store carbon emissions from its Houston facilities, which it says could attract $100 billion to the region. This proposal hinges on government support for a carbon price or tax – initiatives that have struggled to gain traction at both federal and state levels.

These reports come as world leaders meet for a two-day summit on global climate action where President Biden announced a new emissions reduction target for the country. The new goal – aiming to curb emissions by 50-52% below 2005 levels by 2030 – only adds to the urgency of Exxon’s need to adapt to a low-carbon future.

You can watch our full interview and read our key takeaways below, to see why Engine No. 1 chose to take on ExxonMobil for its first campaign, and why CalSTRS decided it wanted to support its selection of board members.

Long-term value lives in the boardroom

Engine No. 1 and ExxonMobil have been fiercely debating the present and long-term future of the company, but the actual campaign comes down to who will be in the boardroom.

For Penner, taking that route came down to tracing a “lack of evolution and responsiveness to changing industry dynamics to a lack of energy industry expertise on the board.” Since Engine No. 1 launched its campaign, Exxon has added three board members: Michael Angelakis, the CEO of the fund Atairos; Jeff Ubben, veteran activist investor turned founder of the ESG-focused Inclusive Capital; and Wan Zulkiflee, the former CEO of Petronas, the Malaysian state-owned oil and gas company.

In a letter to shareholders last month, ExxonMobil CEO Darren Woods and board member Ken Chenault wrote that Engine No. 1’s “candidates for the Board do not have the experience or knowledge to help lead your company through one of the most complex and challenging transitions the world has ever faced.”

Penner and Mastagni’s rebuttal focuses on Engine No. 1’s slate’s proven experience in leading companies through energy transitions. Prior to Zulkiflee’s appointment, Mastagni said ExxonMobil’s lack of board members with oil and gas or energy expertise, left “a gaping hole and a skillset we thought was clearly missing from this board.” She added that she believed Petronas’ ties were too close to Exxon to consider the addition to represent a new direction.

The four proposed directors Engine No. 1’s putting forward would bring that expertise from 17% to 42%, Penner said. He also stressed that there’s “not really a turnkey solution here” for Exxon, given the risk climate change poses to the energy industry specifically, which is why Engine No. 1’s nominated candidates have experience in “transformative industries.”

Mastagni added that targeting the boardroom is the best option investors have with Exxon at this point. Other tools they might have used, like proxy votes, proposals, and public letters, just haven’t worked, she said. And she made the point that for investors, a seat in the boardroom is the closest they can get to ensuring a company is generating long-term value for its shareholders.

“We as investors, we don’t sit in the boardroom, but we do rely on those individuals that are inside the boardroom to help oversee the strategy and oversee management,” she said. “What we’re trying to do is populate that boardroom with the best collective skillsets that we think can mitigate risk and drive long-term shareholder value.”

Treat climate change like the material risk it is

Pushing Exxon to address the risk climate change poses to its core business isn’t something Penner wants the company to see as an ask “out of the goodness of people’s hearts.” He raised findings from a CalSTRS study showing that climate change could cause an $83 billion loss to their portfolio. “If the world seriously addresses that, their business model doesn’t make a whole lot of sense,” he said.

He pointed out that Exxon is the world’s fifth largest independent source of greenhouse gas emissions. And as more major global economies commit to net zero emissions by 2050, the fact that Exxon has “no real plan to address the energy transition” is a serious threat to its business, he said.

While U.S. climate policy has shifted under the Biden administration, Penner doesn’t look at Engine No. 1’s push as political. The presidential election outcome didn’t change the long-term trends when it comes to avoiding the worst financial impacts of climate change, he said. Mastagni also made the point that Engine No. 1’s campaign is targeting a long-term time horizon. “An administration is four years. What we’re looking at is much longer than that,” she said.

Think in terms of long-term resilience – not corporate overhaul

In that recent letter to shareholders, ExxonMobil strongly pushed against the Reenergize Exxon campaign: “Engine No. 1 has not said where cash flows needed to pay the dividend will come from if we elect their directors and adopt their ill-conceived proposals. To put it bluntly, we have a plan that will grow earnings and cash flow, pay and grow the dividend, fund future growth and position the company to have a meaningful role in the energy transition. Engine No. 1 does not.”

Penner said the framing is alarmist, and said Engine No. 1’s goal is not about completely overhauling Exxon, but positioning it for long-term success. “We’re not trying to say it’s time to shut off the pipes and start putting solar panels up on the roof,” he said. “We understand Exxon is an oil and gas company and will be for quite some time. This is about where their long-term trajectory is headed.”

For CalSTRS, this focus on company longevity is also what’s allowed them to support Engine No. 1’s campaign. “We’re the ultimate long-term shareholder. We’ve been around 100 years and we want to be around another 100 years,” Mastagni said. “And we want the companies in our portfolio to be here 20, 30, 50 years from now.”

Penner also made the point that if Engine No. 1’s candidates are elected to the board, they would represent a third of directors – not the majority. “They’ll have to work collaboratively and constructively with everyone else on the board to affect any level of change,” he said.

Between now and May 26, Engine No. 1 will be in “campaign mode,” Penner said. And if they succeed? “For Exxon, it’s in our minds, it’s the beginning,” he said. “That’s when they start the hard work of repositioning this company for success. For Exxon, we view it as being day one.”

If you want to stay in the loop for more discussions with foremost experts in the ESG investing space as soon as they go live, be sure to follow Martin Whittaker on LinkedIn.

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